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: October 31, 2006
ITEM 1. REPORTS TO STOCKHOLDERS
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 23
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 24
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 26
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 26
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 26
- --------------------------------------------------------------------------------
Trustees and Officers 27
</Table>
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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 2.26% 0.83% 3.42%
Excluding sales charges 8.21 1.98 4.01
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (With sales charges)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND S&P 500 INDEX INDEX
----------------- ------------- -------------------
10/31/96 9450 10000 10000
11695 13211 13047
13977 16117 16263
18346 20253 21832
20627 21487 23869
12695 16136 14335
10101 13698 11523
11719 16548 14036
11667 18107 14511
12940 19686 15790
10/31/06 14003 22903 17501
</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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 2.40% 0.82% 3.24%
Excluding sales charges 7.40 1.20 3.24
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (With sales charges)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND S&P 500 INDEX INDEX
----------------- ------------- -------------------
10/31/96 10000 10000 10000
12316 13211 13047
14600 16117 16263
19013 20253 21832
21217 21487 23869
12956 16136 14335
10228 13698 11523
11771 16548 14036
11632 18107 14511
12807 19686 15790
10/31/06 13755 22903 17501
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
With sales charges 6.40% 1.20% 3.24%
Excluding sales charges 7.40 1.20 3.24
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (With sales charges)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND S&P 500 INDEX INDEX
----------------- ------------- -------------------
10/31/96 10000 10000 10000
12316 13211 13047
14600 16117 16263
19013 20253 21832
21217 21487 23869
12956 16136 14335
10228 13698 11523
11771 16548 14036
11632 18107 14511
12807 19686 15790
10/31/06 13755 22903 17501
</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 as 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. Prior to 9/1/98 (for
Class C shares) and 12/31/03 (for Class I shares), performance for Class C and
Class 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 C
and 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 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
8.84% 2.28% 4.20%
</Table>
(LINE GRAPH FOR CLASS I IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND S&P 500 INDEX INDEX
----------------- ------------- -------------------
10/31/96 10000 10000 10000
12436 13211 13047
14886 16117 16263
19561 20253 21832
21999 21487 23869
13485 16136 14335
10750 13698 11523
12494 16548 14036
12462 18107 14511
13866 19686 15790
10/31/06 15092 22903 17501
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ---------------------------------------------------------------
Russell 1000(R) Growth Index(2) 10.84% 4.07% 5.76%
S&P 500(R) Index(3) 16.34 7.26 8.64
Average Lipper large-cap growth fund(4) 7.42 3.53 5.60
</Table>
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 20
of the Notes to Financial Statements for further explanation.) If these
nonrecurring reimbursements had not been made the total return (excluding
sales charges) would have been 7.95% for Class A, 7.15% for Class B, 7.15%
for Class C and 8.57% for Class I.
2. The Russell 1000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume the
reinvestment of all income and capital gains. 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 in 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 in 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.
6 MainStay Capital Appreciation Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $993.50 $ 6.53 $1,018.50 $ 6.61
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $989.55 $10.28 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $989.55 $10.28 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $997.20 $ 3.02 $1,022.00 $ 3.06
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.30% for Class A, 2.05% for Class B and Class C, and 0.60% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period). In the absence of
waivers and/or reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 97.1
Short-Term Investments (collateral from securities lending 7
is 3.9%)
Liabilities in Excess of Cash and Other Assets (4.1)
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Apple Computer, Inc.
2. Coach, Inc.
3. WellPoint, Inc.
4. Danaher Corp.
5. Kohl's Corp.
6. United Technologies Corp.
7. Praxair, Inc.
8. Fisher Scientific International, Inc.
9. Weatherford International, Ltd.
10. Harley-Davidson, Inc.
</Table>
8 MainStay Capital Appreciation Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Edmund C. Spelman of MacKay Shields LLC
HOW DID MAINSTAY CAPITAL APPRECIATION FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Capital Appreciation Fund returned 8.21%
for Class A shares, 7.40% for Class B shares, and 7.40% for Class C shares for
the 12 months ended October 31, 2006. For the same period, the Fund's Class I
shares returned 8.84%. All share classes underperformed the 10.84% return of
Russell 1000(R) Growth Index,(1) the Fund's broad-based securities-market index,
for the 12-month period. Class A and Class I shares outperformed--and Class B
and Class C shares underperformed--the 7.42% return of the average Lipper(2)
large-cap growth fund for the 12 months ended October 31, 2006.(3)
WHAT DECISIONS HAD THE BIGGEST INFLUENCE ON THE FUND'S PERFORMANCE?
Ineffective stock selection in the health care, financials, and information
technology sectors had the most dramatic impact on the Fund's relative
performance during the reporting period. An underweighted position in the
consumer staples sector also had a negative impact on the Fund's overall
performance. At the end of the reporting period, the Fund had no holdings in the
telecommunication services and utilities sectors. This positioning also
detracted from results. In contrast, individual stock selection in the
industrials, energy, and materials sectors contributed positively to the Fund's
relative performance.
WHICH INDIVIDUAL SECURITIES WERE THE STRONGEST PERFORMERS DURING THE REPORTING
PERIOD?
Fisher Scientific, which makes analytical instruments, laboratory equipment, and
reagents, was the Fund's top performer from a total-return perspective. Apple
Computer was also a solid performer, primarily because of strong sales of iPod
MP-3 players. Multiline retailer Kohl's enjoyed considerable sales growth, and
the company sold its credit card portfolio--a move that reduced receivables and
improved operating cash flow. Biopharmaceutical company Gilead Sciences and
energy equipment & services company Weatherford International were among the
Fund's other strong performers.
WHICH STOCKS DETRACTED FROM PERFORMANCE?
UnitedHealth Group saw its stock price decline primarily because of a cautious
earnings outlook and heightened competition in the health care providers &
services industry. Omnicare, a leading provider of pharmaceutical care for the
elderly, saw its stock price decline because of litigation with UnitedHealth
Group and a mislabeling mishap that led to a product recall. Shares of Internet
services provider Yahoo! declined throughout the year and we sold the position
in September. Oilfield equipment provider B.J. Services slid on concerns about a
possible natural gas glut. EMC, the world leader in information management and
storage, had a difficult third quarter and vowed to cut its workforce to make
room for and integrate the company's 21 acquisitions in the last three years.
WERE THERE ANY SIGNIFICANT PURCHASES AND SALES DURING THE REPORTING PERIOD?
In the technology sector, we added a position in Akamai Technologies, a company
that accelerates delivery of content and business processes online. The Fund
also added a position in networking giant Cisco Systems. In the consumer
discretionary sector, we added Comcast and News Corporation.
We sold the Fund's entire positions in Yahoo! and eBay. We eliminated eBay
because of slow earnings growth and the company's inability to expand its core
business in the United States and abroad. In the consumer discretionary sector,
we sold Chico's FAS, which had seen poor sales and earnings because of
weaker-than-expected same-store sales in recent months. We also sold D.R. Horton
and Lennar because of weakening fundamentals in the homebuilding subindustry.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
During the reporting period, the Fund's weighting in the information technology
sector significantly increased. We also increased the Fund's weightings in the
health care and financials sectors. The Fund's weightings in the energy,
industrials, and consumer discretionary sectors were reduced during the
reporting period.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price for the stock may decline significantly, even if earnings showed an
absolute increase.
1. See page 6 for more information on the Russell 1000(R) Growth Index.
2. See page 6 for more information about Lipper Inc.
3. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 6.
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, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (97.1%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.9%)
L-3 Communications Holdings, Inc. 212,300 $ 17,094,396
V United Technologies Corp. 394,200 25,906,824
--------------
43,001,220
--------------
AIR FREIGHT & LOGISTICS (2.0%)
FedEx Corp. 194,300 22,255,122
--------------
AUTOMOBILES (2.2%)
V Harley-Davidson, Inc. (a) 351,200 24,102,856
--------------
BEVERAGES (1.7%)
PepsiCo, Inc. 297,300 18,860,712
--------------
BIOTECHNOLOGY (5.9%)
Amgen, Inc. (b) 302,600 22,970,366
Genentech, Inc. (b) 218,600 18,209,380
Gilead Sciences, Inc. (a)(b) 342,600 23,605,140
--------------
64,784,886
--------------
CAPITAL MARKETS (1.1%)
Ameriprise Financial, Inc. (a) 114,200 5,881,300
Lehman Brothers Holdings, Inc. 75,400 5,869,136
--------------
11,750,436
--------------
CHEMICALS (2.3%)
V Praxair, Inc. 417,600 25,160,400
--------------
COMMUNICATIONS EQUIPMENT (5.6%)
Cisco Systems, Inc. (b) 482,700 11,647,551
Corning, Inc. (b) 1,026,300 20,967,309
Motorola, Inc. 967,700 22,315,162
Research In Motion, Ltd. (b) 62,600 7,354,248
--------------
62,284,270
--------------
COMPUTERS & PERIPHERALS (4.3%)
V Apple Computer, Inc. (a)(b) 363,700 29,488,796
EMC Corp. (b) 1,420,000 17,395,000
--------------
46,883,796
--------------
CONSUMER FINANCE (3.8%)
American Express Co. 380,200 21,979,362
Capital One Financial Corp. (a) 249,600 19,800,768
--------------
41,780,130
--------------
DIVERSIFIED FINANCIAL SERVICES (2.4%)
Bank of America Corp. 299,200 16,117,904
JPMorgan Chase & Co. 225,800 10,711,952
--------------
26,829,856
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (8.9%)
Baker Hughes, Inc. 332,000 $ 22,924,600
BJ Services Co. (a) 539,200 16,262,272
ENSCO International, Inc. 250,000 12,242,500
Transocean, Inc. (b) 308,300 22,364,082
V Weatherford International, Ltd. (b) 591,700 24,307,036
--------------
98,100,490
--------------
FOOD & STAPLES RETAILING (1.8%)
Walgreen Co. 448,200 19,577,376
--------------
HEALTH CARE PROVIDERS & SERVICES (8.6%)
Caremark Rx, Inc. 454,200 22,360,266
Coventry Health Care, Inc. (b) 231,600 10,873,620
Quest Diagnostics, Inc. 236,100 11,743,614
UnitedHealth Group, Inc. 452,900 22,092,462
V WellPoint, Inc. (b) 366,100 27,940,752
--------------
95,010,714
--------------
HOUSEHOLD DURABLES (1.3%)
Harman International Industries, Inc. 143,100 14,646,285
--------------
INDUSTRIAL CONGLOMERATES (2.8%)
3M Co. 94,700 7,466,148
General Electric Co. 680,500 23,892,355
--------------
31,358,503
--------------
INSURANCE (1.2%)
Prudential Financial, Inc. 170,600 13,124,258
--------------
INTERNET SOFTWARE & SERVICES (1.3%)
Akamai Technologies, Inc. (a)(b) 300,900 14,100,174
--------------
LIFE SCIENCES TOOLS & SERVICES (2.6%)
V Fisher Scientific International, Inc. (b) 288,900 24,735,618
Thermo Electron Corp. (b) 84,000 3,601,080
--------------
28,336,698
--------------
MACHINERY (3.8%)
Caterpillar, Inc. 64,600 3,921,866
V Danaher Corp. 374,500 26,877,865
Illinois Tool Works, Inc. 234,300 11,229,999
--------------
42,029,730
--------------
</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.
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)
- --------------------------------------------------------------------------------
MEDIA (4.1%)
Comcast Corp. Class A (b) 364,700 $ 14,832,349
News Corp. Class A 559,300 11,661,405
Omnicom Group, Inc. 180,800 18,342,160
--------------
44,835,914
--------------
MULTILINE RETAIL (4.4%)
V Kohl's Corp. (b) 372,000 26,263,200
Target Corp. 376,500 22,281,270
--------------
48,544,470
--------------
OIL, GAS & CONSUMABLE FUELS (1.8%)
Apache Corp. 120,800 7,890,656
Peabody Energy Corp. 289,600 12,154,512
--------------
20,045,168
--------------
PHARMACEUTICALS (2.1%)
Johnson & Johnson 344,800 23,239,520
--------------
ROAD & RAIL (1.4%)
Norfolk Southern Corp. 290,700 15,282,099
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (4.7%)
Intel Corp. 834,900 17,816,766
Linear Technology Corp. (a) 205,700 6,401,384
National Semiconductor Corp. 741,200 18,003,748
Texas Instruments, Inc. 318,100 9,600,258
--------------
51,822,156
--------------
SOFTWARE (2.3%)
Citrix Systems, Inc. (b) 228,600 6,750,558
Microsoft Corp. 646,700 18,566,757
--------------
25,317,315
--------------
SPECIALTY RETAIL (4.9%)
Bed Bath & Beyond, Inc. (b) 419,500 16,901,655
Best Buy Co., Inc. 432,850 23,914,962
Lowe's Cos., Inc. 425,500 12,824,570
--------------
53,641,187
--------------
TEXTILES, APPAREL & LUXURY GOODS (3.9%)
V Coach, Inc. (b) 712,500 28,243,500
NIKE, Inc. Class B 161,600 14,847,808
--------------
43,091,308
--------------
Total Common Stocks (Cost $764,385,990) 1,069,797,049
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (7.0%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (3.9%)
Fairway Finance Corp.
5.289%, due 11/20/06 (c) $ 750,101 $ 750,101
Goldman Sachs Group, Inc.
5.25%, due 11/2/06 11,270,000 11,268,357
Greyhawk Funding
5.286%, due 11/13/06 (c) 1,000,135 1,000,135
Jupiter Securitization Corp.
5.303%, due 11/14/06 (c) 1,230,076 1,230,076
Lexington Parker Capital Co.
5.282%, due 11/8/06 (c) 1,000,135 1,000,135
Liberty Street Funding Co.
5.286%, due 11/27/06 (c) 1,238,113 1,238,113
Old Line Funding LLC
5.287%, due 11/15/06 (c) 1,000,135 1,000,135
Rabobank USA Finance Corp.
5.24%, due 11/3/06 11,785,000 11,781,569
Sheffield Receivables Corp.
5.272%, due 11/8/06 (c) 1,000,135 1,000,135
Societe Generale North America, Inc.
5.29%, due 11/1/06 11,305,000 11,305,000
Yorktown Capital LLC
5.282%, due 11/16/06 (c) 875,118 875,118
--------------
Total Commercial Paper (Cost $42,448,874) 42,448,874
--------------
<Caption>
SHARES
INVESTMENT COMPANY (0.2%)
BGI Institutional Money Market Fund (c) 2,159,072 2,159,072
--------------
Total Investment Company (Cost $2,159,072) 2,159,072
--------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.1%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $1,178,076
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34, with a
Principal Amount of
$1,191,406 and a Market Value
of $1,224,726) (c) $ 1,177,899 1,177,899
--------------
Total Repurchase Agreement (Cost $1,177,899) 1,177,899
--------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
TIME DEPOSITS (2.8%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (c) $ 2,000,270 $ 2,000,270
Bank of America
5.27%, due 11/21/06 (c)(d) 2,750,372 2,750,372
Bank of Montreal
5.28%, due 11/27/06 (c) 2,000,270 2,000,270
Bank of Nova Scotia
5.30%, due 11/10/06 (c) 2,000,270 2,000,270
Barclays
5.32%, due 1/18/07 (c) 2,000,270 2,000,270
Deutsche Bank AG
5.27%, due 11/9/06 (c) 2,000,270 2,000,270
Fortis Bank
5.27%, due 11/6/06 (c) 4,350,588 4,350,588
Halifax Bank of Scotland
5.30%, due 1/10/07 (c) 2,000,270 2,000,270
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (c) 2,000,270 2,000,270
Royal Bank of Canada
5.30%, due 12/22/06 (c) 2,000,270 2,000,270
Royal Bank of Scotland
5.29%, due 12/12/06 (c) 2,000,271 2,000,271
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (c) 2,000,271 2,000,271
Societe Generale North America, Inc.
5.28%, due 12/6/06 (c) 2,000,271 2,000,271
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
UBS AG
5.28%, due 12/5/06 (c) $ 2,000,271 $ 2,000,271
--------------
Total Time Deposits
(Cost $31,104,204) 31,104,204
--------------
Total Short-Term Investments
(Cost $76,890,049) 76,890,049
--------------
Total Investments
(Cost $841,276,039) (e) 104.1% 1,146,687,098(f)
Liabilities in Excess of
Cash and Other Assets (4.1) (45,282,172)
----------- --------------
Net Assets 100.0% $1,101,404,926
=========== ==============
</Table>
<Table>
(a) Represents a security, or a portion thereof, which is out on loan.
(b) Non-income producing security.
(c) Represents a 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, 2006.
(e) The cost for federal income tax purposes is $842,437,120.
(f) At October 31, 2006 net unrealized appreciation was $304,249,978, 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 $312,201,745 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $7,951,767.
</Table>
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, 2006
<Table>
ASSETS:
Investment in securities, at value
(identified cost $841,276,039) including
$41,310,602 market value of securities
loaned $1,146,687,098
Cash 4,854
Receivables:
Investment securities sold 8,801,888
Dividends and interest 163,619
Fund shares sold 124,313
Other assets 38,909
--------------
Total assets 1,155,820,681
--------------
LIABILITIES:
Securities lending collateral 42,535,123
Payables:
Investment securities purchased 8,226,182
Fund shares redeemed 1,547,289
Transfer agent (See Note 3) 722,789
Manager (See Note 3) 575,280
NYLIFE Distributors (See Note 3) 506,643
Shareholder communication 196,245
Professional fees 76,414
Trustees 14,138
Custodian 8,747
Accrued expenses 6,905
--------------
Total liabilities 54,415,755
--------------
Net assets $1,101,404,926
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 215,474
Class B 133,136
Class C 2,011
Class I --(a)
Additional paid-in capital 980,304,677
Accumulated net realized loss on investments (184,661,431)
Net unrealized appreciation on investments 305,411,059
--------------
Net assets $1,101,404,926
==============
CLASS A
Net assets applicable to outstanding shares $ 701,373,590
==============
Shares of beneficial interest outstanding 21,547,416
==============
Net asset value per share outstanding $ 32.55
Maximum sales charge (5.50% of offering
price) 1.89
--------------
Maximum offering price per share outstanding $ 34.44
==============
CLASS B
Net assets applicable to outstanding shares $ 394,076,820
==============
Shares of beneficial interest outstanding 13,313,590
==============
Net asset value and offering price per share
outstanding $ 29.60
==============
CLASS C
Net assets applicable to outstanding shares $ 5,953,361
==============
Shares of beneficial interest outstanding 201,110
==============
Net asset value and offering price per share
outstanding $ 29.60
==============
CLASS I
Net assets applicable to outstanding shares $ 1,155
==============
Shares of beneficial interest outstanding 35
==============
Net asset value and offering price per share
outstanding $ 32.88*
==============
</Table>
(a) Less than one dollar.
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
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, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 7,988,219
Interest 303,490
Income from securities loaned--net 82,879
-------------
Total income 8,374,588
-------------
EXPENSES:
Manager (See Note 3) 6,811,493
Transfer agent--Classes A, B and C (See Note
3) 4,440,496
Transfer agent--Class I (See Note 3) 1
Distribution--Class B (See Note 3) 4,096,874
Distribution--Class C (See Note 3) 51,236
Distribution/Service--Class A (See Note 3) 1,577,747
Service--Class B (See Note 3) 1,365,625
Service--Class C (See Note 3) 17,079
Shareholder communication 638,807
Professional fees 292,088
Recordkeeping 145,097
Registration 93,031
Trustees 68,923
Custodian 39,667
Miscellaneous 81,309
-------------
Total expenses before reimbursement 19,719,473
Reimbursement from Manager for professional
fees (See Note 3(B) on page 20.) (120,946)
-------------
Net expenses 19,598,527
-------------
Net investment loss (11,223,939)
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 54,523,653
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 20.) 3,205,000
Net change in unrealized appreciation on
investments 44,444,576
-------------
Net realized and unrealized gain on
investments 102,173,229
-------------
Net increase in net assets resulting from
operations $ 90,949,290
=============
</Table>
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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (11,223,939) $ (13,627,331)
Net realized gain on investments 54,523,653 87,362,858
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 20.) 3,205,000 --
Net change in unrealized
appreciation on investments 44,444,576 58,572,551
-------------------------------
Net increase in net assets
resulting from operations 90,949,290 132,308,078
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A 104,529,828 35,814,597
Class B 32,001,472 48,606,802
Class C 762,444 838,918
Class I 1,577,275 14
-------------------------------
138,871,019 85,260,331
Cost of shares redeemed:
Class A (149,012,046) (109,647,573)
Class B (194,560,163) (296,854,534)
Class C (2,418,347) (3,199,154)
Class I (1,485,422) (13)
-------------------------------
(347,475,978) (409,701,274)
Net asset value of shares converted (See Note
1):
Class A 498,514,133 --
Class B (498,514,133) --
Decrease in net assets derived
from capital share
transactions (208,604,959) (324,440,943)
-------------------------------
Net decrease in net assets (117,655,669) (192,132,865)
NET ASSETS:
Beginning of year 1,219,060,595 1,411,193,460
-------------------------------
End of year $1,101,404,926 $1,219,060,595
===============================
</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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 30.08 $ 27.12 $ 27.24 $ 22.49 $ 32.86 $ 43.46
-------- -------- -------- ----------- -------- --------
Net investment loss (a) (0.20) (0.12)(b) (0.13) (0.09) (0.13) (0.15)
Net realized and unrealized gain (loss) on
investments 2.67(e) 3.08 0.01 4.84 (10.24) (10.22)
-------- -------- -------- ----------- -------- --------
Total from investment operations 2.47 2.96 (0.12) 4.75 (10.37) (10.37)
-------- -------- -------- ----------- -------- --------
Less distributions:
From net realized gain on investments -- -- -- -- -- (0.23)
-------- -------- -------- ----------- -------- --------
Net asset value at end of period $ 32.55 $ 30.08 $ 27.12 $ 27.24 $ 22.49 $ 32.86
======== ======== ======== =========== ======== ========
Total investment return (c) 8.21%(d)(e) 10.91% (0.44%) 21.12%(f) (31.56%) (23.85%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.63%) (0.41%)(b) (0.48%) (0.45%)+ (0.48%) (0.41%)
Net expenses 1.30% 1.27% 1.25% 1.30%+ 1.28% 1.29%
Expenses (before reimbursement) 1.31%(d) 1.27% 1.25% 1.30%+ 1.23% 1.10%
Portfolio turnover rate 23% 27% 28% 19% 69% 44%
Net assets at end of period (in 000's) $701,374 $220,611 $268,199 $335,484 $277,526 $442,526
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $27.56 $25.03 $25.33 $ 21.05 $31.00 $ 41.35
------ ------ ------ ----------- ------ -------
Net investment loss (a) (0.39) (0.31)(b) (0.32) (0.23) (0.32) (0.39)
Net realized and unrealized gain (loss) on
investments 2.43(e) 2.84 0.02 4.51 (9.63) (9.73)
------ ------ ------ ----------- ------ -------
Total from investment operations 2.04 2.53 (0.30) 4.28 (9.95) (10.12)
------ ------ ------ ----------- ------ -------
Less distributions:
From net realized gain on investments -- -- -- -- -- (0.23)
------ ------ ------ ----------- ------ -------
Net asset value at end of period $29.60 $27.56 $25.03 $ 25.33 $21.05 $ 31.00
====== ====== ====== =========== ====== =======
Total investment return (c) 7.40%(d)(e) 10.11% (1.18%) 20.33%(f) (32.10%) (24.46%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.35%) (1.16%)(b) (1.23%) (1.20%)+ (1.23%) (1.16%)
Net expenses 2.05% 2.02% 2.00% 2.05%+ 2.03% 2.04%
Expenses (before reimbursement) 2.06%(d) 2.02% 2.00% 2.05%+ 1.98% 1.85%
Portfolio turnover rate 23% 27% 28% 19% 69% 44%
Net assets at end of period (in 000's) $5,953 $7,120 $8,694 $10,475 $9,819 $18,162
</Table>
<Table>
* The Fund has 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) 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.
(c) Total return is calculated exclusive of sales charges. Class I Shares are not subject to
sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundred of a percent. (See Note 3 (B) on page 20.)
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were $0.08 per share on net
realized gains on investments; and the effect on total investment return was 0.27% for
Class A and Class I and 0.26% for Class B and Class C, respectively. (See Note 3 (B) on
page 20.)
(f) Total return is not annualized.
</Table>
16 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- -----------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 27.56 $ 25.03 $ 25.33 $ 21.05 $ 30.99 $ 41.34
-------- -------- ---------- ----------- ---------- ----------
(0.38) (0.31)(b) (0.32) (0.23) (0.32) (0.39)
2.42(e) 2.84 0.02 4.51 (9.62) (9.73)
-------- -------- ---------- ----------- ---------- ----------
2.04 2.53 (0.30) 4.28 (9.94) (10.12)
-------- -------- ---------- ----------- ---------- ----------
-- -- -- -- -- (0.23)
-------- -------- ---------- ----------- ---------- ----------
$ 29.60 $ 27.56 $ 25.03 $ 25.33 $ 21.05 $ 30.99
======== ======== ========== =========== ========== ==========
7.40%(d)(e) 10.11% (1.18%) 20.33%(f) (32.07%) (24.47%)
(1.31%) (1.16%)(b) (1.23%) (1.20%)+ (1.23%) (1.16%)
2.05% 2.02% 2.00% 2.05%+ 2.03% 2.04%
2.06%(d) 2.02% 2.00% 2.05%+ 1.98% 1.85%
23% 27% 28% 19% 69% 44%
$394,077 $991,328 $1,134,299 $1,300,835 $1,165,260 $2,004,638
</Table>
<Table>
<Caption>
CLASS I
- -----------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2006 2005 2004
$30.21 $27.15 $28.48
------ ------ -----------
0.14 (0.06)(b) (0.11)
2.53(e) 3.12 (1.22)
------ ------ -----------
2.67 3.06 (1.33)
------ ------ -----------
-- -- --
------ ------ -----------
$32.88 $30.21 $27.15
====== ====== ===========
8.84%(d)(e) 11.27% (4.67%)(f)
0.44% (0.18%)(b) (0.11%)+
0.60% 1.04% 0.88%+
0.61%(d) 1.04% 0.88%+
23% 27% 28%
$ 1 $ 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 commenced on
January 3, 1995, Class B shares commenced on May 1, 1986, Class C shares
commenced on September 1, 1998 and Class I 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 a 1% contingent deferred sales charge may be imposed on redemptions made
within one year of purchase of Class C shares. Class I shares are not subject to
sales charge. As approved by the Board of Trustees in 1997, Class B shares
convert to Class A shares eight years after the date they were purchased. The
first conversion occurred December 28, 2005. The four classes of shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions. 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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,
2006, are not affected.
ACCUMULATED
NET REALIZED LOSS ADDITIONAL
NET INVESTMENT LOSS ON INVESTMENTS PAID-IN-CAPITAL
$11,223,939 $(3,205,000) $ (8,018,939)
- ----------------------------------------------------------------------------
18 MainStay Capital Appreciation Fund
The reclassifications for the Fund are primarily due to the reimbursement
payment (See Note 10 on page 22) and the fact that net operating losses cannot
be carried forward for federal income tax purposes.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 21.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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, 2006, the Manager earned fees
from the Fund in the amount of $6,811,493.
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, the Manager pays 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 10 on
page 22.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $120,946. Additional payments
were made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) 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 and 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.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $84,761 for the year ended
October 31, 2006. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $10,646, $690,003 and $450, respectively, for the year ended October
31, 2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $4,440,497.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
20 MainStay Capital Appreciation Fund
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $292,737 0.0*%
- ----------------------------------------------------------------
Class C 82 0.0*
- ----------------------------------------------------------------
Class I 1,155 100.0
- ----------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $33,820.
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 $145,097 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
TOTAL
ACCUMULATED CAPITAL UNREALIZED ACCUMULATED
LOSSES APPRECIATION GAIN
$ (183,500,350) $ 304,249,978 $ 120,749,628
- ----------------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2006, for federal income tax purposes, capital loss carryforwards
of $183,500,350 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 $ 73,905
2011 49,074
2012 60,521
-------------------------------------------
$183,500
-------------------------------------------
</Table>
The Fund utilized $54,785,926 of capital loss carryforwards during the year
ended October 31, 2006.
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $41,310,602. The Fund received $42,535,123 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $271,131 and $511,101, respectively.
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 3,307 1,100 26 48
- -------------------------------------------------------------------------------
Shares redeemed (4,683) (6,728) (83) (48)
- -------------------------------------------------------------------------------
Shares converted (See Note 1) 15,588 (17,032) -- --
- -------------------------------------------------------------------------------
Net increase (decrease) 14,212 (22,660) (57) --
- -------------------------------------------------------------------------------
</Table>
<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>
(a) Less than one thousand shares.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$3,205,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
22 MainStay Capital Appreciation 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 Capital Appreciation Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the three-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, 2006, 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 Capital Appreciation Fund of The MainStay Funds as of October 31, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
KPMG LLP SIGNATURE
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 23
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, which include monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund and the Subadvisor's compliance with the Fund's investment
policies and restrictions. They also include administrative services, such as
working with other service providers of the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Board materials and Fund filings, and otherwise managing
the Trust's operations. The Subadvisor is responsible for the day-to-day
portfolio management of the Fund, including determining the composition of
assets of the Fund and the timing of the Fund's execution of the purchase and
sale of assets. In addition, the Subadvisor provides reports to the Manager and
reviews certain aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance over
longer time periods and its recent mid-range performance. The Trustees
considered the cost to the Manager of each Agreement and the profitability to
the Manager and its affiliates of the relationship with the Fund over various
time periods. In reviewing profitability information, the Trustees reviewed,
among other things, information about the allocation of expenses among the
Manager and its affiliates. The Trustees were provided information indicating
that the profitability to the Manager and its affiliates from the Agreements,
and from the overall relationship with the Trust, was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
discussed additional measures that may increase average
24 MainStay Capital Appreciation Fund
shareholder account size and/or otherwise reduce the Trust's transfer agency
expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at levels above the breakpoints, and the fact that the
breakpoints were intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund's management fee rate had been reduced by the
breakpoint schedule applicable to the Fund, although they also noted that the
Fund's asset size had decreased over the past several years. The Trustees
reviewed information about the potential effect of asset growth on Fund
expenses, the difficulty of forecasting its effect on the profitability of the
Manager and its affiliates, and the management fee breakpoints applicable to the
Fund and certain other funds in comparison groups. It was noted that, to the
extent the Fund's gross expenses currently were higher than its net expenses,
the reduction of the Fund's gross expenses through the achievement of economies
of scale might benefit the Manager by reducing the expenses the Manager must
reimburse to the Fund rather than directly benefiting the Fund by reducing its
net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager including other registered funds and separate
institutional accounts having investment strategies similar to that of the Fund,
and took account of explanations and other information relating to the fees and
expenses of those other funds and accounts. The Trustees considered the current
and proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust.
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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
www.mainstayfunds.com 25
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
SPECIAL MEETING OF SHAREHOLDERS
As previously reported to you, pursuant to notice, a special meeting and three
adjournment meetings (pertaining only to certain Funds) of the shareholders of
The MainStay Funds (the "Trust") were held on March 27, April 17, May 8, and
June 8, 2006, respectively, at the Parsippany, New Jersey offices of New York
Life Investment Management LLC. The purpose of the meetings was to present the
following proposals for shareholder consideration:
1. To elect the following individuals to the Board of Trustees of the Trust;
- Charlynn Goins
- Edward J. Hogan
- Alan R. Latshaw
- Terry L. Lierman
- John B. McGuckian
- Donald E. Nickelson
- Richard S. Trutanic
- Gary E. Wendlandt (Interested Trustee)
There are no other Trustees of the Trust.
2. To grant the Trust the approval to enter into and materially amend agreements
with Subadvisors on behalf of one or more of the Funds without obtaining
shareholder approval; and
3. To approve the amendment of certain fundamental investment restrictions.
No other business came before the special meetings.
Each of the proposals listed above was passed by the shareholders of the Fund as
shown below.
<Table>
<Caption>
VOTES VOTES
CAPITAL APPRECIATION FUND VOTES FOR AGAINST WITHHELD TOTAL
PROPOSAL #1-ELECTION OF TRUSTEES
- --------------------------------------------------------------------------------
a. Charlynn Goins 18,221,615 0 2,113,660 20,335,275
- --------------------------------------------------------------------------------
b. Edward J. Hogan 18,216,333 0 2,118,942 20,335,275
- --------------------------------------------------------------------------------
c. Alan R. Latshaw 18,198,017 0 2,137,258 20,335,275
- --------------------------------------------------------------------------------
d. Terry L. Lierman 18,212,700 0 2,122,575 20,335,275
- --------------------------------------------------------------------------------
e. John B. McGuckian 18,206,020 0 2,129,255 20,335,275
- --------------------------------------------------------------------------------
f. Donald E. Nickelson 18,206,360 0 2,128,915 20,335,275
- --------------------------------------------------------------------------------
g. Richard S. Trutanic 18,209,044 0 2,126,231 20,335,275
- --------------------------------------------------------------------------------
h. Gary E Wendlandt 18,220,323 0 2,114,952 20,335,275
- --------------------------------------------------------------------------------
PROPOSAL #2-APPROVAL TO ENTER INTO AND MATERIALLY AMEND AGREEMENTS
- --------------------------------------------------------------------------------
14,667,077 984,942 1,836,679 17,488,698
- --------------------------------------------------------------------------------
PROPOSAL #3-AMENDMENT TO CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
a. Borrowing 15,100,772 544,444 1,843,484 17,488,700
- --------------------------------------------------------------------------------
b. Senior Securities 15,144,947 501,133 1,842,620 17,488,700
- --------------------------------------------------------------------------------
c. Underwriting Securities 15,149,960 492,091 1,846,648 17,488,699
- --------------------------------------------------------------------------------
d. Real Estate 15,151,100 499,815 1,837,784 17,488,699
- --------------------------------------------------------------------------------
e. Commodities 15,088,589 561,368 1,838,742 17,488,699
- --------------------------------------------------------------------------------
f. Making Loans 15,094,012 553,423 1,841,264 17,488,699
- --------------------------------------------------------------------------------
g. Concentration of
Investments 15,156,085 494,178 1,838,437 17,488,700
- --------------------------------------------------------------------------------
h. Diversification 15,182,409 470,792 1,835,499 17,488,700
- --------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposals.
26 MainStay Capital Appreciation Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
28 MainStay Capital Appreciation Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
[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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSCA11-12/06
04
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 16
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 28
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 29
- --------------------------------------------------------------------------------
Federal Income Tax Information 31
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 31
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 31
- --------------------------------------------------------------------------------
Trustees and Officers 32
</Table>
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 4.49% 6.27% 7.38%
Excluding sales charges 10.57 7.48 7.99
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (With sales charges)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/96 9450 10000
11001 12146
10602 12051
12848 15528
16072 18364
14220 15302
13447 13783
15929 17806
16583 19253
18441 20116
10/31/06 20390 22758
</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 4.81% 6.36% 7.21%
Excluding sales charges 9.81 6.67 7.21
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (With sales charges)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/96 10000 10000
11565 12146
11068 12051
13320 15528
16540 18364
14528 15302
13632 13783
16024 17806
16557 19253
18271 20116
10/31/06 20063 22758
</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 8.73% 6.65% 7.20%
Excluding sales charges 9.73 6.65 7.20
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (With sales charges)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/96 10000 10000
11565 12146
11068 12051
13320 15528
16540 18364
14528 15302
13632 13783
16024 17806
16557 19253
18271 20116
10/31/06 20049 22758
</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 as 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. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to this agreement if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense. Prior to 9/1/98 performance
of Class 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
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 5
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ----------------------------------------------------------------------------------
Merrill Lynch All Convertible Securities Index(1) 13.13% 8.26% 8.57%
Average Lipper convertible securities fund(2) 11.59 8.32 7.88
</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 in 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.
6 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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,010.80 $6.08 $1,019.00 $6.11
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,006.25 $9.86 $1,015.25 $9.91
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,006.25 $9.86 $1,015.25 $9.91
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.20% for Class A, 1.95% for Class B and Class C) multiplied by the average
account value over the period, divided by 365 and multiplied by 184 (to
reflect the one-half year period). In the absence of waivers and/or
reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(COMPOSITION PIE CHART)
<Table>
Convertible Bonds 73.7
Convertible Preferred Stocks 11.3
Short-Term Investments (collateral from securities lendng is 11.1
7.3%)
Common Stocks 9.1
Investment Company 1.3
Liabilities in Excess of Cash and Other Assets (6.5)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Schlumberger, Ltd., 1.50%, due 6/1/23
2. Merrill Lynch & Co., Inc., zero coupon, due
3/13/32
3. Chesapeake Energy Corp., 4.50%
4. Cooper Cameron Corp., 1.50%, due 5/15/24
5. Walt Disney Co. (The), 2.125%, due 4/15/23
6. Lehman Brothers Holdings, Inc. (Whole Foods
Market, Inc.) Series WFMI, 1.25%, due 8/5/12
7. Hilton Hotels Corp., 3.375%, due 4/15/23
8. Fisher Scientific International, Inc., 3.25%,
due 3/1/24
9. Pride International, Inc., 3.25%, due 5/1/33
10. Credit Suisse USA, Inc. (Hewlett-Packard Co.),
1.00%, due 3/23/11
</Table>
8 MainStay Convertible Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Edward Silverstein, CFA, and Edmund C.
Spelman of MacKay Shields LLC
HOW DID MAINSTAY CONVERTIBLE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Convertible Fund returned 10.57% for Class
A shares, 9.81% for Class B shares, and 9.73% for Class C shares for the 12
months ended October 31, 2006. All share classes underperformed the 13.13%
return of the Merrill Lynch All Convertible Securities Index,(1) the Fund's
broad-based securities-market index, for the 12-month period. All share classes
also underperformed the 11.59% return of the average Lipper(2) convertible
securities fund for the 12 months ended October 31, 2006.
WHICH SECTORS WERE STRONG PERFORMERS AND WHICH ONES WERE WEAK DURING THE
REPORTING PERIOD?
The best-performing sectors for the Fund in absolute terms were oil services,
financials, and lodging. Sectors that detracted from the Fund's absolute
performance included media, health care, and semiconductors.
WHICH INDIVIDUAL FUND HOLDINGS WERE THE STRONGEST PERFORMERS DURING THE
REPORTING PERIOD?
A position in the convertible bonds of oil services company Schlumberger was the
Fund's strongest holding during the reporting period. Schlumberger benefited
from increased spending for exploration and drilling, and the company's share
price appeared inexpensive relative to future earnings prospects. Hilton's
convertible bonds were also extremely strong during the reporting period. The
company enjoyed increased room rates and high hotel occupancy. Fischer
Scientific also advanced on strong organic sales growth, earnings growth, and
free cash flow. The company is close to consummating a merger with
Thermo-Electron, a leading manufacturer of laboratory equipment and instruments,
and the deal may help Fischer Scientific broaden its product line.
WHICH SECURITIES WERE WEAK PERFORMERS DURING THE REPORTING PERIOD?
Sirius Satellite Radio's common stock and convertible bonds declined as
investors became increasingly concerned about the company's continuing losses
from operations.
We believe the company has experienced early growth pains and remains a viable
holding. Yahoo! shares and convertible bonds declined as the company reported
several disappointing quarters, especially when compared with Google. Concerned
about the prospects at Yahoo!, we sold the Fund's position in the company's
convertible bonds in September 2006. Teva Pharmaceutical Finance shares and
convertible bonds fell because of pricing pressures on generic manufacturers. We
continue to invest in the company, because we believe it is well-run and we
believe in the potential of the generic drug market.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
We initiated a position in the convertible bonds of Wesco International, a
distributor of electrical and industrial maintenance supplies. The company has
benefited from strong demand for its products from utilities. We also purchased
a significant position in the common shares of Microsoft. The shares were
selling at very low historical and absolute valuations, even though the company
is expected to release an upgraded operating system soon. The company has strong
free cash flow and plenty of cash on its balance sheet, which we believe
Microsoft may use to increase shareholder value.
As we already mentioned, we sold the Fund's convertible bonds of Yahoo! in
September. We also eliminated our position in the convertible bonds of Inco, a
leading nickel-mining company, when several merger offers drove the share price
above the level we thought represented full valuation. We also sold the Fund's
Verizon convertible bonds and trimmed the Fund's position in NII International
when the
Issuers of convertible securities may not be as financially strong as issuers of
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. High-yield securities ("junk
bonds") are generally considered speculative because they present a greater risk
of loss than higher-quality debt securities and may be subject to greater price
volatility. Foreign securities may be subject to greater risks than U.S.
investments, including currency fluctuations, less-liquid trading markets,
greater price volatility, political and economic instability, less publicly
available information, and changes in tax or currency laws or monetary policy.
These risks are likely to be greater in emerging markets than in developed
markets. The Fund may experience a portfolio turnover rate of more than 100% and
may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on the Merrill Lynch All
Convertible Securities Index.
2. See footnote on page 6 for more information on Lipper Inc.
www.mainstayfunds.com 9
companies' respective share prices approached our predetermined price targets.
WERE THERE ANY CHANGES IN THE FUND'S WEIGHTINGS DURING THE REPORTING PERIOD?
Yes, we increased the Fund's weightings in the consumer discretionary, health
care, and industrials sectors. We reduced the Fund's weightings in the
financials and telecommunication services sectors. The Fund's weightings in
energy, information technology, and utilities were little changed during the
12-month reporting period.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2006, the Fund was significantly overweighted relative to the
Merrill Lynch All Convertible Securities Index in energy and consumer staples.
On the same date, the Fund held a significantly underweighted position in
information technology. Other sectors were relatively in line with the
benchmark--with consumer discretionary, health care, financials,
telecommunication services, industrials, and materials slightly underweighted,
and utilities slightly overweighted.
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 forecast
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 Convertible Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES (85.0%)+
CONVERTIBLE BONDS (73.7%)
- ------------------------------------------------------------------------------
ADVERTISING (0.8%)
Interpublic Group of Cos., Inc.
4.50%, due 3/15/23 $ 3,675,000 $ 4,037,906
------------
AEROSPACE & DEFENSE (1.7%)
L-3 Communications Corp.
3.00%, due 8/1/35 (a) 6,455,000 6,721,269
Triumph Group, Inc.
2.625%, due 10/1/26 (a) 1,300,000 1,444,625
------------
8,165,894
------------
AIRLINES (0.4%)
AMR Corp.
4.50%, due 2/15/24 1,485,000 2,177,381
------------
AUTO PARTS & EQUIPMENT (1.0%)
ArvinMeritor, Inc.
4.625%, due 3/1/26 (a)
(zero coupon), beginning 3/1/16 1,680,000 1,707,300
Goodyear Tire & Rubber Co. (The)
4.00%, due 6/15/34 (b) 2,150,000 2,996,562
------------
4,703,862
------------
BIOTECHNOLOGY (4.9%)
Amgen, Inc.
0.125%, due 2/1/11 (a) 9,140,000 9,574,150
Citigroup Funding, Inc. (Genentech, Inc.)
0.50%, due 2/3/11 (c) 5,225,000 4,854,547
Genzyme Corp.
1.25%, due 12/1/23 (a) 3,100,000 3,382,875
1.25%, due 12/1/23 5,410,000 5,903,662
------------
23,715,234
------------
COMPUTERS (4.5%)
V Credit Suisse USA, Inc. (Hewlett-Packard Co.)
1.00%, due 3/23/11 (c) 10,339,999 11,212,695
Electronic Data Systems Corp.
3.875%, due 7/15/23 4,790,000 4,921,725
Mentor Graphics Corp.
6.25%, due 3/1/26 (a) 3,355,000 4,252,462
SanDisk Corp.
1.00%, due 5/15/13 1,435,000 1,307,644
------------
21,694,526
------------
DISTRIBUTION & WHOLESALE (4.0%)
Costco Wholesale Corp.
(zero coupon), due 8/19/17 9,150,000 11,140,125
WESCO International, Inc.
1.75%, due 11/15/26 (a) 4,763,000 4,852,306
2.625%, due 10/15/25 (a) 2,175,000 3,705,656
------------
19,698,087
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED FINANCIAL SERVICES (5.3%)
Affiliated Managers Group, Inc.
(zero coupon), due 5/7/21 $ 4,140,000 $ 7,245,000
V Merrill Lynch & Co., Inc.
(zero coupon), due 3/13/32 14,590,000 18,323,581
------------
25,568,581
------------
ELECTRIC (0.8%)
PG&E Corp.
9.50%, due 6/30/10 1,185,000 3,714,975
------------
ELECTRONICS (4.0%)
Fisher Scientific International, Inc.
2.50%, due 10/1/23 3,315,000 6,223,912
V 3.25%, due 3/1/24 (b) 9,300,000 11,566,875
Itron, Inc.
2.50%, due 8/1/26 1,300,000 1,449,500
------------
19,240,287
------------
ENVIRONMENTAL CONTROL (1.5%)
Waste Connections, Inc.
3.75%, due 4/1/26 (a) 2,510,000 2,619,812
3.75%, due 4/1/26 4,445,000 4,639,469
------------
7,259,281
------------
FOOD (3.1%)
V Lehman Brothers Holdings, Inc. (Whole Foods
Market, Inc.)
Series WFMI
1.25%, due 8/5/12 (c) 16,030,000 15,310,253
------------
HEALTH CARE-PRODUCTS (2.7%)
Henry Schein, Inc.
3.00%, due 8/15/34 3,870,000 4,755,262
Medtronic, Inc.
1.625%, due 4/15/13 (a) 8,345,000 8,418,019
------------
13,173,281
------------
HEALTH CARE-SERVICES (1.0%)
Health Management Associates, Inc.
4.375%, due 8/1/23 4,935,000 5,015,194
------------
HOUSEHOLD PRODUCTS & WARES (1.2%)
Church & Dwight Co., Inc.
5.25%, due 8/15/33 4,195,000 5,867,756
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
INTERNET (1.3%)
Amazon.com, Inc.
4.75%, due 2/1/09 (b) $ 5,415,000 $ 5,313,469
At Home Corp.
4.75%, due 12/15/06 (d)(e)(f) 9,147,056 915
Priceline.com, Inc.
0.50%, due 9/30/11 (a) 970,000 1,099,738
------------
6,414,122
------------
LODGING (2.8%)
V Hilton Hotels Corp.
3.375%, due 4/15/23 10,180,000 13,704,825
------------
MEDIA (5.8%)
Liberty Media Corp.
3.50%, due 1/15/31 8,740,000 9,155,150
Sirius Satellite Radio, Inc.
2.50%, due 2/15/09 (b) 2,440,000 2,647,400
V Walt Disney Co. (The)
2.125%, due 4/15/23 14,435,000 16,473,944
------------
28,276,494
------------
MINING (0.9%)
Century Aluminum Co.
1.75%, due 8/1/24 1,500,000 2,137,500
Coeur d'Alene Mines Corp.
1.25%, due 1/15/24 2,070,000 2,002,725
------------
4,140,225
------------
OIL & GAS (4.5%)
Diamond Offshore Drilling, Inc.
1.50%, due 4/15/31 7,165,000 10,380,294
V Pride International, Inc.
3.25%, due 5/1/33 9,315,000 11,317,725
------------
21,698,019
------------
OIL & GAS SERVICES (10.4%)
V Cooper Cameron Corp.
1.50%, due 5/15/24 11,240,000 17,281,500
Halliburton Co.
3.125%, due 7/15/23 (a)(b) 2,875,000 5,063,594
3.125%, due 7/15/23 4,290,000 7,555,763
V Schlumberger, Ltd.
1.50%, due 6/1/23 11,800,000 20,871,250
------------
50,772,107
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PHARMACEUTICALS (5.4%)
ALZA Corp.
(zero coupon), due 7/28/20 $ 7,025,000 $ 6,542,031
Teva Pharmaceutical Finance Co. B.V.
0.375%, due 11/15/22 1,885,000 2,893,475
Series D
1.75%, due 2/1/26 4,735,000 4,492,331
Teva Pharmaceutical Finance LLC
Series B
0.25%, due 2/1/24 3,730,000 3,972,450
Wyeth
5.109%, due 1/15/24 (g) 7,580,000 8,301,616
------------
26,201,903
------------
SEMICONDUCTORS (3.2%)
Diodes, Inc.
2.25%, due 10/1/26 5,498,000 5,875,988
Intel Corp.
2.95%, due 12/15/35 (a) 5,250,000 4,790,625
Lehman Brothers Holdings, Inc.
0.25%, due 6/23/11 (h) 5,075,000 5,066,373
------------
15,732,986
------------
TELECOMMUNICATIONS (2.5%)
AudioCodes, Ltd.
2.00%, due 11/9/24 (a)(b) 1,385,000 1,282,856
2.00%, due 11/9/24 (b) 2,750,000 2,547,188
Comverse Technology, Inc.
(zero coupon), due 5/15/23 995,000 1,293,500
NII Holdings, Inc.
2.75%, due 8/15/25 (a) 3,415,000 5,011,513
Time Warner Telecom, Inc.
2.375%, due 4/1/26 1,605,000 2,060,419
------------
12,195,476
------------
Total Convertible Bonds
(Cost $320,478,903) 358,478,655
------------
<Caption>
SHARES
CONVERTIBLE PREFERRED STOCKS (11.3%)
- ------------------------------------------------------------------------------
AIRLINES (0.5%)
Continental Airlines Finance Trust II
6.00% 62,800 2,645,450
------------
AUTO MANUFACTURERS (1.5%)
Ford Motor Co. Capital Trust II
6.50% 121,000 4,168,450
General Motors Corp.
5.25% Series B 147,500 3,035,550
------------
7,204,000
------------
</Table>
12 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
CHEMICALS (0.6%)
Celanese Corp.
4.25% (b) 101,900 $ 3,057,000
------------
DIVERSIFIED FINANCIAL SERVICES (0.9%)
Citigroup Funding, Inc.
0.50% (i) 137,600 4,399,072
------------
ELECTRIC (1.5%)
NRG Energy, Inc.
5.75% 29,700 7,364,115
------------
INSURANCE (2.0%)
MetLife, Inc.
6.375% (j) 320,800 9,502,096
------------
OIL & GAS (3.6%)
V Chesapeake Energy Corp.
4.50% (b) 173,400 17,379,882
------------
TELECOMMUNICATIONS (0.7%)
Lucent Technologies Capital Trust I
7.75% 3,307 3,385,128
------------
Total Convertible Preferred Stocks
(Cost $55,713,404) 54,936,743
------------
Total Convertible Securities
(Cost $376,192,307) 413,415,398
------------
COMMON STOCKS (9.1%)
- ------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.9%)
Citigroup, Inc. 87,670 4,397,527
------------
ELECTRIC (0.7%)
AES Corp. (The) (j) 143,900 3,164,361
------------
ENGINEERING & CONSTRUCTION (0.8%)
McDermott International, Inc. (j) 88,350 3,949,245
------------
IRON & STEEL (0.2%)
Allegheny Technologies, Inc. (b) 11,700 921,141
------------
LODGING (0.0%)++
FHC Delaware, Inc. (f)(j) 54,216 542
------------
</Table>
<Table>
<Caption>
SHARES VALUE
MEDIA (0.6%)
News Corp. Class A 99,300 $ 2,070,405
Sirius Satellite Radio, Inc. (b)(j) 203,200 778,256
------------
2,848,661
------------
OIL & GAS (2.1%)
ExxonMobil Corp. 56,500 4,035,230
Rowan Cos., Inc. (b) 61,900 2,066,222
Todco (b)(j) 125,300 4,276,489
------------
10,377,941
------------
OIL & GAS SERVICES (1.5%)
Baker Hughes, Inc. 26,300 1,816,015
Input/Output, Inc. (b)(j) 130,400 1,461,784
Tidewater, Inc. 82,500 4,102,725
------------
7,380,524
------------
RETAIL (0.3%)
World Fuel Services Corp. 29,000 1,247,580
------------
SOFTWARE (2.0%)
Microsoft Corp. 344,900 9,902,079
------------
Total Common Stocks
(Cost $39,210,179) 44,189,601
------------
INVESTMENT COMPANY (1.3%)
- ------------------------------------------------------------------------------
S&P 500 Index--SPDR Trust Series 1 (b)(k) 47,600 6,560,708
------------
Total Investment Company
(Cost $5,182,253) 6,560,708
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (11.1%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (5.1%)
American Express Credit Corp.
5.23%, due 11/3/06 $ 5,000,000 4,998,547
Fairway Finance Corp.
5.289%, due 11/20/06 (l) 628,762 628,762
General Electric Capital Corp.
5.23%, due 11/9/06 5,000,000 4,994,189
Goldman Sachs Group
5.25%, due 11/2/06 3,975,000 3,974,420
Greyhawk Funding
5.286%, due 11/13/06 (l) 838,349 838,349
Jupiter Securitization Corp.
5.303%, due 11/14/06 (l) 1,031,094 1,031,094
Lexington Parker Capital Co.
5.282%, due 11/8/06 (l) 838,349 838,349
</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 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
Liberty Street Funding Co.
5.286%, due 11/27/06 (l) $ 1,037,831 $ 1,037,831
Old Line Funding LLC
5.287%, due 11/15/06 (l) 838,349 838,349
Sheffield Receivables Corp.
5.272%, due 11/8/06 (l) 838,349 838,349
Societe Generale North America, Inc.
5.29%, due 11/1/06 4,065,000 4,065,000
Yorktown Capital LLC
5.282%, due 11/16/06 (l) 733,555 733,555
------------
Total Commercial Paper
(Cost $24,816,794) 24,816,794
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.4%)
BGI Institutional Money Market Fund (l) 1,809,811 1,809,811
------------
Total Investment Company
(Cost $1,809,811) 1,809,811
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.2%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $987,505
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with Principal Amount of $998,679
and a Market Value
of $1,026,609) (l) $ 987,357 987,357
------------
Total Repurchase Agreement
(Cost $987,357) 987,357
------------
TIME DEPOSITS (5.4%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (l) 1,676,698 1,676,698
Bank of America
5.27%, due 11/21/06 (g)(l) 2,305,460 2,305,460
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Bank of Montreal
5.28%, due 11/27/06 (l) $ 1,676,698 $ 1,676,698
Bank of Nova Scotia
5.30%, due 11/10/06 (l) 1,676,698 1,676,698
Barclays
5.32%, due 1/18/07 (l) 1,676,698 1,676,698
Deutsche Bank AG
5.27%, due 11/9/06 (l) 1,676,698 1,676,698
Fortis Bank
5.27%, due 11/6/06 (l) 3,646,818 3,646,818
Halifax Bank of Scotland
5.30%, due 1/10/07 (l) 1,676,698 1,676,698
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (l) 1,676,698 1,676,698
Royal Bank of Canada
5.30%, due 12/22/06 (l) 1,676,698 1,676,698
Royal Bank of Scotland
5.29%, due 12/12/06 (l) 1,676,698 1,676,698
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (l) 1,676,698 1,676,698
Societe Generale North America, Inc.
5.28%, due 12/6/06 (l) 1,676,698 1,676,698
UBS AG
5.28%, due 12/5/06 (l) 1,676,698 1,676,698
------------
Total Time Deposits
(Cost $26,072,654) 26,072,654
------------
Total Short-Term Investments
(Cost $53,686,616) 53,686,616
------------
Total Investments
(Cost $474,271,355) (m) 106.5% 517,852,323(n)
Liabilities in Excess of Cash and Other Assets (6.5) (31,607,513)
----------- ------------
Net Assets 100.0% $486,244,810
=========== ============
</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.
<Table>
++ Less than one tenth of a percent.
(a) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(b) Represents a security, or a portion thereof, which is out on loan.
(c) Synthetic Convertible--An equity-linked security issued by an entity other
than the issuer of the underlying equity instrument.
(d) Issue in default.
(e) Issuer in bankruptcy.
(f) Fair valued security. The total market value of these securities at October
31, 2006 is $1,457, which reflects 0.0% (less than one tenth of a percent)
of the Fund's net assets.
(g) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(h) 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 Analog Devices,
Inc., Applied Materials, Inc., Broadcom Corp., Intel Corp., Linear
Technology Corp., Marvell Technology, Maxim Integrated, Motorola, Inc.,
STMicroelectronics N.V. and Texas Instruments, Inc.
(i) Variable rate security that may be tendered back to the issuer at any time
prior to maturity at par.
(j) Non-income producing security.
(k) Exchange Traded Fund--represents a basket of securities that are traded on
an exchange.
(l) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(m) The cost for federal income tax purposes is $475,699,364.
(n) At October 31, 2006 net unrealized appreciation was $42,152,959, 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 $$51,858,286 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $9,705,327.
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $474,271,355) including $34,451,740
market value of securities loaned $517,852,323
Cash 3,499
Receivables:
Investment securities sold 10,938,636
Dividends and interest 1,663,009
Fund shares sold 250,847
Other assets 23,761
-------------
Total assets 530,732,075
-------------
LIABILITIES:
Securities lending collateral 35,654,460
Payables:
Investment securities purchased 7,432,519
Fund shares redeemed 741,616
Transfer agent (See Note 3) 247,361
NYLIFE Distributors (See Note 3) 200,779
Shareholder communication 78,637
Professional fees 56,830
Manager (See Note 3) 54,524
Trustees 6,145
Custodian 4,700
Accrued expenses 9,694
-------------
Total liabilities 44,487,265
-------------
Net assets $486,244,810
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 234,536
Class B 83,404
Class C 16,960
Additional paid-in capital 466,256,703
Accumulated undistributed net investment
income 1,898,136
Accumulated net realized loss on investments (25,825,897)
Net unrealized appreciation on investments 43,580,968
-------------
Net assets $486,244,810
=============
CLASS A
Net assets applicable to outstanding shares $340,331,142
=============
Shares of beneficial interest outstanding 23,453,550
=============
Net asset value per share outstanding $ 14.51
Maximum sales charge (5.50% of offering price) 0.84
-------------
Maximum offering price per share outstanding $ 15.35
=============
CLASS B
Net assets applicable to outstanding shares $121,273,968
=============
Shares of beneficial interest outstanding 8,340,357
=============
Net asset value and offering price per share
outstanding $ 14.54
=============
CLASS C
Net assets applicable to outstanding shares $ 24,639,700
=============
Shares of beneficial interest outstanding 1,695,959
=============
Net asset value and offering price per share
outstanding $ 14.53
=============
</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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 7,561,845
Dividends 4,580,091
Income from securities loaned--net 182,758
------------
Total income 12,324,694
------------
EXPENSES:
Manager (See Note 3) 3,626,998
Transfer agent (See Note 3) 1,507,709
Distribution--Class B (See Note 3) 1,301,523
Distribution--Class C (See Note 3) 185,324
Distribution/Service--Class A (See Note 3) 765,725
Service--Class B (See Note 3) 433,841
Service--Class C (See Note 3) 61,775
Shareholder communication 263,613
Professional fees 105,481
Recordkeeping 77,121
Registration 59,489
Custodian 40,359
Trustees 29,622
Miscellaneous 36,470
------------
Total expenses before waiver 8,495,050
Expense waiver from Manager (See Note 3) (953,770)
------------
Net expenses 7,541,280
------------
Net investment income 4,783,414
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 23,369,269
Net change in unrealized appreciation on
investments 20,900,326
------------
Net realized and unrealized gain on investments 44,269,595
------------
Net increase in net assets resulting from
operations $49,053,009
============
</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 CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 4,783,414 $ 4,108,322
Net realized gain on investments 23,369,269 38,968,649
Net change in unrealized
appreciation on investments 20,900,326 10,973,165
-----------------------------
Net increase in net assets
resulting from operations 49,053,009 54,050,136
-----------------------------
Dividends to shareholders:
From net investment income:
Class A (3,056,752) (1,266,634)
Class B (813,303) (2,245,163)
Class C (90,324) (137,512)
-----------------------------
Total dividends to shareholders (3,960,379) (3,649,309)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 58,976,922 18,535,270
Class B 8,898,168 12,183,390
Class C 4,052,259 2,385,934
Net asset value of shares issued to
shareholders in reinvestment of dividends:
Class A 2,778,951 1,093,305
Class B 740,898 2,081,858
Class C 66,242 102,145
-----------------------------
75,513,440 36,381,902
Cost of shares redeemed:
Class A (64,307,139) (29,578,330)
Class B (72,575,766) (93,490,476)
Class C (5,629,698) (7,945,433)
-----------------------------
(142,512,603) (131,014,239)
Net asset value of shares converted (See Note 1):
Class A 225,467,092 --
Class B (225,467,092) --
Decrease in net assets derived
from capital share transactions (66,999,163) (94,632,337)
-----------------------------
Net decrease in net assets (21,906,533) (44,231,510)
NET ASSETS:
Beginning of year 508,151,343 552,382,853
-----------------------------
End of year $ 486,244,810 $ 508,151,343
=============================
Accumulated undistributed net
investment income at end of year $ 1,898,136 $ 248,504
=============================
</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.
This page intentionally left blank
www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 13.28 $ 12.10 $ 11.78 $ 10.31 $ 11.58 $ 12.45
-------- ------- ------- ----------- ------- -------
Net investment income 0.16 (a) 0.18 (b) 0.15 0.16 0.25 0.36 (c)
Net realized and unrealized gain (loss) on
investments 1.23 1.17 0.34 1.46 (1.27) (0.87)(c)
Net realized and unrealized gain on
foreign currency transactions -- -- -- -- 0.00 (d) 0.00 (d)
-------- ------- ------- ----------- ------- -------
Total from investment operations 1.39 1.35 0.49 1.62 (1.02) (0.51)
-------- ------- ------- ----------- ------- -------
Less dividends:
From net investment income (0.16) (0.17) (0.17) (0.15) (0.25) (0.36)
-------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 14.51 $ 13.28 $ 12.10 $ 11.78 $ 10.31 $ 11.58
======== ======= ======= =========== ======= =======
Total investment return (e) 10.57% 11.21% 4.11% 15.86%(f) (8.88%) (4.01%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.14% 1.38%(b) 1.22% 1.85%+ 2.30% 2.97%(c)
Net expenses 1.20% 1.20% 1.34% 1.38%+ 1.37% 1.29%
Expenses (before waiver) 1.39% 1.38% 1.35% 1.38%+ 1.37% 1.29%
Portfolio turnover rate 72% 93% 96% 73% 94% 175%
Net assets at end of period (in 000's) $340,331 $93,996 $95,015 $89,751 $68,871 $74,317
</Table>
<Table>
<Caption>
CLASS C
----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59 $ 12.46
------- ------- ------- ----------- ------- -------
Net investment income 0.07 (a) 0.08(b) 0.06 0.10 0.17 0.27 (c)
Net realized and unrealized gain (loss) on
investments 1.22 1.17 0.33 1.45 (1.27) (0.87)(c)
Net realized and unrealized gain on
foreign currency transactions -- -- -- -- 0.00(d) 0.00 (d)
------- ------- ------- ----------- ------- -------
Total from investment operations 1.29 1.25 0.39 1.55 (1.10) (0.60)
------- ------- ------- ----------- ------- -------
Less dividends:
From net investment income (0.05) (0.07) (0.07) (0.09) (0.16) (0.27)
------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 14.53 $ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59
======= ======= ======= =========== ======= =======
Total investment return (e) 9.73% 10.35% 3.32% 15.09%(f) (9.50%) (4.76%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.49% 0.63%(b) 0.47% 1.10%+ 1.55% 0.22%(c)
Net expenses 1.95% 1.95% 2.09% 2.13%+ 2.12% 2.04%
Expenses (before waiver) 2.14% 2.13% 2.10% 2.13%+ 2.12% 2.04%
Portfolio turnover rate 72% 93% 96% 73% 94% 175%
Net assets at end of period (in 000's) $24,640 $23,992 $27,041 $26,079 $15,289 $13,241
</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) 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.
(c) 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.
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
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 (0.07%) (0.07%) (0.07%)
</Table>
<Table>
(d) Less than one cent per share.
(e) Total return is calculated exclusive of sales charges.
(f) Total return is not annualized.
</Table>
20 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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59 $ 12.46
-------- -------- -------- ----------- -------- --------
0.09 (a) 0.08(b) 0.06 0.10 0.17 0.27 (c)
1.21 1.17 0.33 1.45 (1.27) (0.87)(c)
-- -- -- -- 0.00(d) 0.00 (d)
-------- -------- -------- ----------- -------- --------
1.30 1.25 0.39 1.55 (1.10) (0.60)
-------- -------- -------- ----------- -------- --------
(0.05) (0.07) (0.07) (0.09) (0.16) (0.27)
-------- -------- -------- ----------- -------- --------
$ 14.54 $ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59
======== ======== ======== =========== ======== ========
9.81% 10.35% 3.32% 15.09%(f) (9.50%) (4.76%)
0.68% 0.63%(b) 0.47% 1.10%+ 1.55% 2.22%(c)
1.95% 1.95% 2.09% 2.13%+ 2.12% 2.04%
2.14% 2.13% 2.10% 2.13%+ 2.12% 2.04%
72% 93% 96% 73% 94% 175%
$121,274 $390,163 $430,326 $470,459 $436,572 $561,254
</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
Convertible Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares commenced on
January 3, 1995, Class B shares commenced on May 1, 1986 and Class C shares
commenced 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 a 1% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. As approved by the Board of Trustees in 1997, Class B shares convert to
Class A shares eight years after the date they were purchased. The first
conversion occurred December 28, 2005. The three 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 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 also invests in high yield securities (sometimes called "junk bonds"),
which are generally considered speculative because they present a greater risk
of loss, including default, than higher quality debt securities. These
securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to 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, as defined in Note 3,
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 trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time).
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund held securities with a value of $1,457
that were valued in such manner.
22 MainStay Convertible Fund
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, as defined in Note 3, conclude that such events may have
affected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's
Board of Trustees, adjust the value of the local price to reflect the impact on
the price of such securities as a result of events. Additionally, international
equity securities are also fair valued whenever the movement of a particular
index exceeds certain amounts. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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 undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT LOSS ON PAID-IN
INCOME INVESTMENTS CAPITAL
$ 826,597 $ (865,022) $ 38,425
- --------------------------------------------
</Table>
The reclassification for the Fund is primarily due to defaulted bond reclasses.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities,
other than short-term securities, purchased for the Fund are accreted and
amortized, respectively, on the effective interest rate 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.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 26.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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, to 0.62% on assets from $500 million to $1
billion and to 0.57% on assets in excess of $1 billion.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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 written expense
limitation 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. For the year ended October 31, 2006,
the Manager earned fees from the Fund in the amount of $3,626,998, and waived
its fees in the amount of $953,770.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$213,955 $953,770 $1,167,725
</Table>
- ----------------------------------------------------------
*The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, the Manager pays 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 or waive fees of the Fund,
the Subadvisor has voluntarily agreed to do so proportionately.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
24 MainStay Convertible Fund
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The 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 and 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 $52,872 for the year ended
October 31, 2006. 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 $6,052, $204,170 and $2,025, respectively, for the year ended October
31, 2006.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $1,507,709.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $241,480 0.1%
- -----------------------------------------------------------
Class C 126 0.0*
- -----------------------------------------------------------
</Table>
* Less than one tenth of a percent
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $14,100.
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 $77,121 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME LOSSES APPRECIATION GAIN
$2,690,570 $(25,190,322) $42,152,959 $19,653,207
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2006, for federal income tax purposes, capital loss carryforwards
of $25,190,322 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
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
probable that the capital gains so offset will not be distributed to
shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
2010 $20,187
2011 5,003
-------------------------------------------
$25,190
-------------------------------------------
</Table>
The Fund utilized $21,411,953 of capital loss carryforwards during the year
ended October 31, 2006.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary income $3,960,379 $3,649,309
- -------------------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $34,451,740. The Fund received $35,654,460 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $355,185 and $426,092, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C
Shares sold 4,257 631 287
- ---------------------------------------------------------------------
Shares issued in reinvestment of
dividends 199 53 5
- ---------------------------------------------------------------------
4,456 684 292
Shares redeemed (4,563) (5,236) (401)
- ---------------------------------------------------------------------
Shares converted (See Note 1) 16,482 (16,457) --
- ---------------------------------------------------------------------
Net increase (decrease) 16,375 (21,009) (109)
- ---------------------------------------------------------------------
</Table>
<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>
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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 Convertible Fund
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
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 Convertible Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2006, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
KPMG SIGNATURE
Philadelphia, Pennsylvania
December 21, 2006
28 MainStay Convertible Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's excellent investment
performance during the past year and the Fund's mid-range performance over
several other time periods relative to groupings of funds having similar
investment mandates, and the Trustees noted that the Subadvisor had changed the
portfolio manager of the Fund in 2004.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken
www.mainstayfunds.com 29
certain actions intended to increase the average size of shareholder accounts,
including imposing higher investment minimums for some share classes. The
Trustees discussed additional measures that may increase average shareholder
account size and/or otherwise reduce the Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at asset levels above the breakpoints, and the fact
that the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund's management fee rate had been reduced
by the breakpoint schedule applicable to the Fund. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to waive a certain portion
of its management fee, and to maintain a limit on the Fund's net expenses at a
certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
30 MainStay Convertible Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 62.7% to arrive at the amount eligible for qualified
dividend income, 90.7% to arrive at the amount eligible for qualified interest
income and 69.0% for the corporate dividends received deduction.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 and review copies of
Form N-Q by 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).
www.mainstayfunds.com 31
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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."
32 MainStay Convertible Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 33
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
34 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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSC11-12/06
05
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 9
- --------------------------------------------------------------------------------
Financial Statements 18
- --------------------------------------------------------------------------------
Notes to Financial Statements 23
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 28
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management Agreement 29
- --------------------------------------------------------------------------------
Federal Income Tax Information 31
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 31
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 31
- --------------------------------------------------------------------------------
Trustees and Officers 32
</Table>
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 CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
With sales charges 12.38% 5.81% 7.48%
Excluding sales charges 15.85 6.45 7.81
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY EQUITY INDEX FUND S&P 500 INDEX
-------------------------- -------------
10/31/96 9700 10000
12715 13211
15367 16117
19173 20253
20178 21487
15044 16136
12676 13698
15166 16548
16442 18107
17753 19686
10/31/06 20567 22903
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
S&P 500(R) Index(2) 16.34% 7.26% 8.64%
Average Lipper S&P 500 Index objective fund(3) 15.74 6.65 8.16
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect change in share price, reinvestment of dividend and capital-gain
distributions, and maximum applicable sales charges as 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.
These fee waivers and/or expense limitations are contractual and may be modified
or terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of any management fee waivers or expense reimbursements from
the Fund pursuant to this agreement if such action does not cause the Fund to
exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense.
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 25
of the Notes to Financial Statements for further explanation). If these
nonrecurring reimbursements had not been made the total return (excluding
sales charges) would have been 15.75%.
2. "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 in an index.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY 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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,058.50 $3.32 $1,021.80 $3.26
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of 0.64% multiplied
by the average account value over the period, divided by 365 and multiplied
by 184 (to reflect the one-half year period). In the absence of waivers
and/or reimbursements, expenses would have been higher.
6 MainStay Equity Index Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 95.5
Short-Term Investments (collateral from securities lending 11.9
is 6.8%)
Futures Contracts 0.2
Liabilities in Excess of Cash and Other Assets (7.6)
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. ExxonMobil Corp.
2. General Electric Co.
3. Microsoft Corp.
4. Citigroup, Inc.
5. Bank of America Corp.
6. Procter & Gamble Co. (The)
7. Johnson & Johnson
8. Pfizer, Inc.
9. American International Group, Inc.
10. Altria Group, Inc.
</Table>
www.mainstayfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Francis J. Ok of New York Life
Investment Management LLC
HOW DID MAINSTAY EQUITY INDEX FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, Class A shares of MainStay Equity Index Fund
returned 15.85% for the 12 months ended October 31, 2006. The Fund, which offers
only one share class, underperformed the 16.34% return of the S&P 500(R)
Index,(1) the Fund's broad-based securities-market index, for the 12-month
reporting period. Because the Fund faces real-world expenses that a hypothetical
index does not, there will be times when the Fund lags the Index. The Fund
outperformed the 15.74% return of the average Lipper(2) S&P 500 Index objective
fund for the 12 months ended October 31, 2006.(3)
DURING THE REPORTING PERIOD, WHICH INDUSTRIES WERE THE STRONGEST CONTRIBUTORS TO
THE FUND'S PERFORMANCE AND WHICH WERE THE WEAKEST?
On the basis of impact, which takes weightings and total returns into account,
the industry that made the strongest positive contribution to the Fund's
performance was oil, gas & consumable fuels. Pharmaceuticals was the
second-strongest contributor, and diversified financial services was third. The
weakest contribution came from Internet software & services, followed by
wireless telecommunication services, and diversified consumer services.
DURING THE REPORTING PERIOD, WHICH INDUSTRIES HAD THE STRONGEST AND WHICH HAD
THE WEAKEST TOTAL RETURNS?
The best-performing S&P 500(R) industry in terms of total return was metals &
mining, followed by diversified telecommunication services and real estate
investment trusts. Diversified consumer services recorded the lowest total
return of any industry in the Index. Internet & catalog retail had the second-
lowest total return, followed by wireless telecommunication services.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS HAD THE STRONGEST AND WHICH
HAD THE WEAKEST TOTAL RETURNS?
The S&P 500(R) Index stock with the highest total return for the 12-month
reporting period was Allegheny Technologies. NVIDIA was second, followed by
NuCor. The Index stock with the lowest total return for the reporting period was
Calpine, followed by Dana and Apollo Group.
WHICH STOCKS WERE THE GREATEST POSITIVE CONTRIBUTORS TO THE FUND'S PERFORMANCE
AND WHICH WERE THE GREATEST DETRACTORS?
On the basis of impact, which takes weightings and total returns into
consideration, the stocks that made the greatest positive contributions to the
Fund's performance were ExxonMobil, Bank of America, and AT&T. The weakest
contributor in terms of impact was Dell, followed by Yahoo! and UnitedHealth
Group.
WERE THERE ANY CHANGES IN THE MAKEUP OF THE S&P(R) 500 INDEX DURING THE
REPORTING 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. In addition, Standard & Poor's may occasionally adjust
the Index to better reflect the companies that Standard & Poor's believes are
most representative of the makeup of the U.S. economy. During the 12-month
reporting period, there were 27 additions to the S&P 500(R) Index and 27
deletions from it. Notable additions included Amazon.com, GenWorth Financial,
Google, Legg Mason, and Chicago Mercantile Exchange. Notable deletions included
Calpine, Dana, Cooper Tire & Rubber, and Gateway.
The Fund was closed to new investors and 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 5 for more information on the S&P 500(R) Index.
2. See footnote on page 5 for more information on Lipper Inc.
3. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 5.
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, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (95.5%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.3%)
Boeing Co. (The) 30,285 $ 2,418,560
General Dynamics Corp. 15,415 1,096,006
Goodrich Corp. 4,711 207,708
Honeywell International, Inc. 31,189 1,313,681
L-3 Communications Holdings, Inc. 4,735 381,262
Lockheed Martin Corp. 13,564 1,179,119
Northrop Grumman Corp. 13,105 870,041
Raytheon Co. 17,098 854,045
Rockwell Collins, Inc. 6,547 380,250
United Technologies Corp. 38,544 2,533,112
------------
11,233,784
------------
AIR FREIGHT & LOGISTICS (0.9%)
FedEx Corp. 11,641 1,333,360
United Parcel Service, Inc. Class B 41,155 3,101,029
------------
4,434,389
------------
AIRLINES (0.1%)
Southwest Airlines Co. 29,935 449,923
------------
AUTO COMPONENTS (0.1%)
Goodyear Tire & Rubber Co. (The) (a)(b) 6,777 103,891
Johnson Controls, Inc. (b) 7,461 608,370
------------
712,261
------------
AUTOMOBILES (0.4%)
Ford Motor Co. (b) 71,674 593,461
General Motors Corp. (b) 21,567 753,120
Harley-Davidson, Inc. 10,021 687,741
------------
2,034,322
------------
BEVERAGES (2.0%)
Anheuser-Busch Cos., Inc. 29,280 1,388,458
Brown-Forman Corp. Class B 3,011 217,364
Coca-Cola Co. (The) 77,658 3,628,182
Coca-Cola Enterprises, Inc. 10,557 211,457
Constellation Brands, Inc. (a)(b) 8,073 221,927
Molson Coors Brewing Co. Class B 1,715 122,074
Pepsi Bottling Group, Inc. (The) 5,182 163,855
PepsiCo, Inc. 62,829 3,985,872
------------
9,939,189
------------
</Table>
<Table>
<Caption>
SHARES VALUE
BIOTECHNOLOGY (1.3%)
Amgen, Inc. (a) 44,619 $ 3,387,028
Biogen Idec, Inc. (a) 13,064 621,846
Celgene Corp. (a) 7,100 379,424
Genzyme Corp. (a) 9,967 672,872
Gilead Sciences, Inc. (a) 17,413 1,199,756
MedImmune, Inc. (a)(b) 9,141 292,878
------------
6,553,804
------------
BUILDING PRODUCTS (0.1%)
American Standard Cos., Inc. 6,643 294,218
Masco Corp. 15,188 419,948
------------
714,166
------------
CAPITAL MARKETS (3.6%)
Ameriprise Financial, Inc. 9,328 480,392
Bank of New York Co., Inc. (The) 29,088 999,755
Bear Stearns Cos., Inc. (The) 4,565 690,913
Charles Schwab Corp. (The) 39,416 718,160
E*TRADE Financial Corp. (a) 16,229 377,811
Federated Investors, Inc. Class B 3,490 119,672
Franklin Resources, Inc. 6,319 720,113
Goldman Sachs Group, Inc. (The) 16,483 3,128,309
Janus Capital Group, Inc. 7,907 158,773
Legg Mason, Inc. (b) 5,027 452,531
Lehman Brothers Holdings, Inc. 20,482 1,594,319
Mellon Financial Corp. 15,720 609,936
Merrill Lynch & Co., Inc. (b) 33,745 2,949,988
Morgan Stanley 40,832 3,120,790
Northern Trust Corp. 7,105 417,206
State Street Corp. 12,585 808,335
T. Rowe Price Group, Inc. 9,998 473,005
------------
17,820,008
------------
CHEMICALS (1.4%)
Air Products & Chemicals, Inc. 8,345 581,396
Ashland, Inc. (b) 2,457 145,209
Dow Chemical Co. (The) 36,506 1,489,080
E.I. du Pont de Nemours & Co. 35,138 1,609,320
Eastman Chemical Co. 3,121 190,131
Ecolab, Inc. (b) 6,825 309,514
Hercules, Inc. (a) 4,294 78,151
International Flavors & Fragrances, Inc. 3,041 129,182
Monsanto Co. 20,678 914,381
PPG Industries, Inc. 6,315 431,946
Praxair, Inc. 12,317 742,099
Rohm & Haas Co. (b) 5,482 284,077
Sigma-Aldrich Corp. (b) 2,487 186,799
------------
7,091,285
------------
COMMERCIAL BANKS (4.1%)
AmSouth Bancorp 13,033 393,857
BB&T Corp. 20,409 888,200
Comerica, Inc. 6,152 357,985
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
COMMERCIAL BANKS (CONTINUED)
xCommerce Bancorp, Inc. (b) 7,101 $ 247,967
Compass Bancshares, Inc. 4,944 278,149
Fifth Third Bancorp (b) 21,236 846,255
First Horizon National Corp. 4,686 184,254
Huntington Bancshares, Inc. 9,038 220,618
KeyCorp 15,381 571,250
M&T Bank Corp. 2,919 355,563
Marshall & Ilsley Corp. 9,729 466,408
National City Corp. (b) 23,048 858,538
North Fork Bancorp., Inc. 17,719 506,409
PNC Financial Services Group, Inc. 11,254 788,118
Regions Financial Corp. (b) 17,323 657,408
SunTrust Banks, Inc. 13,941 1,101,200
Synovus Financial Corp. 12,340 362,549
U.S. Bancorp 67,659 2,289,581
Wachovia Corp. 72,929 4,047,560
Wells Fargo & Co. (b) 128,230 4,653,467
Zions Bancorp 4,076 327,710
------------
20,403,046
------------
COMMERCIAL SERVICES & SUPPLIES (0.5%)
Allied Waste Industries, Inc. (a) 9,648 117,223
Avery Dennison Corp. 3,611 227,999
Cintas Corp. 5,222 216,191
Equifax, Inc. 4,839 184,027
Monster Worldwide, Inc. (a) 4,903 198,621
Pitney Bowes, Inc. 8,447 394,559
R.R. Donnelley & Sons Co. 8,218 278,261
Robert Half International, Inc. 6,558 239,695
Waste Management, Inc. 20,633 773,325
------------
2,629,901
------------
COMMUNICATIONS EQUIPMENT (2.6%)
ADC Telecommunications, Inc. (a) 4,508 64,509
Avaya, Inc. (a) 17,212 220,486
Ciena Corp. (a) 3,215 75,585
Cisco Systems, Inc. (a) 232,561 5,611,697
Comverse Technology, Inc. (a)(b) 7,647 166,475
Corning, Inc. (a) 59,379 1,213,113
JDS Uniphase Corp. (a)(b) 8,024 116,589
Juniper Networks, Inc. (a) 21,547 371,039
Lucent Technologies, Inc. (a) 170,774 414,981
Motorola, Inc. 93,350 2,152,651
QUALCOMM, Inc. 62,925 2,289,841
Tellabs, Inc. (a) 17,123 180,476
------------
12,877,442
------------
COMPUTERS & PERIPHERALS (3.5%)
Apple Computer, Inc. (a) 32,414 2,628,127
Dell, Inc. (a) 86,530 2,105,275
EMC Corp. (a) 87,556 1,072,561
</Table>
<Table>
<Caption>
SHARES VALUE
COMPUTERS & PERIPHERALS (CONTINUED)
Hewlett-Packard Co. 104,304 $ 4,040,737
International Business Machines Corp. 58,002 5,355,325
Lexmark International, Inc. Class A (a) 3,867 245,903
NCR Corp. (a) 6,840 283,997
Network Appliance, Inc. (a) 14,153 516,584
QLogic Corp. (a) 5,949 122,430
SanDisk Corp. (a)(b) 7,453 358,489
Sun Microsystems, Inc. (a) 133,636 725,643
------------
17,455,071
------------
CONSTRUCTION & ENGINEERING (0.1%)
Fluor Corp. 3,380 265,093
------------
CONSTRUCTION MATERIALS (0.1%)
Vulcan Materials Co. 3,722 303,269
------------
CONSUMER FINANCE (0.9%)
American Express Co. 46,283 2,675,620
Capital One Financial Corp. 11,614 921,339
SLM Corp. 15,592 759,019
------------
4,355,978
------------
CONTAINERS & PACKAGING (0.2%)
Ball Corp. 3,988 165,861
Bemis Co., Inc. 3,991 134,177
Pactiv Corp. (a) 5,302 163,514
Sealed Air Corp. 3,122 185,821
Temple-Inland, Inc. 4,177 164,741
------------
814,114
------------
DISTRIBUTORS (0.1%)
Genuine Parts Co. 6,519 296,745
------------
DIVERSIFIED CONSUMER SERVICES (0.1%)
Apollo Group, Inc. Class A (a)(b) 5,333 197,108
H&R Block, Inc. 12,220 267,129
------------
464,237
------------
DIVERSIFIED FINANCIAL SERVICES (5.4%)
V Bank of America Corp. 172,430 9,288,804
Chicago Mercantile Exchange Holdings, Inc. 1,400 701,400
CIT Group, Inc. 7,608 395,996
V Citigroup, Inc. 188,286 9,444,426
JPMorgan Chase & Co. 132,284 6,275,553
Moody's Corp. 8,974 594,976
------------
26,701,155
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.8%)
AT&T, Inc. 147,958 5,067,562
BellSouth Corp. 69,141 3,118,259
CenturyTel, Inc. 4,451 179,108
</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 TELECOMMUNICATION SERVICES (CONTINUED)
Citizens Communications Co. 12,265 $ 179,805
Embarq Corp. 5,719 276,514
Qwest Communications International, Inc. (a) 60,923 525,765
Verizon Communications, Inc. 110,416 4,085,392
Windstream Corp. 17,996 246,905
------------
13,679,310
------------
ELECTRIC UTILITIES (1.5%)
Allegheny Energy, Inc. (a) 6,279 270,185
American Electric Power Co., Inc. 15,036 622,941
Edison International 12,383 550,301
Entergy Corp. 7,962 683,378
Exelon Corp. 25,534 1,582,597
FirstEnergy Corp. 12,538 737,861
FPL Group, Inc. (b) 15,374 784,074
Pinnacle West Capital Corp. 3,822 182,730
PPL Corp. (b) 14,556 502,473
Progress Energy, Inc. (b) 9,666 444,636
Southern Co. (The) 28,290 1,029,756
------------
7,390,932
------------
ELECTRICAL EQUIPMENT (0.4%)
American Power Conversion Corp. (b) 6,461 195,316
Cooper Industries, Ltd. Class A 3,487 311,912
Emerson Electric Co. 15,540 1,311,576
Rockwell Automation, Inc. 6,729 417,198
------------
2,236,002
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%)
Agilent Technologies, Inc. (a) 15,590 555,004
Jabil Circuit, Inc. 7,066 202,865
Molex, Inc. 5,424 189,298
Sanmina-SCI Corp. (a) 20,275 80,086
Solectron Corp. (a) 34,822 116,305
Symbol Technologies, Inc. 9,673 144,418
Tektronix, Inc. 3,234 98,217
------------
1,386,193
------------
ENERGY EQUIPMENT & SERVICES (1.7%)
Baker Hughes, Inc. 12,524 864,782
BJ Services Co. 11,412 344,186
Halliburton Co. 39,329 1,272,293
Nabors Industries, Ltd. (a)(b) 12,042 371,857
National-Oilwell Varco, Inc. (a) 6,640 401,056
Noble Corp. 5,216 365,642
Rowan Cos., Inc. (b) 4,190 139,862
Schlumberger, Ltd. 45,101 2,844,971
Smith International, Inc. 7,600 300,048
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (CONTINUED)
Transocean, Inc. (a) 11,996 $ 870,190
Weatherford International, Ltd. (a) 13,196 542,092
------------
8,316,979
------------
FOOD & STAPLES RETAILING (2.2%)
Costco Wholesale Corp. 17,819 951,178
CVS Corp. 31,243 980,405
Kroger Co. (The) 27,508 618,655
Safeway, Inc. 16,981 498,562
SUPERVALU, Inc. 8,100 270,540
Sysco Corp. 23,551 823,814
Walgreen Co. 38,437 1,678,928
Wal-Mart Stores, Inc. 93,730 4,619,014
Whole Foods Market, Inc. 5,357 341,991
------------
10,783,087
------------
FOOD PRODUCTS (1.1%)
Archer-Daniels-Midland Co. 24,994 962,269
Campbell Soup Co. 8,791 328,608
ConAgra Foods, Inc. 19,419 507,807
Dean Foods Co. (a) 5,110 214,058
General Mills, Inc. 13,481 765,990
H.J. Heinz Co. 12,641 532,945
Hershey Co. (The) (b) 6,655 352,116
Kellogg Co. 9,529 479,404
McCormick & Co., Inc. 5,053 188,982
Sara Lee Corp. 28,918 494,498
Tyson Foods, Inc. Class A (b) 9,600 138,720
Wm. Wrigley Jr. Co. (b) 8,391 435,912
------------
5,401,309
------------
GAS UTILITIES (0.0%)++
Nicor, Inc. 1,722 79,143
Peoples Energy Corp. 1,486 64,923
------------
144,066
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.5%)
Bausch & Lomb, Inc. 2,073 110,988
Baxter International, Inc. 24,881 1,143,780
Becton, Dickinson & Co. 9,301 651,349
Biomet, Inc. 9,349 353,766
Boston Scientific Corp. (a) 44,878 714,009
C.R. Bard, Inc. (b) 3,940 322,922
Hospira, Inc. (a) 5,953 216,392
Medtronic, Inc. (b) 43,767 2,130,578
St. Jude Medical, Inc. (a) 13,446 461,870
Stryker Corp. 11,268 589,204
Zimmer Holdings, Inc. (a) 9,283 668,469
------------
7,363,327
------------
HEALTH CARE PROVIDERS & SERVICES (2.4%)
Aetna, Inc. 20,860 859,849
AmerisourceBergen Corp. 7,693 363,110
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
Cardinal Health, Inc. 15,474 $ 1,012,773
Caremark Rx, Inc. 16,268 800,874
CIGNA Corp. 4,260 498,335
Coventry Health Care, Inc. (a) 6,090 285,925
Express Scripts, Inc. (a) 5,272 335,932
HCA, Inc. (b) 16,119 814,332
Health Management Associates, Inc. Class A (b) 9,169 180,629
Humana, Inc. (a) 6,308 378,480
Laboratory Corp. of America Holdings (a)(b) 4,814 329,711
Manor Care, Inc. 2,779 133,364
McKesson Corp. 11,415 571,777
Medco Health Solutions, Inc. (a) 11,196 598,986
Patterson Cos., Inc. (a)(b) 5,261 172,824
Quest Diagnostics, Inc. 6,165 306,647
Tenet Healthcare Corp. (a)(b) 17,945 126,692
UnitedHealth Group, Inc. 51,264 2,500,658
WellPoint, Inc. (a) 23,609 1,801,839
------------
12,072,737
------------
HEALTH CARE TECHNOLOGY (0.0%)++
IMS Health, Inc. 7,651 213,080
------------
HOTELS, RESTAURANTS & LEISURE (1.5%)
Carnival Corp. (b) 16,953 827,645
Darden Restaurants, Inc. 5,559 232,922
Harrah's Entertainment, Inc. 7,049 523,952
Hilton Hotels Corp. 14,729 425,963
International Game Technology 12,908 548,719
Marriott International, Inc. Class A 13,082 546,435
McDonald's Corp. 46,679 1,956,784
Starbucks Corp. (a) 28,759 1,085,652
Starwood Hotels & Resorts Worldwide, Inc. 8,347 498,650
Wendy's International, Inc. 4,448 153,901
Wyndham Worldwide Corp. (a) 7,644 225,498
Yum! Brands, Inc. 10,347 615,233
------------
7,641,354
------------
HOUSEHOLD DURABLES (0.6%)
Black & Decker Corp. (The) 2,833 237,632
Centex Corp. (b) 4,488 234,722
D.R. Horton, Inc. (b) 10,372 243,016
Fortune Brands, Inc. (b) 5,739 441,616
Harman International Industries, Inc. 2,501 255,977
KB HOME 3,025 135,943
Leggett & Platt, Inc. 6,843 159,784
Lennar Corp. Class A 5,263 249,887
</Table>
<Table>
<Caption>
SHARES VALUE
HOUSEHOLD DURABLES (CONTINUED)
Newell Rubbermaid, Inc. 10,515 $ 302,622
Pulte Homes, Inc. (b) 8,032 248,912
Snap-on, Inc. 2,253 105,959
Stanley Works (The) 3,117 148,525
Whirlpool Corp. 2,981 259,138
------------
3,023,733
------------
HOUSEHOLD PRODUCTS (2.1%)
Clorox Co. (The) 5,772 372,640
Colgate-Palmolive Co. 19,632 1,255,859
Kimberly-Clark Corp. 17,435 1,159,776
V Procter & Gamble Co. (The) 120,930 7,665,753
------------
10,454,028
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.4%)
AES Corp. (The) (a) 25,177 553,642
Constellation Energy Group, Inc. 6,851 427,502
Dynegy, Inc. Class A (a) 14,438 87,783
TXU Corp. 17,586 1,110,204
------------
2,179,131
------------
INDUSTRIAL CONGLOMERATES (3.8%)
3M Co. 28,662 2,259,712
V General Electric Co. 393,245 13,806,832
Textron, Inc. 4,771 433,827
Tyco International, Ltd. 76,781 2,259,665
------------
18,760,036
------------
INSURANCE (4.5%)
ACE, Ltd. 12,424 711,274
AFLAC, Inc. 18,871 847,685
Allstate Corp. (The) 23,975 1,471,106
Ambac Financial Group, Inc. 4,082 340,806
V American International Group, Inc. 98,970 6,647,815
Aon Corp. 11,985 416,958
Chubb Corp. (The) 15,619 830,150
Cincinnati Financial Corp. 6,615 301,975
Genworth Financial, Inc. Class A 17,298 578,445
Hartford Financial Services Group, Inc. (The) 11,592 1,010,475
Lincoln National Corp. 10,894 689,699
Loews Corp. 17,442 678,843
Marsh & McLennan Cos., Inc. 20,953 616,856
MBIA, Inc. (b) 5,105 316,612
MetLife, Inc. (b) 28,924 1,652,428
Principal Financial Group, Inc. 10,290 581,282
Progressive Corp. (The) 29,447 711,734
Prudential Financial, Inc. 18,430 1,417,820
SAFECO Corp. 4,480 260,691
St. Paul Travelers Cos., Inc. (The) 26,339 1,346,713
Torchmark Corp. 3,799 234,322
</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)
UnumProvident Corp. 12,987 $ 256,883
XL Capital, Ltd. Class A 6,884 485,666
------------
22,406,238
------------
INTERNET & CATALOG RETAIL (0.1%)
Amazon.com, Inc. (a)(b) 11,937 454,680
------------
INTERNET SOFTWARE & SERVICES (1.4%)
eBay, Inc. (a) 44,743 1,437,593
Google, Inc. Class A (a) 8,106 3,861,617
VeriSign, Inc. (a) 9,273 191,766
Yahoo!, Inc. (a) 47,397 1,248,437
------------
6,739,413
------------
IT SERVICES (0.9%)
Affiliated Computer Services, Inc. Class A (a)(b) 4,554 243,548
Automatic Data Processing, Inc. 21,170 1,046,645
Computer Sciences Corp. (a) 6,551 346,220
Convergys Corp. (a) 5,245 111,246
Electronic Data Systems Corp. 19,703 499,077
First Data Corp. 29,132 706,451
Fiserv, Inc. (a) 6,590 325,546
Paychex, Inc. 12,894 509,055
Sabre Holdings Corp. Class A 5,061 128,651
Unisys Corp. (a) 13,138 85,923
Western Union Co. (The) (a) 29,132 642,361
------------
4,644,723
------------
LEISURE EQUIPMENT & PRODUCTS (0.2%)
Brunswick Corp. 3,493 110,029
Eastman Kodak Co. (b) 10,898 265,911
Hasbro, Inc. 6,241 161,767
Mattel, Inc. 14,389 325,623
------------
863,330
------------
LIFE SCIENCES TOOLS & SERVICES (0.3%)
Applera Corp.--Applied BioSystems Group 6,948 259,160
Fisher Scientific International, Inc. (a) 4,732 405,154
Millipore Corp. (a)(b) 2,069 133,513
PerkinElmer, Inc. 4,748 101,417
Thermo Electron Corp. (a) 6,036 258,763
Waters Corp. (a) 3,939 196,162
------------
1,354,169
------------
MACHINERY (1.4%)
Caterpillar, Inc. 25,011 1,518,418
Cummins, Inc. (b) 1,981 251,547
Danaher Corp. 9,003 646,145
Deere & Co. 8,768 746,420
</Table>
<Table>
<Caption>
SHARES VALUE
MACHINERY (CONTINUED)
Dover Corp. 7,725 $ 366,938
Eaton Corp. 5,730 415,024
Illinois Tool Works, Inc. 16,000 766,880
Ingersoll-Rand Co. Class A 12,222 448,670
ITT Corp. 7,061 384,048
Navistar International Corp. (a) 2,324 64,445
PACCAR, Inc. (b) 9,534 564,508
Pall Corp. 4,744 151,334
Parker Hannifin Corp. 4,587 383,611
------------
6,707,988
------------
MEDIA (3.3%)
CBS Corp. Class B 29,784 861,949
Clear Channel Communications, Inc. 18,869 657,585
Comcast Corp. Class A (a) 79,684 3,240,748
Dow Jones & Co., Inc. (b) 2,495 87,550
E.W. Scripps Co. (The) Class A 3,142 155,403
Gannett Co., Inc. 9,022 533,561
Interpublic Group of Cos., Inc. (The) (a)(b) 16,745 182,688
McGraw-Hill Cos., Inc. (The) 13,454 863,343
Meredith Corp. 1,438 75,495
New York Times Co. (The) Class A (b) 5,502 132,983
News Corp. Class A 89,003 1,855,713
Omnicom Group, Inc. 6,502 659,628
Time Warner, Inc. 154,905 3,099,649
Tribune Co. (b) 7,265 242,142
Univision Communications, Inc. Class A (a)(b) 9,574 335,664
Viacom, Inc. Class B (a) 27,054 1,052,942
Walt Disney Co. (The) 79,651 2,505,820
------------
16,542,863
------------
METALS & MINING (0.9%)
Alcoa, Inc. 33,019 954,579
Allegheny Technologies, Inc. (b) 3,824 301,064
Freeport-McMoRan Copper & Gold, Inc. Class B (b) 7,516 454,568
Newmont Mining Corp. 17,151 776,426
Nucor Corp. 11,753 686,493
Phelps Dodge Corp. 7,726 775,536
United States Steel Corp. 4,694 317,314
------------
4,265,980
------------
MULTILINE RETAIL (1.2%)
Big Lots, Inc. (a) 4,093 86,280
Dillard's, Inc. Class A (b) 2,296 69,270
Dollar General Corp. 11,888 166,789
Family Dollar Stores, Inc. 5,748 169,279
Federated Department Stores, Inc. 20,745 910,913
J.C. Penney Co., Inc. 8,582 645,624
Kohl's Corp. (a) 12,429 877,487
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
MULTILINE RETAIL (CONTINUED)
Nordstrom, Inc. 8,671 $ 410,572
Sears Holdings Corp. (a) 3,215 560,921
Target Corp. 32,751 1,938,204
------------
5,835,339
------------
MULTI-UTILITIES (1.4%)
Ameren Corp. (b) 7,810 422,521
CenterPoint Energy, Inc. (b) 11,853 183,484
CMS Energy Corp. (a)(b) 8,446 125,761
Consolidated Edison, Inc. 9,438 456,327
Dominion Resources, Inc. 13,488 1,092,393
DTE Energy Co. (b) 6,816 309,651
Duke Energy Corp. 47,738 1,510,430
KeySpan Corp. 6,705 272,089
NiSource, Inc. 10,417 242,404
PG&E Corp. 13,271 572,511
Public Service Enterprise Group, Inc. 9,582 584,981
Sempra Energy 9,972 528,915
TECO Energy, Inc. 7,988 131,722
Xcel Energy, Inc. (b) 15,489 341,842
------------
6,775,031
------------
OFFICE ELECTRONICS (0.1%)
Xerox Corp. (a) 37,270 633,590
------------
OIL, GAS & CONSUMABLE FUELS (7.4%)
Anadarko Petroleum Corp. 17,476 811,236
Apache Corp. 12,578 821,595
Chesapeake Energy Corp. (b) 14,412 467,525
Chevron Corp. 83,682 5,623,430
ConocoPhillips 62,767 3,781,084
CONSOL Energy, Inc. (b) 7,006 247,942
Devon Energy Corp. 16,846 1,125,987
El Paso Corp. (b) 26,495 362,982
EOG Resources, Inc. 9,214 613,007
V ExxonMobil Corp. 226,501 16,176,699
Hess Corp. (b) 9,159 388,342
Kinder Morgan, Inc. 4,049 425,550
Marathon Oil Corp. 13,640 1,178,496
Murphy Oil Corp. (b) 7,159 337,618
Occidental Petroleum Corp. 32,792 1,539,256
Sunoco, Inc. 4,970 328,666
Valero Energy Corp. 23,347 1,221,749
Williams Cos., Inc. (The) 22,649 553,315
XTO Energy, Inc. 13,914 649,227
------------
36,653,706
------------
</Table>
<Table>
<Caption>
SHARES VALUE
PAPER & FOREST PRODUCTS (0.3%)
International Paper Co. 17,294 $ 576,755
Louisiana-Pacific Corp. 4,107 81,236
MeadWestvaco Corp. 6,943 191,071
Weyerhaeuser Co. 9,334 593,549
------------
1,442,611
------------
PERSONAL PRODUCTS (0.2%)
Alberto-Culver Co. 2,954 150,093
Avon Products, Inc. 17,087 519,616
Estee Lauder Cos., Inc. (The) Class A (b) 4,939 199,486
------------
869,195
------------
PHARMACEUTICALS (6.3%)
Abbott Laboratories 58,221 2,766,080
Allergan, Inc. 5,717 660,314
Barr Pharmaceuticals, Inc. (a) 4,039 211,522
Bristol-Myers Squibb Co. 74,958 1,855,211
Eli Lilly & Co. 37,437 2,096,846
Forest Laboratories, Inc. (a) 12,120 593,153
V Johnson & Johnson 111,459 7,512,337
King Pharmaceuticals, Inc. (a) 9,286 155,355
Merck & Co., Inc. 82,880 3,764,410
Mylan Laboratories, Inc. 8,065 165,333
V Pfizer, Inc. 277,781 7,402,864
Schering-Plough Corp. 56,393 1,248,541
Watson Pharmaceuticals, Inc. (a) 3,930 105,756
Wyeth 51,309 2,618,298
------------
31,156,020
------------
REAL ESTATE INVESTMENT TRUSTS (1.1%)
Apartment Investment & Management Co. Class A 3,736 214,148
Archstone-Smith Trust (b) 8,155 491,013
Boston Properties, Inc. 4,304 459,796
Equity Office Properties Trust (b) 13,308 565,590
Equity Residential 11,077 604,915
Kimco Realty Corp. (b) 8,282 367,969
Plum Creek Timber Co., Inc. 6,786 243,889
ProLogis (b) 9,320 589,676
Public Storage, Inc. 4,623 414,729
Simon Property Group, Inc. 8,446 820,107
Vornado Realty Trust (b) 4,676 557,613
------------
5,329,445
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.1%)
CB Richard Ellis Group, Inc. Class A (a) 3,800 114,114
Realogy Corp. (a) 8,156 210,262
------------
324,376
------------
</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)
- --------------------------------------------------------------------------------
ROAD & RAIL (0.7%)
Burlington Northern Santa Fe Corp. 13,817 $ 1,071,232
CSX Corp. 16,900 602,823
Norfolk Southern Corp. 15,750 827,978
Ryder System, Inc. 2,399 126,307
Union Pacific Corp. 10,265 930,317
------------
3,558,657
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.5%)
Advanced Micro Devices, Inc. (a) 18,493 393,346
Altera Corp. (a) 13,720 252,997
Analog Devices, Inc. 13,427 427,247
Applied Materials, Inc. 52,865 919,322
Broadcom Corp. Class A (a) 17,849 540,289
Freescale Semiconductor, Inc. Class B (a) 15,445 607,452
Intel Corp. 219,715 4,688,718
KLA-Tencor Corp. 7,548 371,135
Linear Technology Corp. 11,441 356,044
LSI Logic Corp. (a)(b) 15,193 152,690
Maxim Integrated Products, Inc. 12,191 365,852
Micron Technology, Inc. (a) 27,801 401,724
National Semiconductor Corp. 11,294 274,331
Novellus Systems, Inc. (a) 4,704 130,066
NVIDIA Corp. (a) 13,417 467,851
PMC-Sierra, Inc. (a)(b) 8,026 53,212
Teradyne, Inc. (a)(b) 7,526 105,515
Texas Instruments, Inc. 58,377 1,761,818
Xilinx, Inc. 13,057 333,084
------------
12,602,693
------------
SOFTWARE (3.3%)
Adobe Systems, Inc. (a) 22,064 843,948
Autodesk, Inc. (a) 8,869 325,936
BMC Software, Inc. (a) 7,845 237,782
CA, Inc. 15,693 388,559
Citrix Systems, Inc. (a) 7,013 207,094
Compuware Corp. (a) 14,189 114,080
Electronic Arts, Inc. (a) 11,638 615,534
Intuit, Inc. (a) 13,062 461,089
V Microsoft Corp. 329,041 9,446,767
Novell, Inc. (a) 12,947 77,682
Oracle Corp. (a) 153,700 2,838,839
Parametric Technology Corp. (a) 4,283 83,690
Symantec Corp. (a) 37,717 748,305
------------
16,389,305
------------
SPECIALTY RETAIL (1.9%)
AutoNation, Inc. (a) 5,821 116,711
AutoZone, Inc. (a) 1,967 220,304
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (CONTINUED)
Bed Bath & Beyond, Inc. (a) 10,799 $ 435,092
Best Buy Co., Inc. 15,457 853,999
Circuit City Stores, Inc. 5,391 145,449
Gap, Inc. (The) 20,509 431,099
Home Depot, Inc. (The) 78,581 2,933,429
Limited Brands, Inc. 12,890 379,868
Lowe's Cos., Inc. (b) 58,189 1,753,816
Office Depot, Inc. (a) 10,779 452,610
OfficeMax, Inc. 2,797 133,081
RadioShack Corp. (b) 5,090 90,806
Sherwin-Williams Co. (The) 4,323 256,051
Staples, Inc. 27,674 713,712
Tiffany & Co. 5,288 188,887
TJX Cos., Inc. (The) 17,115 495,479
------------
9,600,393
------------
TEXTILES, APPAREL & LUXURY GOODS (0.4%)
Coach, Inc. (a) 13,963 553,493
Jones Apparel Group, Inc. 4,281 142,985
Liz Claiborne, Inc. 3,886 163,873
NIKE, Inc. Class B 7,272 668,151
VF Corp. 3,368 256,002
------------
1,784,504
------------
THRIFTS & MORTGAGE FINANCE (1.4%)
Countrywide Financial Corp. (b) 23,275 887,243
Fannie Mae 36,864 2,184,561
Freddie Mac 26,301 1,814,506
MGIC Investment Corp. 3,254 191,205
Sovereign Bancorp, Inc. 13,649 325,665
Washington Mutual, Inc. 36,731 1,553,721
------------
6,956,901
------------
TOBACCO (1.5%)
V Altria Group, Inc. 79,797 6,489,890
Reynolds American, Inc. (b) 6,546 413,445
UST, Inc. 6,119 327,734
------------
7,231,069
------------
TRADING COMPANIES & DISTRIBUTERS (0.0%)++
W.W. Grainger, Inc. 2,858 208,005
------------
WIRELESS TELECOMMUNICATION SERVICES (0.6%)
ALLTEL Corp. 14,809 789,468
Sprint Nextel Corp. 113,790 2,126,735
------------
2,916,203
------------
Total Common Stocks
(Cost $256,350,510) 472,840,913(i)
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (11.9%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (3.9%)
Fairway Finance Corp.
5.289%, due 11/20/06 (c) $ 591,533 $ 591,533
FPL Fuels, Inc. (Turkey)
5.25%, due 11/30/06 8,000,000 7,966,167
Greyhawk Funding
5.286%, due 11/13/06 (c) 788,710 788,710
Jupiter Securitization Corp.
5.303%, due 11/14/06 (c) 970,043 970,043
Lexington Parker Capital Co.
5.282%, due 11/8/06 (c) 788,710 788,710
Liberty Street Funding Co.
5.286%, due 11/27/06 (c) 976,381 976,381
Old Line Funding LLC
5.287%, due 11/15/06 (c) 788,710 788,710
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (c) 788,710 788,710
UBS Finance Delaware LLC
5.225%, due 11/6/06 4,900,000 4,896,444
Yorktown Capital LLC
5.282%, due 11/16/06 (c) 690,122 690,122
------------
Total Commercial Paper (Cost $19,245,530) 19,245,530
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.3%)
BGI Institutional Money Market Fund (c) 1,702,652 1,702,652
------------
Total Investment Company
(Cost $1,702,652) 1,702,652
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.2%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $929,035
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$939,547 and a Market Value
of $965,823) (c) $ 928,895 928,895
------------
Total Repurchase Agreement (Cost $928,895) 928,895
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (5.0%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (c) $ 1,577,421 $ 1,577,421
Bank of America
5.27%, due 11/21/06 (c)(e) 2,168,953 2,168,953
Bank of Montreal
5.28%, due 11/27/06 (c) 1,577,421 1,577,421
Bank of Nova Scotia
5.30%, due 11/10/06 (c) 1,577,421 1,577,421
Barclays
5.32%, due 1/18/07 (c) 1,577,421 1,577,421
Deutsche Bank AG
5.27%, due 11/9/06 (c) 1,577,421 1,577,421
Fortis Bank
5.27%, due 11/6/06 (c) 3,430,889 3,430,889
Halifax Bank of Scotland
5.30%, due 1/10/07 (c) 1,577,421 1,577,421
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (c) 1,577,421 1,577,421
Royal Bank of Canada
5.30%, due 12/22/06 (c) 1,577,421 1,577,421
Royal Bank of Scotland
5.29%, due 12/12/06 (c) 1,577,421 1,577,421
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (c) 1,577,420 1,577,420
Societe Generale North America, Inc.
5.28%, due 12/6/06 (c) 1,577,421 1,577,421
UBS AG
5.28%, due 12/5/06 (c) 1,577,421 1,577,421
------------
Total Time Deposits
(Cost $24,528,893) 24,528,893
------------
U.S. GOVERNMENT (2.5%)
United States Treasury Bills
4.989%, due 1/18/07 (d) 3,200,000 3,165,817
4.998%, due 1/25/07 9,500,000 9,389,420
------------
Total U.S. Government
(Cost $12,554,559) 12,555,237
------------
Total Short-Term Investments
(Cost $58,960,529) 58,961,207
------------
Total Investments
(Cost $315,311,039) (f) 107.4% 531,802,120(g)
Liabilities in Excess of
Cash and Other Assets (7.4) (36,831,492)
------------- ------------
Net Assets 100.0% $494,970,628
============= ============
</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>
<Caption>
UNREALIZED
CONTRACTS APPRECIATION/
LONG (DEPRECIATION)(H)
FUTURES CONTRACTS (0.2%)
- -----------------------------------------------------------------------------
Standard & Poor's 500 Index
December 2006 72 $ 1,191,240
Mini December 2006 3 (491)
-------------------
Total Futures Contracts
(Settlement Value $25,105,080) (i) $ 1,190,749
===================
</Table>
<Table>
++ Less than one tenth of a percent.
+++ Fifty percent of the Fund's assets are maintained to cover "senior
securities transactions" which may include, but are not limited to,
forwards, TBA's, options and futures. This percentage is marked-to-market
daily against the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan.
(c) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(d) Segregated as collateral for futures contracts.
(e) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(f) The cost for federal income tax purposes is $324,445,983.
(g) At October 31, 2006 net unrealized appreciation was $207,356,137, 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 $221,279,234 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $13,923,097.
(h) Represents the difference between the value of the contracts at the time
they were opened and the value at October 31, 2006.
(i) The combined market value of common stocks and settlement value of Standard
& Poor's 500 Index futures contracts represents 100.6% of 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 17
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified cost
$315,311,039) including $32,432,748 market value of
securities loaned $531,802,120
Cash 76,070
Receivables:
Dividends and interest 410,023
Manager 45,579
Other assets 12,907
-------------
Total assets 532,346,699
-------------
LIABILITIES:
Securities lending collateral 33,543,359
Payables:
Fund shares redeemed 3,070,019
Investment securities purchased 377,428
Transfer agent (See Note 3) 134,921
NYLIFE Distributors (See Note 3) 108,855
Shareholder communication 64,337
Professional fees 52,654
Custodian 9,078
Trustees 6,295
Variation margin on futures contracts 1,521
Accrued expenses 7,604
-------------
Total liabilities 37,376,071
-------------
Net assets $494,970,628
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par value of
$.01 per share) unlimited number of shares authorized $ 103,572
Additional paid-in capital 364,903,392
Accumulated undistributed net investment income 6,642,296
Accumulated net realized loss on investments and
futures transactions (94,360,462)
Net unrealized appreciation on investments and futures
contracts 217,681,830
-------------
Net assets $494,970,628
=============
Net assets applicable to outstanding shares $494,970,628
=============
Shares of beneficial interest outstanding (a) 10,357,237
=============
Net asset value per share outstanding (a) $ 47.79
Maximum sales charge (3.00% of offering price) (a) 1.48
-------------
Maximum offering price per share outstanding (a) $ 49.27
=============
</Table>
(a) Adjusted to reflect the effects of the reverse stock split on December 19,
2006. (See Note 2(C) on page 23.)
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, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 9,638,047
Interest 1,290,107
Income from securities loaned--net 49,654
------------
Total income 10,977,808
------------
EXPENSES:
Manager (See Note 3) 1,312,254
Distribution/Service (See Note 3) 1,312,254
Transfer agent (See Note 3) 855,624
Shareholder communication 232,026
Professional fees 186,018
Recordkeeping 79,157
Custodian 51,434
Trustees 30,504
Registration 23,664
Miscellaneous 62,760
------------
Total expenses before waiver/reimbursement 4,145,695
Expense waiver from Manager (See Note 3) (735,844)
Reimbursement from Manager for professional
fees (See Note 3(B) on page 25.) (60,567)
------------
Net expenses 3,349,284
------------
Net investment income 7,628,524
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FUTURES:
Net realized gain on:
Security transactions 28,234,316
Futures transactions 1,068,502
------------
Net realized gain on investments and futures
transactions 29,302,818
------------
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 25.) 516,000
------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 37,995,958
Futures contracts 1,537,648
------------
Net unrealized appreciation (depreciation) and
futures contracts 39,533,606
------------
Net realized and unrealized gain on investments
and futures 69,352,424
------------
Net increase in net assets resulting from
operations $76,980,948
============
</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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 7,628,524 $ 8,307,658
Net realized gain on investments
and futures transactions 29,302,818 9,210,349
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 25.) 516,000 --
Net change in unrealized
appreciation (depreciation) on
investments and futures contracts 39,533,606 29,640,088
-----------------------------
Net increase in net assets
resulting from operations 76,980,948 47,158,095
-----------------------------
Dividends to shareholders:
From net investment income (6,709,434) (6,540,173)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares 74,135 423,785
Net asset value of shares issued
to shareholders in reinvestment
of dividends 6,402,778 6,540,173
-----------------------------
6,476,913 6,963,958
Cost of shares redeemed (132,084,363) (104,817,109)
-----------------------------
Decrease in net assets derived
from capital share transactions (125,607,450) (97,853,151)
-----------------------------
Net decrease in net assets (55,335,936) (57,235,229)
NET ASSETS:
Beginning of year 550,306,564 607,541,793
-----------------------------
End of year $ 494,970,628 $ 550,306,564
=============================
Accumulated undistributed net
investment income at end of year $ 6,642,296 $ 5,809,391
=============================
</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.
This page intentionally left blank
www.mainstayfunds.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 41.76 $ 39.06 $ 36.16 $ 30.08 $ 40.91 $ 48.59
-------- -------- -------- ----------- -------- --------
Net investment income (a) 0.73 0.61(b) 0.28 0.19 0.23 0.18
Net realized and unrealized gain (loss) on
investments(a) 5.82(e) 2.51 2.75 5.89 (9.53) (6.34)
-------- -------- -------- ----------- -------- --------
Total from investment operations (a) 6.55 3.12 3.03 6.08 (9.30) (6.16)
-------- -------- -------- ----------- -------- --------
Less dividends and distributions:
From net investment income (a) (0.52) (0.42) (0.13) -- (0.31) (0.18)
From net realized gain on investments
(a) -- -- -- -- (1.22) (1.34)
-------- -------- -------- ----------- -------- --------
Total dividends and distributions (a) (0.52) (0.42) (0.13) -- (1.53) (1.52)
-------- -------- -------- ----------- -------- --------
Net asset value at end of period (a) $ 47.79 $ 41.76 $ 39.06 $ 36.16 $ 30.08 $ 40.91
======== ======== ======== =========== ======== ========
Total investment return (c) 15.85%(d)(e) 7.97% 8.42% 20.23%(f) (22.70%) (12.65%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.45% 1.40%(b) 0.73% 0.72%+ 0.59% 0.38%
Net expenses 0.64% 0.74% 0.96% 1.04%+ 1.02% 0.97%
Expenses (before waiver/reimbursement) 0.79%(d) 1.03% 1.02% 1.04%+ 1.02% 0.97%
Portfolio turnover rate 5% 6% 3% 2% 4% 4%
Net assets at end of period (in 000's) $494,971 $550,307 $607,542 $646,450 $589,034 $951,662
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) Adjusted to reflect the cumulative effects of the reverse stock split in each period, as
well as the reverse stock split on December 19, 2006. (See Note 2(C) on page 23.)
(b) 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.
(c) Total return is calculated exclusive of sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundred of a percent. (See Note 3(B) on page 25.)
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were $0.04 per share on net
realized gains on investments; and the effect on total investment return was 0.10%,
respectively. (See Note 3(B) on page 25.)
(f) Total return is not annualized.
</Table>
22 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises 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 investors and new share purchases effective January 1, 2002.
Existing shareholders are permitted to reinvest dividends only and NYLIFE LLC
will continue to honor the unconditional guarantee associated with the Fund.
(See Note 10 on page 27.)
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 S&P 500(R) 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 each day the fund is open for business
("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 prior 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 the Board of Trustees to represent fair value. Equity and non-equity
securities which may be valued in this manner include, but are not limited to: a
security the trading for which has been halted or suspended; a debt security
that has recently gone into default and for which there is not current market
quotation; a security of an issuer that has entered into a restructuring; a
security that has been de-listed from a national exchange; a security the market
price of which is not available from an independent pricing source or, if so
provided, does not, in the opinion of the Fund's investment adviser or
sub-adviser (if applicable), reflect the security's market value; and a security
where the trading on that security's principal market is temporarily closed at a
time when, under normal conditions, it would be open. At October 31, 2006 the
Fund did not hold securities that were valued in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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 Fund declared a dividend of $0.7405 per share which was paid on December 19,
2006, and also underwent a reverse share split on that day. The reverse share
split rate was 0.98483 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 on page 27.) 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 2006.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income, accumulated net
realized loss on investments and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2006, are not affected.
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED LOSS ADDITIONAL
INCOME ON INVESTMENTS PAID-IN-CAPITAL
$(86,185) $(429,812) $515,997
- ---------------------------------------------------------
</Table>
The reclassifications for the Funds are primarily due to real estate trust
distributions and the reimbursement payment (See Note 11 on page 27).
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) 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.
(I) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 26.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or "Manager"), a
registered investment adviser and an indirect wholly-owned subsidiary of New
24 MainStay Equity Index Fund
York Life Insurance Company ("New York Life"), serves as the Fund's Manager. The
Manager provides offices and conducts clerical, recordkeeping and bookkeeping
services, and is responsible for the financial and accounting records required
to be maintained by 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 the
services performed and the facilities furnished at an annual percentage of the
Fund's average daily net assets as follows: 0.25% on assets up to $1.0 billion,
0.225% on assets from $1.0 billion to $3.0 billion and 0.20% on assets in excess
of $3.0 billion. NYLIM has also voluntarily agreed to waive its management fee
by 0.06% to 0.19% on assets up to $1.0 billion, to 0.165% on assets from $1.0
billion to $3.0 billion and to 0.14% on assets in excess of $3.0 billion.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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, 0.60% of the average daily net assets of
the Fund. 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 written expense limitation 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, 2006, this limit was 0.65% of the average daily net assets of
the Fund. For the year ended October 31, 2006, the Manager earned fees from the
Fund in the amount of $1,312,254 and waived its fees in the amount of $735,844.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$209,184 $420,903 $630,087
- --------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENT FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 11 on
page 27.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $60,567. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION FEES 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 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.
(D) SALES CHARGES. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemption of Class A shares of $15 for the
year ended October 31, 2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $855,624.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received an additional $2,000 for
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
each meeting of the Audit and Compliance Committee attended and the Chairpersons
of the Brokerage and Expense Committee, Operations Committee and Performance
Committee each received an additional $1,000 for each meeting of the respective
committee meetings attended. In addition, each Non-Interested Trustee received
$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.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $15,037.
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 $186,018 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of November 30, 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
$6,649,961 $ (112,880,274) $64,621 $167,814,081 $61,648,389
- ----------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals. The other temporary differences are
primarily due to mark-to-market of futures contracts.
At November 30, 2005, for federal income tax purposes, capital loss
carryforwards of $112,880,274 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)
2010 $ 80,388
2011 29,198
2012 3,294
-------------------------------------------
$112,880
-------------------------------------------
</Table>
The Fund utilized $9,465,664 of capital loss carryforwards during the tax year
ended November 30, 2005.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005 shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $6,709,434 $6,540,173
- -----------------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $32,432,748. The Fund received $33,543,359 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $23,683 and $152,676, respectively.
26 MainStay Equity Index Fund
NOTE 9--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
2006 2005
Shares sold (a) 5 172
- -------------------------------------------------------------------
Shares issued in reinvestment of
distributions (a) 150 --(b)
- -------------------------------------------------------------------
155 172
Shares redeemed (a) (2,974) (2,544)
- -------------------------------------------------------------------
Net decrease (a) (2,819) (2,372)
- -------------------------------------------------------------------
</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 19, 2006. (See Note
2(C) on page 23.)
(b) Less than one thousand 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. (See
Note 3 on page 24.) 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.
NOTE 11--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$516,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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 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.
NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
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 Equity Index Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2006, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
KPMG LLP SIGNATURE
Philadelphia, Pennsylvania
December 21, 2006
28 MainStay Equity Index Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager (the "Agreement") at a meeting held on June 12 and
13, 2006. In connection with the approval of the Agreement, the Trustees
reviewed a wide variety of information that they had requested and received from
the Manager, and data and analysis from an outside data provider and a third
party consultant. In their deliberations, the Trustees considered various
regulatory developments and industry trends, including the reduction of fees or
net expense ratios by certain other equity index funds. In considering the
approval of the Agreement, and in evaluating the fairness of the compensation to
be paid by the Fund under the Agreement, the Trustees met a number of times as a
full Board, and in executive session with no Interested Trustee present, to
discuss the Board's consideration of the approval of the Agreement. The Trustees
considered the factors 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
historically provided to the Fund, and also generally to other series of the
Trust. The Manager's services include, among others, investment management
services and administrative services. The investment management services
include, but are not limited to, monitoring and evaluating the Fund's investment
program and investment results, providing the day-to-day portfolio management of
the Fund, determining the composition of assets of the Fund and the timing of
the Fund's execution of the purchase and sale of assets, and the Fund's
compliance with its investment policies and restrictions. The administrative
services include, but are not limited to, working with other service providers
of the Trust, maintaining certain Fund records, providing office space, managing
reverse stock splits, performing clerical and bookkeeping services for the Fund,
preparing Board materials and Fund filings, and otherwise managing the Trust's
operations.
The Trustees also considered the Manager's management, personnel, resources,
operations and portfolio management capabilities. The Board reviewed reports on
the Manager's brokerage practices, including, but not limited to, reports
related to best execution of portfolio trades. The Trustees received information
about the Manager's supervision of the Fund's service providers, the Manager's
attention to its compliance program and those of the Trust and certain other
service providers. The Trustees noted the generally favorable results of a third
party review of the services and communications that NYLIM Service Company LLC,
an affiliate of the Manager, has provided to Trust shareholders. The Trustees
acknowledged the guarantee feature associated with the Fund's shares 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 Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and, in consultation with an outside data provider and a third party
consultant, compared that performance to that of other having similar investment
objectives. The Board's decision took account of, among other things, the Fund's
investment results that, consistent with its investment objective, corresponded
to the total return performance of publicly traded common stocks represented by
the S&P 500 Index, and the sensitivity of index funds' relative net performance
to their net expense ratios.
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 reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreement, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher invest-
www.mainstayfunds.com 29
ment minimums for some share classes. The Trustees discussed additional measures
that may increase average shareholder account size and/or otherwise reduce the
Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. The Trustees noted that the Fund had not reached the asset
level at which breakpoints would reduce the Fund's management fee rate, and that
the Fund can reach that asset level only through capital appreciation so long as
the Fund remains closed to new share purchases. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses. The
Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other registered fund clients of the Manager having investment strategies
similar to that of the Fund, and took account of explanations and other
information relating to the fees and expenses of those other funds and accounts.
The Trustees considered the current and proposed contractual and net management
fees, its anticipated gross and net expense ratio, and various components of the
expense ratio, in comparison to other funds having similar investment
objectives. The Trustees noted that recent information suggested the net expense
ratios of these other funds have been reduced noticeably over the prior year.
The Trustees generally acknowledged the historical relationship between the
Manager and the Trust and the likely difficulties in implementing an alternative
to the investment management arrangement between the Trust and the Manager. The
Trustees noted the Manager's agreement to waive a certain portion of its
management fee, and to lower the limit on the Fund's net expenses.
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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary describes
the most important, but not all, of the factors considered by the Trustees in
considering 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 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 the
Agreement was in the best interests of the Fund and its shareholders.
30 MainStay Equity Index Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income, 1.6% to arrive at the amount eligible for qualified interest
income and 100% for the corporate dividends received deduction.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
www.mainstayfunds.com 31
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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."
32 MainStay Equity Index Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 33
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
34 MainStay Equity Index Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSEI11-12/06
06
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Important Tax Information 29
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
Trustees and Officers 30
</Table>
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 -0.44% 2.06% 4.67%
Excluding sales charges 4.26 3.00 5.16
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
CLASS A BOND INDEX
------- --------------------------
10/31/96 9550 10000
10318 10866
11325 12092
11130 11946
11931 12906
13620 14852
14260 15803
14535 16262
15058 17048
15147 17208
10/31/06 15792 17996
</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 -1.40% 1.90% 4.40%
Excluding sales charges 3.60 2.25 4.40
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
CLASS B BOND INDEX
------- --------------------------
10/31/96 10000 10000
10743 10866
11700 12092
11407 11946
12145 12906
13764 14852
14303 15803
14453 16262
14875 17048
14849 17208
10/31/06 15384 17996
</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 2.48% 2.23% 4.39%
Excluding sales charges 3.48 2.23 4.39
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
CLASS C BOND INDEX
------- --------------------------
10/31/96 10000 10000
10743 10866
11700 12092
11407 11946
12145 12906
13764 14852
14303 15803
14453 16262
14875 17048
14849 17208
10/31/06 15365 17996
</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 as 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. These fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of any management fee
waivers or expense reimbursements from the Fund pursuant to this agreement if
such action does not cause the Fund to exceed existing expense limitations and
the recoupment is made within three years after the year in which the Manager
incurred the expense. Prior to 9/1/98, performance of Class 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 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 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
4.78% 3.34% 5.49%
</Table>
(LINE GRAPH FOR CLASS I SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
CLASS I BOND INDEX
------- --------------------------
10/31/96 10000 10000
10849 10866
11942 12092
11748 11946
12634 12906
14472 14852
15186 15803
15497 16262
16107 17048
16281 17208
10/31/06 17059 17996
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ------------------------------------------------------------------
Lehman Brothers(R) Government Bond Index(1) 4.58% 3.91% 6.05%
Average Lipper general U.S. government
fund(2) 3.76 3.12 5.09
</Table>
1. The Lehman Brothers(R) Government Bond Index is an unmanaged index that
consists 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 in 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.
6 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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,039.45 $5.40 $1,019.75 $5.35
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,035.70 $9.24 $1,016.00 $9.15
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,035.70 $9.24 $1,016.00 $9.15
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,042.05 $2.93 $1,022.15 $2.91
- ---------------------------------------------------------------------------------------------------------------------------
</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 0.57% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period). In the absence of
waivers and/or reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
U.S. Government & Federal Agencies 90.1
Short-Term Investments (collateral from securities lending 10.6
is 8.0%)
Asset-Backed Securities 4.1
Mortgage-Backed Securities 3.5
Corporate Bonds 1.6
Municipal Bond 0.5
Liabilities in Excess of Cash and Other Assets (10.4)
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association, 4.00%,
due 9/2/08
2. Federal National Mortgage Association (Mortgage
Pass-Through Security), 4.50%, due 7/1/18
3. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 6/1/33
4. Federal National Mortgage Association, 6.625%,
due 9/15/09
5. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 2/1/17
6. Federal Home Loan Mortgage Corporation, 5.25%,
due 11/5/12
7. Federal National Mortgage Association (Mortgage
Pass-Through Security), 4.50%, due 11/1/18
8. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.00%, due 1/1/36
9. United States Treasury Bond, 6.25%, due 5/15/30
10. United States Treasury Bond, 8.75%, due 8/15/20
</Table>
8 MainStay Government Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Gary Goodenough and Joseph Portera of
MacKay Shields LLC
HOW DID MAINSTAY GOVERNMENT FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Government Fund returned 4.26% for Class A
shares, 3.60% for Class B shares, and 3.48% for Class C shares for the 12 months
ended October 31, 2006. Over the same period, Class I shares returned 4.78%.
Class I shares outperformed--and Class A, Class B, and Class C shares
underperformed--the 4.58% return of the Lehman Brothers(R) Government Bond
Index,(1) the Fund's broad-based securities-market index, for the 12-month
period. Class A and Class I shares outperformed--and Class B and Class C shares
underperformed--the 3.76% return of the average Lipper(2) general U.S.
government fund for the 12 months ended October 31, 2006.
HOW WAS THE FUND POSITIONED RELATIVE TO ITS PEERS?
MainStay Government Fund was positioned for rising interest rates, tighter
spreads,(3) lower interest-rate volatility, and a steeper Treasury yield curve.
With the exception of the yield curve steepening, each of these events occurred
and positively affected the Fund's performance. To execute our strategy, we
actively adjusted the Fund's duration, sector weightings, and issue selection.
We assumed prudent sector and security risks to boost the Fund's yield relative
to its duration, and the improvement was an important contributor to the Fund's
total return.
Our analysis suggests that the Fund was not as exposed to longer-maturity
Treasurys as were many other funds in its Lipper universe. By itself, this
posture would have detracted from the Fund's relative performance for the
reporting period when the yield curve flattened between its two- and 30-year
points. Other aspects of the Fund's positioning, however, were more than able to
compensate. The Fund's duration posture, for example, made the Fund less
sensitive than the median peer fund to higher rates. That would partially
explain why Class I shares outperformed relative to the Fund's peers.
HOW DID YOU SEEK TO ENHANCE THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
We maintained overweighted positions in agency debentures and mortgage-backed
securities, and we underweighted Treasury securities to generate incremental
yield. We substituted higher-yielding subordinated agency debt and callable
agency debentures for senior, noncallable agency debt. The callable agency
debentures benefited from lower interest-rate volatility and performed
especially well.
We overweighted issues that were less prone to extension risk, or the risk that
durations would lengthen as interest rates rose. Mortgage-backed securities
collateralized by 15-year loan terms and balloon loans fit this profile. We
underweighted securities guaranteed by Ginnie Mae, because their rich valuations
were difficult to justify relative to similar securities guaranteed by Fannie
Mae and Freddie Mac. Investors appeared to share our valuation concerns and
backed away from Ginnie Maes during the reporting period. Demand from overseas
accounts also declined as the U.S. dollar weakened.
WHAT OTHER STRATEGIES DID YOU EMPLOY DURING THE REPORTING PERIOD?
We purchased interest-only mortgage pass-through strips for the Fund to
capitalize on a slowdown in housing price appreciation. Homeowners are less
inclined to cash out on the equity in their homes as housing prices moderate. In
turn, mortgage loans are slower to prepay, and that dynamic can positively
impact the price performance of interest-only pass-through strips. To fund the
trade, we sold the Fund's positions in higher-coupon (7% and 7.5%) mortgage-
backed securities, whose prepayment levels were still surprisingly responsive to
rate changes, despite the age of the securities' collateral.
Finally, spreads of asset-backed securities, commercial mortgage-backed
securities, and investment-grade corporate bonds were well-contained during the
reporting period. As a result, the Fund's modestly overweighted positions in
these sectors outperformed Treasury securities with similar durations.
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 more than 100% and may
generate taxable short- term capital gains. Funds that invest in bonds are
subject to interest-rate risk and can lose principal value when interest rates
rise. 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 6 for more information on the Lehman Brothers(R)
Government Bond Index.
2. See footnote on page 6 for more information about Lipper Inc.
3. The terms "spread" and "yield spread" may refer to the difference in yield
between a 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.
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, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (99.8%)+
ASSET-BACKED SECURITIES (4.1%)
- ------------------------------------------------------------------------------
CONSUMER FINANCE (0.6%)
Harley-Davidson Motorcycle Trust
Series 2002-1, Class A2
4.50%, due 1/15/10 $ 1,854,779 $ 1,853,801
------------
CONSUMER LOANS (0.8%)
Atlantic City Electric Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 2,275,000 2,332,837
------------
DIVERSIFIED FINANCIAL SERVICES (2.1%)
Massachusetts RRB Special Purpose Trust
Series 2001-1, Class A
6.53%, due 6/1/15 5,862,296 6,143,809
Structured Asset Investment Loan Trust
Series 2006-3, Class A4
5.42%, due 6/25/36 (a) 485,000 485,453
------------
6,629,262
------------
THRIFTS & MORTGAGE FINANCE (0.6%)
Citicorp Residential Mortgage Securities, Inc.
Series 2006-1, Class A3
5.706%, due 7/25/36 (a) 1,060,000 1,065,913
Series 2006-1, Class A1
5.956%, due 7/25/36 755,074 755,374
------------
1,821,287
------------
Total Asset-Backed Securities
(Cost $12,292,067) 12,637,187
------------
CORPORATE BONDS (1.6%)
- ------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.1%)
Residential Capital Corp.
6.50%, due 4/17/13 300,000 305,293
------------
ELECTRIC (0.6%)
Kiowa Power Partners LLC
Series B
5.737%, due 3/30/21 (b) 2,000,000 1,937,060
------------
INSURANCE (0.5%)
Fund American Cos., Inc.
5.875%, due 5/15/13 1,480,000 1,479,628
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (0.4%)
TCI Communications, Inc.
8.75%, due 8/1/15 $ 1,075,000 $ 1,273,312
------------
Total Corporate Bonds
(Cost $5,134,619) 4,995,293
------------
MORTGAGE-BACKED SECURITIES (3.5%)
- ------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (3.5%)
Banc of America Commercial Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 2,060,000 2,049,650
Citigroup Commercial Mortgage Trust
Series 2005-EMG, Class A1
4.154%, due 9/20/51 (b) 1,518,462 1,492,220
Series 2004-C2, Class A5
4.733%, due 10/15/41 2,000,000 1,932,277
Citigroup Mortgage Loan Trust, Inc.
Series 2006-AR6, Class 1A1
6.103%, due 8/25/36 (a) 1,478,733 1,483,361
Credit Suisse Mortgage Capital Certificates
Series 2006-C4, Class AJ
5.538%, due 9/15/39 (a) 1,550,000 1,566,024
GS Mortgage Securities Corp. II
Series 2001-ROCK, Class A1
6.22%, due 5/3/18 (b) 2,185,308 2,227,329
------------
Total Mortgage-Backed Securities
(Cost $10,913,891) 10,750,861
------------
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 1,724,076
------------
Total Municipal Bond
(Cost $1,742,511) 1,724,076
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (90.1%)
- ------------------------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATIONS) (1.0%)
Series 2006-B1, Class AB
6.00%, due 6/25/16 2,954,009 2,977,954
------------
</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
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ------------------------------------------------------------------------------
FANNIE MAE GRANTOR TRUST
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.7%)
Series 2003-T1, Class B
4.491%, due 11/25/12 $ 3,865,000 $ 3,748,771
Series 1998-M6, Class A2
6.32%, due 8/15/08 (c) 4,605,277 4,669,782
------------
8,418,553
------------
FANNIE MAE STRIP
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.2%)
Series 360, Class 2, IO
5.00%, due 8/1/35 (d) 2,840,254 686,729
Series 361, Class 2, IO
6.00%, due 10/1/35 (d) 590,683 118,764
------------
805,493
------------
FEDERAL HOME LOAN BANK (3.5%)
5.125%, due 8/14/13 5,140,000 5,191,297
5.50%, due 7/15/36 5,400,000 5,702,535
------------
10,893,832
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (4.0%)
4.75%, due 11/17/15 1,615,000 1,590,431
V 5.25%, due 11/5/12 10,900,000 10,788,809
------------
12,379,240
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (10.7%)
3.00%, due 8/1/10 4,713,994 4,465,189
5.00%, due 1/1/20 1,559,896 1,537,371
5.00%, due 6/1/33 6,106,219 5,916,124
5.00%, due 8/1/33 4,372,056 4,235,136
5.00%, due 5/1/36 5,606,286 5,416,745
5.50%, due 1/1/21 3,927,994 3,931,992
5.50%, due 11/1/35 2,439,600 2,414,233
5.50%, due 1/1/36 5,224,142 5,169,821
------------
33,086,611
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (13.8%)
V 4.00%, due 9/2/08 (e) 21,220,000 20,840,183
5.25%, due 8/1/12 3,805,000 3,832,339
6.00%, due 11/1/36 4,985,000 5,015,864
6.25%, due 2/1/11 1,875,000 1,960,646
V 6.625%, due 9/15/09 10,495,000 10,983,101
------------
42,632,133
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (39.0%)
3.35%, due 4/1/34 (a) 3,712,745 3,717,793
V 4.50%, due 7/1/18 17,555,665 17,020,723
V 4.50%, due 11/1/18 10,420,498 10,102,973
5.00%, due 9/1/17 6,733,160 6,648,098
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (CONTINUED)
V 5.00%, due 1/1/36 $10,158,133 $ 9,810,711
5.50%, due 1/1/17 468,049 469,602
V 5.50%, due 2/1/17 10,868,484 10,907,458
5.50%, due 6/1/19 3,377,569 3,384,991
5.50%, due 11/1/19 3,271,312 3,278,501
5.50%, due 4/1/21 7,860,940 7,872,134
V 5.50%, due 6/1/33 12,285,317 12,173,355
5.50%, due 11/1/33 5,523,725 5,473,385
5.50%, due 12/1/33 6,028,241 5,973,302
5.50%, due 12/1/34 1,277,604 1,264,798
6.00%, due 12/1/16 1,008,371 1,025,031
6.00%, due 11/1/32 2,966,288 2,995,003
6.00%, due 1/1/33 2,010,976 2,029,166
6.00%, due 3/1/33 2,607,811 2,629,848
6.00%, due 9/1/34 619,609 624,274
6.00%, due 9/1/35 5,141,177 5,175,655
6.00%, due 10/1/35 1,425,003 1,434,162
6.00%, due 6/1/36 5,232,159 5,264,554
6.50%, due 10/1/31 1,395,045 1,429,998
------------
120,705,515
------------
FREDDIE MAC STRIP
(COLLATERALIZED MORTGAGE OBLIGATION) (0.2%)
Series 231, Class IO
5.50%, due 8/1/35 (d) 2,496,989 590,955
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (2.3%)
6.00%, due 8/15/32 2,389,671 2,426,733
6.00%, due 12/15/32 1,719,225 1,745,689
6.50%, due 8/15/28 841,274 867,508
6.50%, due 4/15/31 2,139,314 2,204,907
------------
7,244,837
------------
HVIDE VAN OMMEREN TANKERS LLC (1.9%)
Series I
7.54%, due 12/14/23 (f) 2,778,000 2,883,203
Series II
7.54%, due 12/14/23 (f) 2,780,000 2,885,279
------------
5,768,482
------------
OVERSEAS PRIVATE INVESTMENT CORP. (1.2%)
5.142%, due 12/15/23 (f) 3,700,000 3,676,616
------------
TENNESSEE VALLEY AUTHORITY (1.7%)
4.65%, due 6/15/35 (f) 5,605,000 5,203,340
------------
UNITED STATES TREASURY BONDS (6.5%)
6.25%, due 8/15/23 515,000 599,331
V 6.25%, due 5/15/30 (e) 7,845,000 9,472,837
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ------------------------------------------------------------------------------
UNITED STATES TREASURY BONDS (CONTINUED)
6.875%, due 8/15/25 (e) $ 1,410,000 $ 1,766,025
V 8.75%, due 8/15/20 (e) 5,860,000 8,191,178
------------
20,029,371
------------
UNITED STATES TREASURY NOTE (1.4%)
2.00%, due 7/15/14 T.I.P. (g) 4,326,600 4,214,377
------------
Total U.S. Government & Federal Agencies
(Cost $279,801,989) 278,627,309
------------
Total Long-Term Bonds
(Cost $309,885,077) 308,734,726
------------
SHORT-TERM INVESTMENTS (10.6%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (1.5%)
Fairway Finance Corp.
5.289%, due 11/20/06 (h) 436,959 436,959
Greyhawk Funding
5.286%, due 11/13/06 (h) 582,612 582,612
Jupiter Securitization Corp.
5.303%, due 11/14/06 (h) 716,560 716,560
Lexington Parker Capital Co.
5.282%, due 11/8/06 (h) 582,612 582,612
Liberty Street Funding Co.
5.286%, due 11/27/06 (h) 721,242 721,242
Old Line Funding LLC
5.287%, due 11/15/06 (h) 582,612 582,612
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (h) 582,612 582,612
Yorktown Capital LLC
5.282%, due 11/16/06 (h) 509,785 509,785
------------
Total Commercial Paper
(Cost $4,714,994) 4,714,994
------------
FEDERAL AGENCY (2.6%)
Federal Home Loan Bank
(Discount Note)
4.98%, due 11/1/06 7,945,000 7,945,000
------------
Total Federal Agency
(Cost $7,945,000) 7,945,000
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.4%)
BGI Institutional Money Market Fund (h) 1,257,731 1,257,731
------------
Total Investment Company
(Cost $1,257,731) 1,257,731
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENT (0.2%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $686,268
(Collateralized by various Corporate Bonds, with
rates between 0%-8.40% and maturity dates between
1/30/07-6/15/34, with a Principal Amount of
$713,444 and a Market Value
of $694,034) (h) $ 686,165 $ 686,165
------------
Total Repurchase Agreement
(Cost $686,165) 686,165
------------
TIME DEPOSITS (5.9%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (h) 1,165,224 1,165,224
Bank of America
5.27%, due 11/21/06 (a)(h) 1,602,183 1,602,183
Bank of Montreal
5.28%, due 11/27/06 (h) 1,165,224 1,165,224
Bank of Nova Scotia
5.30%, due 11/10/06 (h) 1,165,224 1,165,224
Barclays
5.32%, due 1/18/07 (h) 1,165,224 1,165,224
Deutsche Bank AG
5.27%, due 11/9/06 (h) 1,165,224 1,165,224
Fortis Bank
5.27%, due 11/6/06 (h) 2,534,363 2,534,363
Halifax Bank of Scotland
5.30%, due 1/10/07 (h) 1,165,224 1,165,224
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (h) 1,165,224 1,165,224
Royal Bank of Canada
5.30%, due 12/22/06 (h) 1,165,224 1,165,224
Royal Bank of Scotland
5.29%, due 12/12/06 (h) 1,165,224 1,165,224
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (h) 1,165,224 1,165,224
Societe Generale North America, Inc.
5.28%, due 12/6/06 (h) 1,165,224 1,165,224
</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.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
UBS AG
5.28%, due 12/5/06 (h) $ 1,165,224 $ 1,165,224
------------
Total Time Deposits
(Cost $18,119,234) 18,119,234
------------
Total Short-Term Investments
(Cost $32,723,124) 32,723,124
------------
Total Investments
(Cost $342,608,201) (i) 110.4% 341,457,850(j)
Liabilities in Excess of
Cash and Other Assets (10.4) (32,134,050)
----------- ------------
Net Assets 100.0% $309,323,800
=========== ============
</Table>
<Table>
(a) Floating rate. Rate shown is the rate in effect at October
31, 2006.
(b) May be sold to institutional investors only under Rule 144a
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) ACES--Alternative Credit Enhancement Structure.
(d) Interest only.
(e) Represents a security, or a portion thereof, which is out on
loan.
(f) United States Government Guaranteed Security.
(g) 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.
(h) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(i) The cost for federal income tax purposes is $342,621,627.
(j) At October 31, 2006, net unrealized depreciation was
$1,163,777 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 $2,680,264 and aggregate gross unrealized
depreciation for all investments on which there was an
excess of cost over market value of $3,844,041.
</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, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $342,608,201) including $24,274,887
market value of securities loaned $341,457,850
Cash 281
Receivables:
Investment securities sold 8,831,725
Dividends and interest 2,436,639
Fund shares sold 24,798
Other assets 22,738
-------------
Total assets 352,774,031
-------------
LIABILITIES:
Securities lending collateral 24,778,124
Payables:
Investment securities purchased 17,772,240
Fund shares redeemed 253,410
Transfer agent (See Note 3) 206,247
NYLIFE Distributors (See Note 3) 113,841
Manager (See Note 3) 64,328
Shareholder communication 56,111
Professional fees 41,563
Custodian 8,604
Trustees 3,985
Accrued expenses 6,321
Dividend payable 145,457
-------------
Total liabilities 43,450,231
-------------
Net assets $309,323,800
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 292,248
Class B 78,468
Class C 6,946
Class I 1
Additional paid-in capital 352,235,572
Accumulated undistributed net investment
income 251,832
Accumulated net realized loss on investments (42,390,916)
Net unrealized depreciation on investments (1,150,351)
-------------
Net assets $309,323,800
=============
CLASS A
Net assets applicable to outstanding shares $239,392,053
=============
Shares of beneficial interest outstanding 29,224,799
=============
Net asset value per share outstanding $ 8.19
Maximum sales charge (4.50% of offering price) 0.39
-------------
Maximum offering price per share outstanding $ 8.58
=============
CLASS B
Net assets applicable to outstanding shares $ 64,246,386
=============
Shares of beneficial interest outstanding 7,846,788
=============
Net asset value and offering price per share
outstanding $ 8.19
=============
CLASS C
Net assets applicable to outstanding shares $ 5,684,299
=============
Shares of beneficial interest outstanding 694,637
=============
Net asset value and offering price per share
outstanding $ 8.18
=============
CLASS I
Net assets applicable to outstanding shares $ 1,062
=============
Shares of beneficial interest outstanding 129
=============
Net asset value and offering price per share
outstanding $ 8.24*
=============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $16,657,984
Income from securities loaned--net 26,416
------------
Total income 16,684,400
------------
EXPENSES:
Manager (See Note 3) 1,981,647
Transfer agent--Classes A, B and C (See Note
3) 1,185,704
Transfer agent--Class I (See Note 3) 10
Distribution--Class B (See Note 3) 779,165
Distribution--Class C (See Note 3) 48,040
Distribution/Service--Class A (See Note 3) 549,932
Service--Class B (See Note 3) 259,722
Service--Class C (See Note 3) 16,013
Shareholder communication 162,548
Professional fees 78,787
Registration 66,774
Recordkeeping 59,695
Custodian 34,171
Trustees 19,625
Miscellaneous 27,266
------------
Total expenses before waiver 5,269,099
Expense waiver from Manager (See Note 3) (973,891)
------------
Net expenses 4,295,208
------------
Net investment income 12,389,192
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,241,090)
Net change in unrealized depreciation on
investments 2,438,770
------------
Net realized and unrealized gain on investments 197,680
------------
Net increase in net assets resulting from
operations $12,586,872
============
</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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 12,389,192 $ 9,972,929
Net realized gain (loss) on
investments (2,241,090) 3,097,109
Net change in unrealized
appreciation (depreciation) on
investments 2,438,770 (12,999,649)
-----------------------------
Net increase in net assets resulting
from operations 12,586,872 70,389
-----------------------------
Dividends to shareholders:
From net investment income:
Class A (8,842,446) (2,706,725)
Class B (3,371,593) (7,476,171)
Class C (207,911) (204,772)
Class I (314) (606)
-----------------------------
Total dividends to shareholders (12,422,264) (10,388,274)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 25,589,502 22,653,777
Class B 6,132,777 12,287,303
Class C 1,035,532 2,248,347
Class I -- 5,200
Net asset value of shares issued to
shareholders in reinvestment of
dividends:
Class A 7,705,104 2,395,498
Class B 2,603,271 6,291,823
Class C 147,250 155,292
Class I 44 250
-----------------------------
43,213,480 46,037,490
Cost of shares redeemed:
Class A (55,002,905) (32,537,780)
Class B (34,928,672) (70,008,494)
Class C (3,277,586) (3,035,383)
Class I (14,975) (15,039)
-----------------------------
(93,224,138) (105,596,696)
Net asset value of shares converted
(See Note 1):
Class A 185,002,360 --
Class B (185,002,360) --
Decrease in net assets derived
from capital share transactions (50,010,658) (59,559,206)
-----------------------------
Net decrease in net assets (49,846,050) (69,877,091)
NET ASSETS:
Beginning of year 359,169,850 429,046,941
-----------------------------
End of year $ 309,323,800 $ 359,169,850
=============================
Accumulated undistributed
(distributions in excess of) net
investment income at end of year $ 251,832 $ (71,711)
=============================
</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.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 8.18 $ 8.40 $ 8.42 $ 8.67 $ 8.25 $ 8.19
-------- ------- ------- ----------- ------- -------
Net investment income 0.33(a) 0.26 0.25 0.20 0.32 0.39(a)(b)
Net realized and unrealized gain (loss) on
investments 0.01 (0.21) 0.05 (0.16) 0.47 0.12 (b)
-------- ------- ------- ----------- ------- -------
Total from investment operations 0.34 0.05 0.30 0.04 0.79 0.51
-------- ------- ------- ----------- ------- -------
Less dividends and distributions:
From net investment income (0.33) (0.27) (0.28) (0.29) (0.37) (0.39)
Return of capital -- -- (0.04) -- -- (0.06)
-------- ------- ------- ----------- ------- -------
Total dividends and distributions (0.33) (0.27) (0.32) (0.29) (0.37) (0.45)
-------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 8.19 $ 8.18 $ 8.40 $ 8.42 $ 8.67 $ 8.25
======== ======= ======= =========== ======= =======
Total investment return (c) 4.26% 0.59% 3.60% 0.50%(d) 9.75% 6.33%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.04% 3.09% 2.96% 2.85%+ 3.76% 4.71%(b)
Net expenses 1.05% 1.05% 1.25% 1.25%+ 1.19% 1.17%
Expenses (before waiver) 1.34% 1.34% 1.27% 1.25%+ 1.19% 1.17%
Portfolio turnover rate 83%(e) 164%(e) 110% 99% 117% 151%
Net assets at end of period (in 000's) $239,392 $76,816 $86,516 $99,852 $92,581 $59,405
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18
------ ------ ------ ----------- ------- ------
Net investment income 0.26(a) 0.20 0.17 0.14 0.26 0.33(a)(b)
Net realized and unrealized gain (loss) on
investments 0.02 (0.21) 0.07 (0.16) 0.46 0.12(e)
------ ------ ------ ----------- ------- ------
Total from investment operations 0.28 (0.01) 0.24 (0.02) 0.72 0.45
------ ------ ------ ----------- ------- ------
Less dividends and distributions:
From net investment income (0.27) (0.21) (0.21) (0.24) (0.30) (0.34)
Return of capital -- -- (0.04) -- -- (0.05)
------ ------ ------ ----------- ------- ------
Total dividends and distributions (0.27) (0.21) (0.25) (0.24) (0.30) (0.39)
------ ------ ------ ----------- ------- ------
Net asset value at end of period $ 8.18 $ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24
====== ====== ====== =========== ======= ======
Total investment return (c) 3.48% (0.17%) 2.92% (0.25%)(d) 8.94% 5.54%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.29% 2.34% 2.21% 2.10%+ 3.01% 3.96%(b)
Net expenses 1.80% 1.80% 2.00% 2.00%+ 1.94% 1.92%
Expenses (before waiver) 2.09% 2.09% 2.02% 2.00%+ 1.94% 1.92%
Portfolio turnover rate 83%(e) 164%(e) 110% 99% 117% 151%
Net assets at end of period (in 000's) $5,684 $7,772 $8,620 $12,385 $17,940 $9,245
</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) 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.
</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>
<Table>
(c) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(d) Total return is not annualized.
(e) The portfolio turnover rate not including mortgage dollar rolls is 32% and 31% for the
years ended October 31, 2006 and October 31, 2005, respectively.
</Table>
18 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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18
------- -------- -------- ----------- -------- --------
0.26(a) 0.20 0.17 0.14 0.26 0.33(a)(b)
0.03 (0.21) 0.07 (0.16) 0.46 0.12(b)
------- -------- -------- ----------- -------- --------
0.29 (0.01) 0.24 (0.02) 0.72 0.45
------- -------- -------- ----------- -------- --------
(0.27) (0.21) (0.21) (0.24) (0.30) (0.34)
-- -- (0.04) -- -- (0.05)
------- -------- -------- ----------- -------- --------
(0.27) (0.21) (0.25) (0.24) (0.30) (0.39)
------- -------- -------- ----------- -------- --------
$ 8.19 $ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24
======= ======== ======== =========== ======== ========
3.60% (0.17%) 2.92% (0.25%)(d) 8.94% 5.54%
3.29% 2.34% 2.21% 2.10%+ 3.01% 3.96%(b)
1.80% 1.80% 2.00% 2.00%+ 1.94% 1.92%
2.09% 2.09% 2.02% 2.00%+ 1.94% 1.92%
83%(e) 164%(e) 110% 99% 117% 151%
$64,246 $274,566 $333,884 $408,180 $477,341 $411,271
</Table>
<Table>
<Caption>
CLASS I
---------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2006 2005 2004
$ 8.21 $ 8.41 $ 8.44
-------- -------- -----------
0.35(a) 0.37 0.29
0.03 (0.28) (0.04)
-------- -------- -----------
0.38 0.09 0.25
-------- -------- -----------
(0.35) (0.29) (0.28)
0.00 -- --
-------- -------- -----------
(0.35) (0.29) (0.28)
-------- -------- -----------
$ 8.24 $ 8.21 $ 8.41
======== ======== ===========
4.78% 1.08% 2.99%(d)
4.52% 3.47% 3.34%+
0.57% 0.67% 0.87%+
0.86% 0.96% 0.89%+
83%(e) 164%(e) 110%
$ 1 $ 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 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
Government Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Distribution of Class B shares and Class C shares commenced on
May 1, 1986 and September 1, 1998, respectively. Distribution of Class I 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 a 1% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. Class I shares are not subject to sales charge. As approved by the Board
of Trustees in 1997, Class B shares convert to Class A shares eight years after
the date they were purchased. The first conversion occurred December 28, 2005.
The four classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions.
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, as defined in Note 3,
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 trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time).
Temporary cash investments acquired over 60 days prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006 the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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 undistributed net investment income and accumulated net realized
loss on investments arising from
20 MainStay Government Fund
permanent differences; net assets at October 31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET NET REALIZED LOSS
INVESTMENT INCOME ON INVESTMENTS
$356,615 $(356,615)
-------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydowns.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and includes gains
and losses from repayments of principal on mortgage-backed securities. Interest
income is accrued as earned using the effective interest rate method. Discounts
and premiums on securities, other than short-term securities, purchased for the
Fund are accreted and amortized, respectively, on the effective interest rate
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.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) 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, the Fund forgoes principal and interest on the securities. The 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 liquid assets 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.
(I) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 page 24.)
(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
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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. NYLIM has voluntarily agreed to waive
its management fee by 0.10% to 0.50% on assets up to $1 billion and to 0.45% on
assets in excess of $1 billion.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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, 1.05% 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 written expense
limitation 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. For the year ended October 31, 2006,
the Manager earned fees from the Fund in the amount of $1,981,647, and waived
its fees in the amount of $973,891.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$302,892 $643,616 $946,508
----------------------------
</Table>
<Table>
* The expense limitation agreement became effective in 2005 and the recompments will start
to expire in 2008.
</Table>
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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 and 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
22 MainStay Government Fund
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 $21,882 for the year ended
October 31, 2006. 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 $2,605, $144,947 and $1,154, respectively, for the year ended October
31, 2006.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006 amounted
to $1,185,714.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 172 0.0*%
- --------------------------------------
Class C 107 0.0*
- --------------------------------------
Class I 1,057 99.6
- --------------------------------------
</Table>
* Less than one tenth of one percent
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $9,725.
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 $59,695 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, 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 LOSSES DEPRECIATION LOSS
$410,715 $(42,390,916) $(145,457) $(1,163,777) $(43,289,435)
-----------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to premium amortization adjustments.
The other temporary differences are primarily due to distribution payable.
At October 31, 2006, for federal income tax purposes, capital loss carryforwards
of $42,390,916 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
2014 2,598
-------------------------------------------
$42,391
-------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $12,422,264 $10,388,274
- -----------------------------------------------------------
</Table>
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006 the Fund had securities on loan with an aggregate market
value of $24,274,887. The Fund received $24,778,124 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of U.S. Government
securities were $264,982 and $311,487, respectively. Purchase and sales of
securities, other than U.S. Government securities and short-term securities,
were $9,398 and $10,351, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 3,152 754 128 --
- ------------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 949 320 18 --(a)
- ------------------------------------------------------------
4,101 1,074 146 --(a)
Shares redeemed (6,771) (4,298) (402) (2)
- ------------------------------------------------------------
Shares converted (See
Note 1) 22,506 (22,534) -- --
- ------------------------------------------------------------
Net increase
(decrease) 19,836 (25,758) (256) (2)
- ------------------------------------------------------------
</Table>
<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>
(a) Less than one thousand shares.
</Table>
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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
24 MainStay Government 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 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
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 Government Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2006, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
KPMG LLP SIGNATURE
Philadelphia, Pennsylvania
December 21, 2006
26 MainStay Government Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance when
compared over several time periods with groupings of funds having similar
investment mandates and the Manager's continued monitoring of the Fund's
performance.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher invest-
www.mainstayfunds.com 27
ment minimums for some share classes. The Trustees discussed additional measures
that may increase average shareholder account size and/or otherwise reduce the
Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund had not reached the asset level at which the
breakpoint would reduce the Fund's management fee rate. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other registered fund clients of the Manager and Subadvisor having investment
strategies similar to that of the Fund, and took account of explanations and
other information relating to the fees and expenses of those other funds and
accounts. The Trustees considered the current and proposed contractual and net
management fees, its anticipated gross and net expense ratio, and various
components of the expense ratio, in comparison to other funds in comparison
groupings. The Trustees generally acknowledged the historical relationships
among the Manager, the Subadvisor and the Trust. The Trustees noted the
Manager's agreement to waive a certain portion of its management fee, and to
maintain a limit on the Fund's net expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
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 13% of the
ordinary income dividends paid during its fiscal year ended October 31, 2006 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.
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 99.7% to arrive at the amount eligible for qualified
interest income.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
www.mainstayfunds.com 29
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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."
30 MainStay Government Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
32 MainStay Government Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
[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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSG11-12/06
07
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 22
- --------------------------------------------------------------------------------
Notes to Financial Statements 28
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 36
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 37
- --------------------------------------------------------------------------------
Federal Income Tax Information 39
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 39
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 39
- --------------------------------------------------------------------------------
Trustees and Officers 40
</Table>
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 CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
With sales charges 4.65% 11.00% 7.33%
Excluding sales charges 9.58 12.03 7.82
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/96 9550 10000
11009 11475
10630 11189
11996 11809
12135 11718
11493 11761
10806 11754
15536 15452
17483 17454
18508 18072
10/31/06 20282 19931
</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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 3.92% 10.97% 7.05%
Excluding sales charges 8.92 11.23 7.05
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/96 10000 10000
11470 11475
10988 11189
12315 11809
12358 11718
11608 11761
10859 11754
15477 15452
17279 17454
18150 18072
10/31/06 19768 19931
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
With sales charges 7.91% 11.23% 7.05%
Excluding sales charges 8.91 11.23 7.05
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/96 10000 10000
11470 11475
10988 11189
12315 11809
12358 11718
11608 11761
10859 11754
15477 15452
17279 17454
18150 18072
10/31/06 19767 19931
</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 as 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. Prior to 9/1/98 (for
Class C shares) and 12/31/03 (for Class I shares), performance for Class C and
Class 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 C
and 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 5
CLASS I SHARES--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
10.02% 12.35% 8.11%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/96 10000 10000
11576 11475
11190 11189
12664 11809
12841 11718
12177 11761
11490 11754
16558 15452
18672 17454
19815 18072
10/31/06 21801 19931
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Credit Suisse High Yield Index(2) 10.29% 11.13% 7.14%
Average Lipper high current yield fund(3) 9.18 8.90 5.27
</Table>
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 31
of the Notes to Financial Statements for further explanation). The effect on
total return (excluding sales charges) was less than 0.01%.
2. The Credit Suisse High Yield Index is an unmanaged, market-weighted index
that consists of 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 High Yield Index is considered to be the
Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in 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.
6 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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,047.90 $5.47 $1,019.70 $5.40
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,043.25 $9.32 $1,015.95 $9.20
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,043.25 $9.32 $1,015.95 $9.20
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,048.90 $4.13 $1,021.00 $4.08
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.06% for Class A, 1.81% for Class B and Class C, and 0.80% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Corporate Bonds 64.2
Short-Term Investments (collateral from securities lending 17.7
is 4.6%)
Foreign Bonds 7.8
Loan Assignments & Participations 6.3
Convertible Bonds 2.5
Preferred Stocks 1.8
Yankee Bonds 1.2
Common Stocks 1.2
Asset-Backed Securities 0.9
Convertible Preferred Stocks 0.5
Warrants 0.0*
Liabilities in Excess of Cash and Other Assets (4.1)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. General Motors Acceptance Corp., 8.00%, due 11/1/31
2. Calpine Corp., 8.50%, due 7/15/10
3. Sovereign Real Estate Investment Corp., 12.00%
4. INVISTA, 9.25%, due 5/1/12
5. General Motors Acceptance Corp., 6.75%, due 12/1/14
6. Goodyear Tire & Rubber Co. (The), 11.25%, due 3/1/11
7. AES Corp. (The), 9.00%, due 5/15/15
8. Crescent Real Estate Equities, L.P., 7.50%, due 9/15/07
9. CIENA Corp., 3.75%, due 2/1/08
10. Rainbow National Services LLC, 10.375%, due 9/1/14
</Table>
8 MainStay High Yield Corporate Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager J. Matthew Philo, CFA, of MacKay Shields
LLC
HOW DID MAINSTAY HIGH YIELD CORPORATE BOND FUND PERFORM RELATIVE TO ITS PEERS
AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay High Yield Corporate Bond Fund returned
9.58% for Class A shares, 8.92% for Class B shares, and 8.91% for Class C shares
for the 12 months ended October 31, 2006. Over the same period, the Fund's Class
I shares returned 10.02%. All share classes underperformed the 10.29% return of
the Credit Suisse High Yield Index,(1) the Fund's broad-based securities-market
index, for the 12-month period. Class A and Class I shares outperformed--while
Class B and Class C shares underperformed--the 9.18% return of the average
Lipper(2) high current yield fund for the 12 months ended October 31, 2006.(3)
WHY DID THE FUND UNDERPERFORM THE CREDIT SUISSE HIGH YIELD INDEX DURING THE
REPORTING PERIOD?
The Fund's underperformance resulted primarily from our conservative
positioning. During the reporting period, spreads--or the differences in yield
between high-yield corporate bonds and U.S. Treasurys--remained relatively
tight. In light of historical default expectations, we felt that compensation
for assuming additional risk was inadequate, so we reduced the Fund's exposure
to lower-quality high-yield assets and increased exposure to higher-quality
high-yield bonds. While highly speculative securities were rewarded during the
reporting period, we felt that any shock to the market might cause riskier
assets to underperform.
WHAT WAS THE FUND'S DURATION POSITIONING DURING THE REPORTING PERIOD?
Duration is primarily a residual of our investment process, but we sought to
reduce duration risk by maintaining the Fund's portfolio within a reasonable
range of the benchmark. Historically, the duration of the high-yield market has
varied around four years. In light of tight spreads and low default rates,
however, the Fund had a shorter duration.
HOW WAS THE FUND POSITIONED FROM AN INDUSTRY PERSPECTIVE?
We are bottom-up investors, and the Fund's industry exposure is primarily the
result of individual security selection. During the reporting period, the Fund
remained underweighted in automotive bonds. GM and Ford became high-yield
issuers in 2005, and because both issuers have considerable outstanding debt,
their bonds have a major influence on the high-yield market. The Fund maintained
its position in General Motors Acceptance Corp., which benefited from reports
about GM's plans to sell its finance arm.
Although most of the Fund was conservatively positioned, the Fund's airline
holdings were rather volatile, responding directly to changes in oil prices. The
Fund maintained its investments in Delta Airlines and Northwest Airlines. Both
companies sought to lower their cost structures as they worked through the
bankruptcy process.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
Our most significant purchases during the reporting period were made to increase
the credit quality of the Fund and improve its margin of safety. Since we
anticipated rising interest rates during the reporting period, we increased the
Fund's exposure to bank loans and floating-rate notes. As interest rates rose,
these assets reset their coupons and provided higher yields for the Fund.
Significant sales during the reporting period included bonds that were tendered
by their issuers. (A tender is a payment for bonds called prior to maturity.)
Mergers and refinancings in the recent low-interest-rate and lenient credit
environment encouraged companies to tender, or call, their bonds--a trend that
added to the Fund's already higher-than-normal cash level.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher- quality debt securities
and may be subject to greater price volatility. Foreign securities may be
subject to greater risks than U.S. investments, including currency fluctuations,
less-liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets. The Fund may experience a portfolio turnover
rate of more than 100% and may generate taxable short-term capital gains. Funds
that invest in bonds are subject to credit, inflation, and interest-rate risk
and can lose principal value when interest rates rise.
1. See footnote on page 6 for more information on the Credit Suisse High Yield
Index.
2. See footnote on page 6 for more information on Lipper Inc.
3. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 6.
www.mainstayfunds.com 9
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
The Fund's weightings are a result of our bottom-up security selection process.
At the end of October 2006, the Fund's largest overweighted positions relative
to the Credit Suisse High Yield Index were in financials and in energy:
exploration & production. The Fund's investments in financial companies were
primarily in issues that we felt would do well in a rising interest-rate
environment. These included insurance companies, a check manufacturer, and a
brokerage firm.
At the end of the reporting period, the Fund held underweighted positions
relative to the Index in the cable and manufacturing industries. The Fund had no
exposure to the refining and consumer durables industries because companies in
these areas typically do not meet our investment criteria.
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 forecast 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 High Yield Corporate Bond Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (82.9%)+
ASSET-BACKED SECURITIES (0.9%)
- ---------------------------------------------------------------------------------
ELECTRIC (0.9%)
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 $ 17,266,970 $ 18,907,332
Series 1999-B
9.67%, due 1/2/29 16,820,000 20,268,100
--------------
39,175,432
--------------
ENTERTAINMENT (0.0%)++
United Artists Theatre Circuit, Inc.
Series 1995-A
9.30%, due 7/1/15 (a)(b) 2,507,109 2,256,398
--------------
Total Asset-Backed Securities
(Cost $35,945,874) 41,431,830
--------------
CONVERTIBLE BONDS (2.5%)
- ---------------------------------------------------------------------------------
AIRLINES (0.1%)
Delta Air Lines, Inc.
8.00%, due 6/3/23 (c)(d) 13,575,000 5,005,781
--------------
INSURANCE (0.2%)
Conseco, Inc.
3.50%, due 9/30/35
(zero coupon), beginning 9/30/10 (c) 9,680,000 9,861,500
--------------
INTERNET (0.0%)++
At Home Corp.
4.75%, due 12/15/06 (b)(d)(e) 61,533,853 6,153
--------------
MEDIA (0.0%)++
Adelphia Communications Corp.
6.00%, due 2/15/07 (d) 12,365,000 46,369
--------------
SEMICONDUCTORS (0.2%)
LSI Logic Corp.
4.00%, due 11/1/06 6,725,000 6,725,000
--------------
TELECOMMUNICATIONS (2.0%)
V CIENA Corp.
3.75%, due 2/1/08 41,105,000 40,077,375
Lucent Technologies, Inc.
8.00%, due 8/1/31 (f) 12,800,000 12,912,000
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TELECOMMUNICATIONS (CONTINUED)
Nortel Networks Corp.
4.25%, due 9/1/08 $ 34,890,000 $ 33,668,850
--------------
86,658,225
--------------
Total Convertible Bonds
(Cost $115,795,733) 108,303,028
--------------
CORPORATE BONDS (64.2%)
- ---------------------------------------------------------------------------------
ADVERTISING (0.5%)
R.H. Donnelley, Inc.
10.875%, due 12/15/12 7,810,000 8,542,187
Vertis, Inc.
9.75%, due 4/1/09 14,115,000 14,414,944
--------------
22,957,131
--------------
AEROSPACE & DEFENSE (0.5%)
BE Aerospace, Inc.
8.875%, due 5/1/11 (f) 1,405,000 1,464,712
Sequa Corp.
8.875%, due 4/1/08 5,580,000 5,789,250
9.00%, due 8/1/09 14,815,000 15,629,825
--------------
22,883,787
--------------
AGRICULTURE (1.0%)
Reynolds American, Inc.
7.625%, due 6/1/16 (c) 24,175,000 25,668,459
7.75%, due 6/1/18 (c) 17,070,000 18,229,446
--------------
43,897,905
--------------
AIRLINES (1.8%)
Delta Air Lines, Inc.
8.30%, due 12/15/29 (d) 65,861,000 24,039,265
Series B
9.25%, due 12/27/07 (a)(d) 5,175,000 1,850,062
9.25%, due 3/15/22 (d) 9,000,000 3,240,000
9.75%, due 5/15/21 (d) 2,115,000 761,400
10.00%, due 8/15/08 (d) 8,195,000 2,970,687
10.375%, due 2/1/11 (d) 6,515,000 2,345,400
10.375%, due 12/15/22 (d) 15,160,000 5,457,600
Northwest Airlines, Inc.
7.875%, due 3/15/08 (d) 1,790,000 1,136,650
8.70%, due 3/15/07 (d) 445,000 283,687
9.875%, due 3/15/07 (d) 29,140,000 18,649,600
10.00%, due 2/1/09 (d) 27,301,500 17,063,437
--------------
77,797,788
--------------
APPAREL (0.4%)
Unifi, Inc.
11.50%, due 5/15/14 (c) 17,650,000 16,591,000
--------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (2.4%)
American Tire Distributors, Inc.
10.75%, due 4/1/13 (f) $ 3,195,000 $ 2,891,475
Collins & Aikman Products Co.
12.875%, due 8/15/12 (c)(d)(e) 29,210,000 36,512
FleetPride Corp.
11.50%, due 10/1/14 (c) 17,535,000 17,578,837
Goodyear Tire & Rubber Co. (The)
6.375%, due 3/15/08 5,845,000 5,786,550
6.625%, due 12/1/06 7,469,000 7,469,000
8.50%, due 3/15/07 4,605,000 4,616,512
V 11.25%, due 3/1/11 40,235,000 44,258,500
Tenneco Automotive, Inc.
8.625%, due 11/15/14 (f) 14,555,000 14,664,162
10.25%, due 7/15/13 7,625,000 8,349,375
--------------
105,650,923
--------------
BANKS (0.3%)
Fremont General Corp.
Series B
7.875%, due 3/17/09 13,080,000 12,851,100
--------------
BEVERAGES (0.2%)
Constellation Brands, Inc.
7.25%, due 9/1/16 9,710,000 9,867,787
--------------
BUILDING MATERIALS (1.2%)
Compression Polymers Corp.
10.50%, due 7/1/13 13,620,000 13,892,400
12.39%, due 7/1/12 (g) 3,095,000 3,156,900
Dayton Superior Corp.
10.75%, due 9/15/08 18,355,000 18,997,425
Panolam Industries International, Inc.
10.75%, due 10/1/13 (c)(f) 11,300,000 11,526,000
U.S. Concrete, Inc.
8.375%, due 4/1/14 5,745,000 5,515,200
--------------
53,087,925
--------------
CHEMICALS (2.5%)
Equistar Chemicals, L.P.
7.55%, due 2/15/26 11,985,000 11,026,200
10.125%, due 9/1/08 10,809,000 11,457,540
10.625%, due 5/1/11 17,745,000 18,987,150
IMC Global, Inc.
10.875%, due 8/1/13 4,960,000 5,648,200
Lyondell Chemical Co.
9.50%, due 12/15/08 4,692,000 4,815,165
Millennium America, Inc.
7.625%, due 11/15/26 8,115,000 7,161,487
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CHEMICALS (CONTINUED)
Reichhold Industries, Inc.
9.00%, due 8/15/14 (c) $ 6,435,000 $ 6,402,825
Terra Capital, Inc.
12.875%, due 10/15/08 33,760,000 37,726,800
Tronox Worldwide LLC/Tronox Finance Corp.
9.50%, due 12/1/12 6,810,000 7,031,325
--------------
110,256,692
--------------
COAL (0.1%)
Peabody Energy Corp.
7.375%, due 11/1/16 2,185,000 2,272,400
7.875%, due 11/1/26 2,530,000 2,624,875
--------------
4,897,275
--------------
COMMERCIAL SERVICES (3.0%)
American Color Graphics, Inc.
10.00%, due 6/15/10 3,410,000 2,199,450
Cardtronics, Inc.
9.25%, due 8/15/13 (f) 12,305,000 12,704,912
Chemed Corp.
8.75%, due 2/24/11 11,290,000 11,671,037
El Comandante Capital Corp.
11.75%, due 12/15/06 (a)(b)(d) 21,941,051 28,303,956
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 7,880,000 7,328,400
iPayment, Inc.
9.75%, due 5/15/14 (c) 9,345,000 9,601,987
Knowledge Learning Corp., Inc.
7.75%, due 2/1/15 (c) 3,910,000 3,704,725
Language Line, Inc.
11.125%, due 6/15/12 8,695,000 8,716,737
Phoenix Color Corp.
11.00%, due 2/1/09 6,409,000 6,152,640
Protection One Alarm Monitoring, Inc.
Series B
8.125%, due 1/15/09 5,470,000 5,387,950
Rent-Way, Inc.
11.875%, due 6/15/10 9,210,000 10,774,917
Service Corp. International
7.375%, due 10/1/14 (c) 6,645,000 6,827,737
7.625%, due 10/1/18 (c)(f) 6,850,000 7,038,375
Vertrue, Inc.
9.25%, due 4/1/14 12,670,000 13,176,800
--------------
133,589,623
--------------
COMMERCIAL SERVICES & SUPPLIES (0.1%)
Universal Hospital Services, Inc.
10.125%, due 11/1/11 3,510,000 3,711,825
--------------
</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)
- ---------------------------------------------------------------------------------
COMPUTERS (1.0%)
SunGard Data Systems, Inc.
3.75%, due 1/15/09 $ 660,000 $ 615,450
4.875%, due 1/15/14 12,070,000 10,380,200
9.125%, due 8/15/13 19,335,000 20,060,062
10.25%, due 8/15/15 12,847,000 13,457,232
--------------
44,512,944
--------------
CONSTRUCTION & ENGINEERING (0.1%)
Amsted Industries, Inc.
10.25%, due 10/15/11 (c) 3,200,000 3,440,000
--------------
DISTRIBUTION & WHOLESALE (0.1%)
Intcomex, Inc.
11.75%, due 1/15/11 (c) 4,310,000 4,266,900
--------------
DIVERSIFIED FINANCIAL SERVICES (8.8%)
Alamosa Delaware, Inc.
11.00%, due 7/31/10 13,335,000 14,551,819
American Real Estate Partners, L.P./ American Real
Estate Finance Corp.
7.125%, due 2/15/13 21,155,000 21,102,112
8.125%, due 6/1/12 23,940,000 24,478,650
Cedar Brakes II LLC
9.875%, due 9/1/13 (c) 32,075,247 35,819,390
Ford Motor Credit Co.
7.375%, due 10/28/09 16,015,000 15,588,553
7.875%, due 6/15/10 4,890,000 4,771,730
General Motors Acceptance Corp.
V 6.75%, due 12/1/14 (f) 46,285,000 45,888,615
V 8.00%, due 11/1/31 76,935,000 82,433,544
LaBranche & Co., Inc.
9.50%, due 5/15/09 17,875,000 18,813,437
11.00%, due 5/15/12 18,075,000 19,521,000
MXEnergy Holdings, Inc.
13.018%, due 8/1/11 (c)(g) 11,940,000 11,581,800
Rainbow National Services LLC
8.75%, due 9/1/12 (c) 10,205,000 10,728,006
V 10.375%, due 9/1/14 (c) 35,590,000 39,593,875
Ucar Finance, Inc.
10.25%, due 2/15/12 13,540,000 14,233,925
UGS Corp.
10.00%, due 6/1/12 8,270,000 8,931,600
Vanguard Health Holding Co. I LLC
(zero coupon), due 10/1/15
11.25%, beginning 10/1/09 (f) 9,960,000 7,245,900
Vanguard Health Holding Co. II LLC
9.00%, due 10/1/14 15,350,000 14,851,125
--------------
390,135,081
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ELECTRIC (3.5%)
V AES Corp. (The)
9.00%, due 5/15/15 (c) $ 40,537,000 $ 43,627,946
Calpine Corp.
V 8.50%, due 7/15/10 (c)(d) 70,400,000 73,568,000
9.875%, due 12/1/11 (c)(d) 10,730,000 11,266,500
NRG Energy, Inc.
7.25%, due 2/1/14 17,960,000 18,162,050
7.375%, due 2/1/16 3,920,000 3,964,100
PSE&G Energy Holdings LLC
8.625%, due 2/15/08 5,586,000 5,795,475
Western Resources, Inc.
7.125%, due 8/1/09 50,000 51,932
--------------
156,436,003
--------------
ELECTRONICS (0.2%)
Fisher Scientific International, Inc.
6.125%, due 7/1/15 9,505,000 9,433,712
--------------
ENERGY--ALTERNATE SOURCES (0.0%)++
Salton Sea Funding Corp.
Series E
8.30%, due 5/30/11 (a) 20,650 21,835
--------------
ENTERTAINMENT (0.8%)
Gaylord Entertainment Co.
8.00%, due 11/15/13 11,845,000 12,052,287
Isle of Capri Casinos, Inc.
9.00%, due 3/15/12 2,550,000 2,671,125
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 (c) 10,995,000 10,912,537
Mohegan Tribal Gaming Authority
6.375%, due 7/15/09 4,910,000 4,897,725
7.125%, due 8/15/14 200,000 201,750
Warner Music Group
7.375%, due 4/15/14 5,620,000 5,493,550
--------------
36,228,974
--------------
ENVIRONMENTAL CONTROL (0.5%)
Geo Sub Corp.
11.00%, due 5/15/12 19,340,000 20,016,900
--------------
FOOD (1.4%)
Chiquita Brands International, Inc.
7.50%, due 11/1/14 27,240,000 23,562,600
8.875%, due 12/1/15 (f) 5,205,000 4,743,056
Pinnacle Foods Holding Corp.
8.25%, due 12/1/13 14,740,000 14,776,850
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
FOOD (CONTINUED)
Swift & Co.
10.125%, due 10/1/09 (f) $ 17,614,000 $ 18,142,420
12.50%, due 1/1/10 (f) 2,564,000 2,615,280
--------------
63,840,206
--------------
FOREST PRODUCTS & PAPER (2.0%)
Bowater, Inc.
9.375%, due 12/15/21 (f) 14,220,000 13,864,500
9.50%, due 10/15/12 270,000 272,700
Georgia-Pacific Corp.
7.75%, due 11/15/29 14,115,000 13,938,562
8.00%, due 1/15/24 22,355,000 22,466,775
8.875%, due 5/15/31 33,490,000 35,415,675
Georgia-Pacific Corp./Timber Group
7.25%, due 6/1/28 2,370,000 2,281,125
--------------
88,239,337
--------------
HAND & MACHINE TOOLS (0.2%)
Thermadyne Holdings Corp.
9.25%, due 2/1/14 (f) 8,830,000 7,792,475
--------------
HEALTH CARE--PRODUCTS (0.3%)
Hanger Orthopedic Group, Inc.
10.25%, due 6/1/14 15,080,000 15,381,600
--------------
HEALTH CARE--SERVICES (1.0%)
Ameripath, Inc.
10.50%, due 4/1/13 23,005,000 24,730,375
HCA, Inc.
7.50%, due 11/15/95 13,444,000 9,958,267
Skilled Healthcare Group, Inc.
11.00%, due 1/15/14 (c) 6,775,000 7,452,500
--------------
42,141,142
--------------
HOLDING COMPANIES--DIVERSIFIED (0.3%)
ESI Tractebel Acquisition Corp.
Class B
7.99%, due 12/30/11 12,820,000 13,218,728
--------------
HOUSEHOLD PRODUCTS & WARES (0.4%)
ACCO Brands Corp.
7.625%, due 8/15/15 19,250,000 18,792,812
--------------
INDUSTRIAL CONGLOMERATES (0.4%)
Clarke American Corp.
11.75%, due 12/15/13 15,180,000 15,863,100
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
INSURANCE (0.6%)
Crum & Forster Holdings Corp.
10.375%, due 6/15/13 (f) $ 25,370,000 $ 26,321,375
Lumbermens Mutual Casualty
8.30%, due 12/1/37 (c)(d) 8,525,000 63,937
8.45%, due 12/1/97 (c)(d) 2,575,000 19,312
9.15%, due 7/1/26 (c)(d) 42,123,000 315,923
--------------
26,720,547
--------------
INTERNET (0.1%)
Globix Corp.
11.00%, due 5/1/08 (a)(c)(h) 6,216,348 6,216,348
--------------
IRON & STEEL (0.7%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 14,390,000 14,605,850
Allegheny Technologies, Inc.
8.375%, due 12/15/11 3,510,000 3,685,500
United States Steel Corp.
9.75%, due 5/15/10 2,220,000 2,361,525
10.75%, due 8/1/08 9,425,000 10,155,438
--------------
30,808,313
--------------
LEISURE TIME (0.4%)
Town Sports International, Inc.
9.625%, due 4/15/11 16,025,000 16,906,375
--------------
LODGING (1.4%)
Boyd Gaming Corp.
6.75%, due 4/15/14 8,220,000 8,045,325
7.75%, due 12/15/12 12,000,000 12,330,000
Gaylord Entertainment Co.
6.75%, due 11/15/14 2,615,000 2,503,863
Mandalay Resort Group
9.50%, due 8/1/08 8,670,000 9,146,850
10.25%, due 8/1/07 1,030,000 1,059,613
MGM Mirage, Inc.
9.75%, due 6/1/07 9,225,000 9,409,500
MTR Gaming Group, Inc.
9.00%, due 6/1/12 (c) 10,740,000 10,887,675
Series B
9.75%, due 4/1/10 1,665,000 1,748,250
Park Place Entertainment Corp.
8.875%, due 9/15/08 1,730,000 1,801,363
Resort International Hotel/Casino
11.50%, due 3/15/09 5,840,300 5,854,901
San Pasqual Casino
8.00%, due 9/15/13 (c) 250,000 255,000
--------------
63,042,340
--------------
MEDIA (2.3%)
Dex Media East LLC
12.125%, due 11/15/12 5,513,000 6,133,213
</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)
- ---------------------------------------------------------------------------------
MEDIA (CONTINUED)
Houghton Mifflin Co.
7.20%, due 3/15/11 $ 9,530,000 $ 9,613,388
MediaNews Group, Inc.
6.875%, due 10/1/13 6,935,000 6,440,881
Morris Publishing Group LLC
7.00%, due 8/1/13 19,795,000 18,829,994
Nielsen Finance LLC/Nielsen Finance Co.
10.00%, due 8/1/14 (c) 4,255,000 4,435,838
Paxson Communications Corp.
8.624%, due 1/15/12 (c)(f)(g) 16,465,000 16,650,231
11.624%, due 1/15/13 (c)(g) 26,350,000 26,382,938
Ziff Davis Media, Inc.
11.489%, due 5/1/12 (g) 12,615,000 12,078,863
--------------
100,565,346
--------------
METAL FABRICATE & HARDWARE (0.9%)
Jarden Corp.
9.75%, due 5/1/12 (f) 10,460,000 11,061,450
Metals USA, Inc.
11.125%, due 12/1/15 6,580,000 7,205,100
Mueller Group, Inc.
10.00%, due 5/1/12 7,777,000 8,476,930
Neenah Foundary Co.
11.00%, due 9/30/10 (c) 11,430,000 12,560,770
--------------
39,304,250
--------------
MISCELLANEOUS--MANUFACTURING (0.5%)
RBS Global, Inc./Rexnord Corp.
9.50%, due 8/1/14 (c) 20,900,000 21,631,500
--------------
OIL & GAS (5.0%)
Chaparral Energy, Inc.
8.50%, due 12/1/15 16,935,000 16,892,663
Chesapeake Energy Corp.
6.50%, due 8/15/17 34,820,000 32,817,850
6.625%, due 1/15/16 7,560,000 7,399,350
6.875%, due 11/15/20 3,400,000 3,230,000
Forest Oil Corp.
8.00%, due 12/15/11 7,482,000 7,743,870
Hilcorp Energy I, L.P./Hilcorp Finance Co.
9.00%, due 6/1/16 (c)(f) 12,185,000 12,611,475
10.50%, due 9/1/10 (c) 5,114,000 5,484,765
Mariner Energy, Inc.
7.50%, due 4/15/13 (c) 16,640,000 15,974,400
Newfield Exploration Co.
6.625%, due 4/15/16 1,785,000 1,753,763
Parker Drilling Co.
9.625%, due 10/1/13 9,710,000 10,559,625
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
OIL & GAS (CONTINUED)
PetroHawk Energy Corp.
9.125%, due 7/15/13 (c) $ 5,155,000 $ 5,258,100
Petroquest Energy, Inc.
10.375%, due 5/15/12 3,880,000 4,035,200
Plains Exploration & Production Co.
7.125%, due 6/15/14 4,739,000 5,082,578
8.75%, due 7/1/12 6,030,000 6,406,875
Pogo Producing Co.
6.875%, due 10/1/17 25,860,000 24,631,650
Venoco, Inc.
8.75%, due 12/15/11 10,795,000 10,498,138
Vintage Petroleum, Inc.
8.25%, due 5/1/12 25,580,000 26,953,160
Whiting Petroleum Corp.
7.00%, due 2/1/14 12,070,000 11,888,950
7.25%, due 5/1/13 9,750,000 9,628,125
--------------
218,850,537
--------------
OIL & GAS SERVICES (0.4%)
Allis-Chalmers Energy, Inc.
9.00%, due 1/15/14 (c) 15,725,000 15,685,688
--------------
PACKAGING & CONTAINERS (2.1%)
Berry Plastics Holding Corp.
8.875%, due 9/15/14 (c) 10,825,000 10,933,250
Graphic Packaging International Corp.
8.50%, due 8/15/11 3,835,000 3,940,463
Owens-Brockway Glass Container, Inc.
7.75%, due 5/15/11 45,000 46,350
8.25%, due 5/15/13 5,710,000 5,881,300
8.75%, due 11/15/12 10,250,000 10,813,750
8.875%, due 2/15/09 36,533,000 37,446,325
Owens-Illinois, Inc.
8.10%, due 5/15/07 24,865,000 25,051,488
--------------
94,112,926
--------------
PIPELINES (3.8%)
ANR Pipeline Co.
7.375%, due 2/15/24 2,555,000 2,670,762
8.875%, due 3/15/10 4,880,000 5,126,406
9.625%, due 11/1/21 20,721,000 25,788,383
Colorado Interstate Gas Co.
5.95%, due 3/15/15 11,080,000 10,650,417
El Paso Natural Gas Co.
7.50%, due 11/15/26 2,835,000 2,995,821
7.625%, due 8/1/10 8,175,000 8,440,688
8.375%, due 6/15/32 11,060,000 12,799,495
El Paso Production Holding Co.
7.75%, due 6/1/13 29,430,000 30,165,750
</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 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
PIPELINES (CONTINUED)
MarkWest Energy Partners, L.P./ MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 $ 5,525,000 $ 5,193,500
8.50%, due 7/15/16 (c) 19,610,000 19,757,075
Pacific Energy Partners, L.P./Pacific Energy
Finance Corp.
7.125%, due 6/15/14 5,940,000 6,006,825
Southern Natural Gas Co.
7.35%, due 2/15/31 2,130,000 2,236,660
8.00%, due 3/1/32 1,420,000 1,592,617
Tennessee Gas Pipeline Co.
7.625%, due 4/1/37 30,840,000 33,168,852
--------------
166,593,251
--------------
REAL ESTATE (2.5%)
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 7,982,000 8,500,830
Chukchansi Economic
Development Authority
8.00%, due 11/15/13 (c)(f) 6,480,000 6,739,200
Crescent Real Estate Equities, L.P.
V 7.50%, due 9/15/07 42,142,000 42,300,033
9.25%, due 4/15/09 25,000 25,750
Host Hotels & Resorts, L.P.
6.875%, due 11/1/14 (c) 6,500,000 6,524,375
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 26,445,000 26,478,056
Trustreet Properties, Inc.
7.50%, due 4/1/15 19,240,000 20,971,600
--------------
111,539,844
--------------
RETAIL (2.3%)
Harry & David Holdings, Inc.
9.00%, due 3/1/13 9,410,000 8,939,500
Michaels Stores, Inc.
10.00%, due 11/1/14 (c) 9,285,000 9,296,606
Rite Aid Corp.
7.50%, due 1/15/15 8,350,000 7,942,938
Star Gas Partners, L.P./Star Gas Finance Co.
Series B
10.25%, due 2/15/13 28,144,000 29,199,400
Toys "R" Us, Inc.
7.625%, due 8/1/11 24,890,000 21,529,850
8.75%, due 9/1/21 24,536,000 22,879,820
--------------
99,788,114
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SEMICONDUCTORS (0.2%)
MagnaChip Semiconductor S.A.
8.64%, due 12/15/11 (g) $ 8,975,000 $ 7,718,500
--------------
SOFTWARE (0.5%)
Serena Software, Inc.
10.375%, due 3/15/16 (f) 4,400,000 4,675,000
SS&C Technologies, Inc.
11.75%, due 12/1/13 15,440,000 16,598,000
--------------
21,273,000
--------------
TELECOMMUNICATIONS (4.3%)
Centennial Cellular Operating Co./ Centennial
Communications Corp.
10.125%, due 6/15/13 17,770,000 19,058,325
Dobson Cellular Systems, Inc.
8.375%, due 11/1/11 3,775,000 3,921,281
8.375%, due 11/1/11 (c) 8,070,000 8,382,713
9.875%, due 11/1/12 8,605,000 9,293,400
GCI, Inc.
7.25%, due 2/15/14 6,635,000 6,435,950
Lucent Technologies, Inc.
5.50%, due 11/15/08 (f) 8,959,000 8,835,814
6.45%, due 3/15/29 35,346,000 31,634,670
6.50%, due 1/15/28 11,525,000 10,314,875
PanAmSat Corp.
9.00%, due 8/15/14 6,243,000 6,523,935
9.00%, due 6/15/16 (c) 10,900,000 11,390,500
Qwest Communications International, Inc.
7.25%, due 2/15/11 12,620,000 12,809,300
Series B
7.50%, due 2/15/14 18,105,000 18,467,100
Qwest Corp.
5.625%, due 11/15/08 1,420,000 1,414,675
7.20%, due 11/10/26 6,685,000 6,526,231
7.50%, due 10/1/14 (c) 6,400,000 6,704,000
7.50%, due 6/15/23 335,000 338,350
8.875%, due 3/15/12 13,755,000 15,130,500
8.875%, due 6/1/31 10,218,000 10,652,265
--------------
187,833,884
--------------
TEXTILES (1.0%)
V INVISTA
9.25%, due 5/1/12 (c) 43,530,000 46,250,625
--------------
TRUCKING & LEASING (0.2%)
Interpool, Inc.
6.00%, due 9/1/14 10,595,000 9,641,450
--------------
Total Corporate Bonds
(Cost $2,787,600,208) 2,832,285,348
--------------
</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
FOREIGN BONDS (7.8%)
- ---------------------------------------------------------------------------------
BUILDING MATERIALS (0.2%)
Ainsworth Lumber Co., Ltd.
7.25%, due 10/1/12 (f) $ 1,070,000 $ 794,475
9.367%, due 4/1/13 (g) 7,495,000 5,696,200
--------------
6,490,675
--------------
CHEMICALS (0.2%)
Nova Chemicals Corp.
8.405%, due 11/15/13 (g) 9,020,000 9,177,850
--------------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
Digicel, Ltd.
9.25%, due 9/1/12 (c) 12,255,000 12,714,563
Galaxy Entertainment Finance Co., Ltd.
9.875%, due 12/15/12 (c)(f) 9,680,000 10,236,600
--------------
22,951,163
--------------
ELECTRONICS (0.7%)
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14 (c) 12,295,000 12,479,425
9.50%, due 10/15/15 (c)(f) 18,445,000 18,606,394
--------------
31,085,819
--------------
FOREST PRODUCTS & PAPER (0.1%)
Bowater Canada Finance
7.95%, due 11/15/11 5,740,000 5,481,700
--------------
INSURANCE (0.1%)
Lindsey Morden Group, Inc.
Series B
7.00%, due 6/16/08 C$ 2,965,000 2,336,725
--------------
MEDIA (1.5%)
CanWest Media, Inc.
8.00%, due 9/15/12 $ 24,015,455 24,285,629
Quebecor Media, Inc.
7.75%, due 3/15/16 19,695,000 19,891,950
Shaw Communications, Inc.
7.50%, due 11/20/13 C$22,825,000 22,010,540
Sun Media Corp.
7.625%, due 2/15/13 $ 40,000 40,400
--------------
66,228,519
--------------
MINING (0.2%)
FMG Finance Property, Ltd.
10.00%, due 9/1/13 (c)(f) 5,095,000 4,929,413
10.625%, due 9/1/16 (c)(f) 5,090,000 5,013,650
--------------
9,943,063
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
RETAIL (1.1%)
Jafra Cosmetics International, Inc./ Distribuidora
Comerical
Jafra S.A. de C.V.
10.75%, due 5/15/11 $ 11,873,000 $ 12,748,634
Jean Coutu Group PJC, Inc.
8.50%, due 8/1/14 (f) 36,815,000 36,124,719
--------------
48,873,353
--------------
TELECOMMUNICATIONS (2.5%)
Inmarsat Finance PLC
(zero coupon), due 11/15/12
10.375%, beginning 11/15/08 22,335,000 19,989,825
Intelsat Subsidiary Holding Co., Ltd.
8.25%, due 1/15/13 19,360,000 19,723,000
10.484%, due 1/15/12 (g) 8,050,000 8,160,688
Millicom International Cellular S.A.
10.00%, due 12/1/13 26,360,000 28,369,950
MobiFon Holdings B.V.
12.50%, due 7/31/10 13,425,000 14,834,813
Nortel Networks, Ltd.
10.75%, due 7/15/16 (c) 16,380,000 17,526,600
NTL Cable PLC
9.125%, due 8/15/16 2,755,000 2,896,194
Rogers Cantel, Inc.
9.625%, due 5/1/11 580,000 656,850
--------------
112,157,920
--------------
TRANSPORTATION (0.7%)
Grupo Transportacion Ferroviaria Mexicana S.A. de
C.V.
12.50%, due 6/15/12 16,270,000 17,815,650
Stena AB
9.625%, due 12/1/12 10,205,000 10,906,594
--------------
28,722,244
--------------
Total Foreign Bonds
(Cost $329,818,108) 343,449,031
--------------
LOAN ASSIGNMENTS & PARTICIPATIONS (6.3%) (i)
- ---------------------------------------------------------------------------------
AUTO MANUFACTURERS (0.8%)
Navistar International Corp.
Delayed Draw Term Loan
10.355%, due 3/7/09 34,500,000 34,931,250
--------------
AUTO PARTS & EQUIPMENT (0.5%)
Goodyear Tire & Rubber Co. (The)
2nd Lien Term Loan
8.14%, due 4/30/10 20,350,000 20,488,095
--------------
</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 17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
- ---------------------------------------------------------------------------------
CONTAINERS & PACKAGING (0.0%)++
Graham Packaging Holdings Co.
2nd Lien Term Loan
9.688%, due 4/7/12 $ 714,286 $ 719,196
--------------
MEDIA (1.1%)
Fidelity National Information Solutions, Inc.
Term Loan B
7.07%, due 3/9/13 17,066,450 17,100,822
Nielsen Finance LLC
Dollar Term Loan
8.19%, due 8/6/13 30,020,000 30,123,209
--------------
47,224,031
--------------
MINING (0.9%)
Aleris International, Inc.
Term Loan B
7.875%, due 8/1/13 10,997,438 10,997,438
Unsecured Bridge Loan
9.625%, due 8/1/07 8,900,000 8,922,250
BHM Technologies LLC
1st Lien Term Loan
8.435%, due 7/23/13 22,280,000 21,723,000
--------------
41,642,688
--------------
PHARMACEUTICALS (0.2%)
Warner Chilcott Corp.
1st Lien Tranche D Term Loan
7.867%, due 1/18/12 8,458,421 8,497,694
Dovonex Delayed Draw Term Loan
7.867%, due 1/18/12 1,845,615 1,849,306
--------------
10,347,000
--------------
REAL ESTATE (1.0%)
LNR Property Corp.
Term Loan A1
8.22%, due 7/12/09 2,830,000 2,833,538
Initial Tranche B Term Loan
8.22%, due 7/12/11 25,475,000 25,543,986
Term Loan A2
8.47%, due 7/12/09 2,830,000 2,817,619
Rental Servicing
Bridge Loan
(zero coupon), due 12/31/06 11,235,000 11,235,000
--------------
42,430,143
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
RETAIL (0.8%)
Michaels Stores, Inc.
Term Loan B
8.375%, due 10/31/13 $ 23,415,000 $ 23,498,615
Neiman Marcus Group, Inc. (The)
Term Loan B
7.641%, due 4/6/13 14,145,570 14,250,487
--------------
37,749,102
--------------
SOFTWARE (0.6%)
SunGard Data Systems, Inc.
Term Loan
7.999%, due 2/11/13 24,302,375 24,513,004
--------------
TELECOMMUNICATIONS (0.4%)
Qwest Corp.
Term Loan B
6.95%, due 6/30/10 18,000,000 18,229,500
--------------
Total Loan Assignments & Participations
(Cost $276,198,780) 278,274,009
--------------
YANKEE BONDS (1.2%) (j)
- ---------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL (0.1%)
Marsulex, Inc.
9.625%, due 7/1/08 6,355,000 6,355,000
--------------
FOREST PRODUCTS & PAPER (0.5%)
Abitibi-Consolidated, Inc.
8.85%, due 8/1/30 8,217,000 6,809,839
Smurfit Capital Funding PLC
7.50%, due 11/20/25 18,045,000 16,872,075
--------------
23,681,914
--------------
INSURANCE (0.4%)
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 (f) 6,117,000 5,168,865
7.75%, due 7/15/37 (f) 4,810,000 3,944,200
8.25%, due 10/1/15 (f) 5,175,000 4,812,750
8.30%, due 4/15/26 (f) 3,000,000 2,595,000
--------------
16,520,815
--------------
</Table>
18 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.2%)
Nortel Networks Corp.
6.875%, due 9/1/23 $ 3,000,000 $ 2,475,000
Rogers Cantel, Inc.
9.75%, due 6/1/16 3,660,000 4,556,700
--------------
7,031,700
--------------
Total Yankee Bonds
(Cost $49,813,338) 53,589,429
--------------
Total Long-Term Bonds
(Cost $3,595,172,041) 3,657,332,675
--------------
<Caption>
SHARES
COMMON STOCKS (1.2%)
- ---------------------------------------------------------------------------------
AGRICULTURE (0.0%)++
North Atlantic Trading Co., Inc. (a)(b)(k)(l) 2,156 22
--------------
BUILDING MATERIALS (0.0%)++
Ainsworth Lumber Co., Ltd. (f) 158,400 1,541,232
--------------
HOLDING COMPANIES--DIVERSIFIED (0.0%)++
TLC Beatrice International Holdings (a)(b)(k) 25,000 25,000
--------------
INTERNET (0.4%)
Globix Corp. (b)(k)(l) 5,012,633 15,614,352
--------------
MEDIA (0.0%)++
Digital On-Demand (a)(b)(k) 1,095,395 10,954
--------------
RETAIL (0.2%)
Star Gas Partners, L.P. (k) 3,390,511 8,544,088
--------------
SOFTWARE (0.1%)
QuadraMed Corp. (a)(k) 1,740,545 4,229,524
QuadraMed Corp. (k) 434,011 1,054,647
--------------
5,284,171
--------------
TELECOMMUNICATIONS (0.5%)
Loral Space & Communications, Ltd. (k) 745,030 21,635,671
Remote Dynamics, Inc. (k) 358,615 5,379
--------------
21,641,050
--------------
Total Common Stocks
(Cost $58,790,435) 52,660,869
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (0.5%)
- ---------------------------------------------------------------------------------
INTERNET (0.0%)++
Globix Corp.
6.00% (a)(b)(k) 572,843 $ 1,911,864
--------------
SOFTWARE (0.5%)
QuadraMed Corp.
5.50% (c)(k) 950,000 20,900,000
--------------
Total Convertible Preferred Stocks
(Cost $24,367,654) 22,811,864
--------------
PREFERRED STOCKS (1.8%)
- ---------------------------------------------------------------------------------
COMMERCIAL SERVICES (0.0%)++
Colorado Prime Corp. (a)(b)(l) 7,232 72
--------------
MEDIA (0.4%)
Haights Cross Communications, Inc.
16.00% (a)(l) 397,662 17,298,297
Ziff Davis Holdings, Inc.
10.00% (a)(k) 4,240 557,560
--------------
17,855,857
--------------
REAL ESTATE INVESTMENT TRUSTS (1.1%)
Sovereign Real Estate Investment Corp.
V 12.00% (c) 34,813 48,825,232
--------------
TELECOMMUNICATIONS (0.3%)
Loral Skynet Corp.
12.00% Series A (c)(d)(f)(h) 58,539 11,941,956
--------------
Total Preferred Stocks
(Cost $86,316,130) 78,623,117
--------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (0.0%)++
- ---------------------------------------------------------------------------------
MEDIA (0.0%)++
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 12/10/11 (a)(b)(k)(l) 433 4
Strike Price $0.001
Expire 12/10/11 (a)(b)(k)(l) 409,300 4,093
Ziff Davis Holdings, Inc.
Strike Price $0.001
Expire 8/12/12 (b)(c)(k) 777,370 7,774
--------------
11,871
--------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
NUMBER OF
WARRANTS VALUE
WARRANTS (CONTINUED)
- ---------------------------------------------------------------------------------
SEMICONDUCTORS (0.0%)++
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (a)(b)(c)(k) 8,680 $ 87
--------------
TELECOMMUNICATIONS (0.0%)++
UbiquiTel, Inc.
Strike Price $22.74
Expire 4/15/10 (a)(c)(k) 14,230 142
--------------
Total Warrants
(Cost $1,896,889) 12,100
--------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (17.7%)
- ---------------------------------------------------------------------------------
COMMERCIAL PAPER (12.8%)
Abbey National N.A. LLC
5.24%, due 11/13/06 $ 28,445,000 28,395,316
American Express Credit Corp.
5.24%, due 11/6/06 28,980,000 28,958,909
American General Finance Corp.
5.23%, due 11/7/06 28,080,000 28,055,524
Bank of America
5.24%, due 11/2/06 17,685,000 17,682,426
5.24%, due 11/14/06 30,000,000 29,943,233
Chevron Funding Corp.
5.22%, due 11/9/06 26,170,000 26,139,643
Deutsche Bank Financial LLC
5.25%, due 11/27/06 33,805,000 33,676,823
Fairway Finance Corp.
5.289%, due 11/20/06 (m) 3,594,550 3,594,550
General Electric Capital Corp.
5.23%, due 11/15/06 29,255,000 29,195,498
Greyhawk Funding
5.286%, due 11/13/06 (m) 4,792,733 4,792,733
ING U.S. Funding LLC
5.23%, due 12/4/06 48,945,000 48,710,349
Jupiter Securitization Corp.
5.303%, due 11/14/06 (m) 5,894,629 5,894,629
Lexington Parker Capital Co.
5.282%, due 11/8/06 (m) 4,792,733 4,792,733
Liberty Street Funding Co.
5.286%, due 11/27/06 (m) 5,933,144 5,933,144
Morgan Stanley
5.25%, due 11/3/06 41,745,000 41,732,824
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
Old Line Funding LLC
5.287%, due 11/15/06 (m) $ 4,792,733 $ 4,792,733
Prudential Funding LLC
5.285%, due 11/1/06 57,655,000 57,655,000
Rabobank USA Finance Corp.
5.235%, due 11/16/06 52,265,000 52,150,997
Sheffield Receivables Corp.
5.272%, due 11/8/06 (m) 4,792,733 4,792,733
Societe Generale North America, Inc.
5.23%, due 11/10/06 34,550,000 34,504,826
Toyota Motor Credit Corp.
5.23%, due 11/8/06 36,020,000 35,983,370
Wal-Mart Stores, Inc.
5.21%, due 11/21/06 34,515,000 34,415,098
Yorktown Capital LLC
5.282%, due 11/16/06 (m) 4,193,641 4,193,641
--------------
Total Commercial Paper
(Cost $565,986,732) 565,986,732
--------------
<Caption>
SHARES
INVESTMENT COMPANIES (1.4%)
BGI Institutional Money
Market Fund (m) 10,346,456 10,346,456
Merrill Lynch Funds--Premier Institutional Money
Market Fund 53,206,598 53,206,598
--------------
Total Investment Companies
(Cost $63,553,054) 63,553,054
--------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.1%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $5,645,441
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$5,709,320 and a Market Value
of $5,868,992) (m) $ 5,644,592 5,644,592
--------------
Total Repurchase Agreement
(Cost $5,644,592) 5,644,592
--------------
</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.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ---------------------------------------------------------------------------------
TIME DEPOSITS (3.4%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (m) $ 9,585,466 $ 9,585,466
Bank of America
5.27%, due 11/21/06 (g)(m) 13,180,016 13,180,016
Bank of Montreal
5.28%, due 11/27/06 (m) 9,585,466 9,585,466
Bank of Nova Scotia
5.30%, due 11/10/06 (m) 9,585,466 9,585,466
Barclays
5.32%, due 1/18/07 (m) 9,585,466 9,585,466
Deutsche Bank AG
5.27%, due 11/9/06 (m) 9,585,466 9,585,466
Fortis Bank
5.27%, due 11/6/06 (m) 20,848,388 20,848,388
Halifax Bank of Scotland
5.30%, due 1/10/07 (m) 9,585,466 9,585,466
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (m) 9,585,466 9,585,466
Royal Bank of Canada
5.30%, due 12/22/06 (m) 9,585,466 9,585,466
Royal Bank of Scotland
5.29%, due 12/12/06 (m) 9,585,466 9,585,466
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (m) 9,585,466 9,585,466
Societe Generale North America, Inc.
5.28%, due 12/6/06 (m) 9,585,466 9,585,466
UBS AG
5.28%, due 12/5/06 (m) 9,585,466 9,585,466
--------------
Total Time Deposits
(Cost $149,053,996) 149,053,996
--------------
Total Short-Term Investments
(Cost $784,238,374) 784,238,374
--------------
Total Investments
(Cost $4,550,781,523) (n) 104.1% 4,595,678,999(o)
Liabilities in Excess of
Cash and Other Assets (4.1) (182,973,509)
------------ --------------
Net Assets 100.0% $4,412,705,490
============ ==============
</Table>
<Table>
++ Less than one tenth of a percent.
+++ Fifty percent of the Fund's liquid assets are maintained to cover "senior
securities transactions" which may include, but are not limited to,
forwards, TBA's, options and futures. This percentage is marked-to-market
daily against the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) Illiquid security. The total market value of these securities at October
31, 2006 is $62,686,218, which represents 1.4% of the Fund's net assets.
(b) Fair valued security. The total market value of these securities at October
31, 2006 is $48,140,729, which reflects 1.2% of the Fund's net assets.
(c) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(d) Issue in default.
(e) Issuer in bankruptcy.
(f) Represents a security, or a portion thereof, which is out on loan.
(g) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(h) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(i) Floating Rate Loan--generally pays interest at rates which are periodically
re-determined at a margin above the London Inter-Bank Offered Rate
("LIBOR") or other short-term rates. The rate shown is the rate(s) in
effect at October 31, 2006. Floating Rate Loans are generally considered
restrictive in that the Fund is ordinarily contractually obligated to
receive consent from the Agent Bank and/or borrower prior to disposition of
a Floating Rate Loan. Under procedures adopted by the Board, the loans are
deemed to be liquid except those identified with a footnote (a). (See
footnote (a) above.)
(j) Yankee Bond--dollar-denominated bond issued in the United States by a
foreign bank or corporation.
(k) Non-income producing security.
(l) Restricted security. (See Note 2(L) and Note 6)
(m) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(n) The cost for federal income tax purposes is $4,563,233,886.
(o) At October 31, 2006 net unrealized appreciation was $32,445,113, 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 $198,581,621 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $166,136,508.
The following abbreviations are used in the above portfolio:
C$--Canadian Dollar
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified cost
$4,550,781,523) including $199,253,873 market
value of securities loaned $4,595,678,999
Cash 482,248
Receivables:
Dividends and interest 79,619,072
Fund shares sold 9,450,163
Investment securities sold 5,052,690
Other assets 96,879
Unrealized appreciation on foreign currency
forward contracts 28,107
--------------
Total assets 4,690,408,158
--------------
LIABILITIES:
Securities lending collateral 203,831,940
Unrealized depreciation on unfunded
commitments 199,625
Payables:
Investment securities purchased 53,697,825
Fund shares redeemed 5,661,074
Manager (See Note 3) 2,175,245
NYLIFE Distributors (See Note 3) 1,910,628
Transfer agent (See Note 3) 1,123,577
Professional fees 416,875
Shareholder communication 250,136
Trustees 55,459
Custodian 30,783
Accrued expenses 80,704
Dividend payable 8,268,797
--------------
Total liabilities 277,702,668
--------------
Net assets $4,412,705,490
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number
of shares authorized:
Class A $ 4,432,826
Class B 1,693,706
Class C 669,476
Class I 184,716
Additional paid-in capital 5,010,318,299
Accumulated distributions in excess of net
investment income (16,695,785)
Accumulated net realized loss on investments
and foreign currency transactions (632,682,632)
Net unrealized appreciation on investments 44,897,476
Net unrealized depreciation on unfunded
commitments (199,625)
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts 87,033
--------------
Net assets $4,412,705,490
==============
CLASS A
Net assets applicable to outstanding shares $2,806,799,932
==============
Shares of beneficial interest outstanding 443,282,566
==============
Net asset value per share outstanding $ 6.33
Maximum sales charge (4.50% of offering
price) 0.30
--------------
Maximum offering price per share outstanding $ 6.63
==============
CLASS B
Net assets applicable to outstanding shares $1,067,018,141
==============
Shares of beneficial interest outstanding 169,370,601
==============
Net asset value and offering price per share
outstanding $ 6.30
==============
CLASS C
Net assets applicable to outstanding shares $ 421,854,984
==============
Shares of beneficial interest outstanding 66,947,629
==============
Net asset value and offering price per share
outstanding $ 6.30
==============
CLASS I
Net assets applicable to outstanding shares $ 117,032,433
==============
Shares of beneficial interest outstanding 18,471,620
==============
Net asset value and offering price per share
outstanding $ 6.34
==============
</Table>
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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $334,336,600
Dividends (a) 5,319,708
Income from securities loaned--net 1,208,314
-------------
Total income 340,864,622
-------------
EXPENSES:
Manager (See Note 3) 24,124,532
Distribution--Class B (See Note 3) 10,422,723
Distribution--Class C (See Note 3) 3,045,702
Distribution/Service--Class A (See Note 3) 6,138,400
Service--Class B (See Note 3) 3,474,241
Service--Class C (See Note 3) 1,015,234
Transfer agent--Classes A, B and C (See Note
3) 6,766,286
Transfer agent--Class I (See Note 3) 137,526
Shareholder communication 1,995,876
Professional fees 1,131,131
Recordkeeping 460,749
Trustees 252,453
Registration 179,633
Custodian 125,203
Miscellaneous 235,601
-------------
Total expenses before reimbursement 59,505,290
Reimbursement from Manager for professional
fees (See Note 3(B) on page 31.) (388,736)
-------------
Net expenses 59,116,554
-------------
Net investment income 281,748,068
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $ 37,414,542
Foreign currency transactions (1,079,690)
-------------
Net realized gain on investments and foreign
currency transactions 36,334,852
-------------
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 31.) 814,000
-------------
Net change in unrealized depreciation on:
Security transactions and unfunded
commitments 69,415,987
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts 412,351
-------------
Net change in unrealized depreciation on
investments, unfunded commitments and
foreign currency transactions 69,828,338
-------------
Net realized and unrealized gain on
investments, unfunded commitments and
foreign currency transactions 106,977,190
-------------
Net increase in net assets resulting from
operations $388,725,258
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$26,812.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 23
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 281,748,068 $ 297,632,653
Net realized gain on
investments and foreign
currency transactions 36,334,852 104,886,206
Net increase from payments from
Manager for losses
attributable to shareholder
trading arrangements (See Note
3(B) on page 31.) 814,000 --
Net change in unrealized
depreciation on investments
and foreign currency
transactions 69,828,338 (166,954,644)
---------------------------------
Net increase in net assets
resulting from operations 388,725,258 235,564,215
---------------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (161,212,425) (99,144,651)
Class B (83,794,542) (178,840,012)
Class C (24,518,618) (28,348,396)
Class I (6,209,368) (3,939,459)
Return of capital:
Class A (20,078,416) --
Class B (10,436,303) --
Class C (3,053,704) --
Class I (773,354) --
---------------------------------
Total dividends and
distributions to shareholders (310,076,730) (310,272,518)
---------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 816,001,993 642,682,516
Class B 72,948,113 146,721,557
Class C 108,663,170 142,075,340
Class I 55,402,084 50,212,676
</Table>
<Table>
<Caption>
2006 2005
Net asset value of shares issued to shareholders
in reinvestment of dividends and distributions:
Class A $ 127,045,497 $ 67,494,117
Class B 58,591,631 121,051,883
Class C 16,277,529 16,414,248
Class I 6,008,609 3,395,763
---------------------------------
1,260,938,626 1,190,048,100
Cost of shares redeemed+:
Class A (657,034,025) (585,092,843)
Class B (480,936,991) (553,407,898)
Class C (112,127,499) (168,688,555)
Class I (14,776,957) (5,860,984)
---------------------------------
(1,264,875,472) (1,313,050,280)
Net asset value of shares
converted (See Note 1):
Class A 1,096,223,143 --
Class B (1,096,223,143) --
Decrease in net assets
derived from capital share
transactions (3,936,846) (123,002,180)
---------------------------------
Net increase (decrease) in
net assets 74,711,682 (197,710,483)
NET ASSETS:
Beginning of year 4,337,993,808 4,535,704,291
---------------------------------
End of year $ 4,412,705,490 $ 4,337,993,808
=================================
Accumulated distributions in
excess of net investment income
at end of year $ (16,695,785) $ (28,602,241)
=================================
</Table>
+ Cost of shares redeemed net of redemption fee of $170,964 and $158,854 for the
year ended October 31, 2006 and 2005, respectively.
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.
This page intentionally left blank
www.mainstayfunds.com 25
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2006 2005 2004 2003
Net asset value at beginning of period $ 6.22 $ 6.32 $ 6.05 $ 4.95
---------- ---------- ---------- -----------
Net investment income 0.42(a) 0.45 0.46 (a) 0.39
Net realized and unrealized gain (loss) on
investments 0.15 (f) (0.09) 0.25 1.12
Net realized and unrealized gain (loss) on
foreign currency transactions (0.00)(c) 0.00(c) 0.02 0.00(c)
---------- ---------- ---------- -----------
Total from investment operations 0.57 0.36 0.73 1.51
---------- ---------- ---------- -----------
Less dividends and distributions:
From net investment income (0.41) (0.46) (0.46) (0.40)
Return of capital (0.05) -- -- (0.01)
---------- ---------- ---------- -----------
Total dividends and distributions (0.46) (0.46) (0.46) (0.41)
---------- ---------- ---------- -----------
Redemption fee (a) 0.00 (c) 0.00(c) 0.00(c) --
---------- ---------- ---------- -----------
Net asset value at end of period $ 6.33 $ 6.22 $ 6.32 $ 6.05
========== ========== ========== ===========
Total investment return (d) 9.58%(e)(f) 5.86% 12.53% 31.57%(g)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.77% 7.10% 7.44% 8.43%+
Net expenses 1.06% 1.02% 1.01% 1.01%+
Expenses (before reimbursement) 1.07%(e) 1.02% 1.01% 1.01%+
Portfolio turnover rate 58% 35% 41% 47%
Net assets at end of period (in 000's) $2,806,800 $1,381,080 $1,279,164 $1,265,856
<Caption>
CLASS A
----------------------
YEAR ENDED
DECEMBER 31,
2002 2001
Net asset value at beginning of period $ 5.56 $ 6.10
-------- --------
Net investment income 0.51 0.65 (b)
Net realized and unrealized gain (loss) on
investments (0.54) (0.50)(b)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.02) 0.00 (c)
-------- --------
Total from investment operations (0.05) 0.15
-------- --------
Less dividends and distributions:
From net investment income (0.51) (0.65)
Return of capital (0.05) (0.04)
-------- --------
Total dividends and distributions (0.56) (0.69)
-------- --------
Redemption fee (a) -- --
-------- --------
Net asset value at end of period $ 4.95 $ 5.56
======== ========
Total investment return (d) (0.78%) 2.49%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 9.63% 10.84%(b)
Net expenses 1.07% 1.04%
Expenses (before reimbursement) 1.08% 1.08%
Portfolio turnover rate 50% 51%
Net assets at end of period (in 000's) $850,899 $710,205
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09
-------- -------- -------- ----------- -------- --------
Net investment income 0.38 (a) 0.40 0.42(a) 0.36 0.46 0.61 (b)
Net realized and unrealized gain (loss) on
investments 0.15 (f) (0.09) 0.24 1.12 (0.53) (0.50)(b)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.00)(c) 0.00(c) 0.02 0.00 (c) (0.02) 0.00 (c)
-------- -------- -------- ----------- -------- --------
Total from investment operations 0.53 0.31 0.68 1.48 (0.09) 0.11
-------- -------- -------- ----------- -------- --------
Less dividends and distributions:
From net investment income (0.37) (0.42) (0.42) (0.38) (0.48) (0.61)
Return of capital (0.05) -- -- (0.00)(c) (0.04) (0.04)
-------- -------- -------- ----------- -------- --------
Total dividends and distributions (0.42) (0.42) (0.42) (0.38) (0.52) (0.65)
-------- -------- -------- ----------- -------- --------
Redemption fee (a) 0.00 (c) 0.00(c) 0.00(c) -- -- --
-------- -------- -------- ----------- -------- --------
Net asset value at end of period $ 6.30 $ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55
======== ======== ======== =========== ======== ========
Total investment return (b) 8.91%(e)(f) 5.04% 11.65% 30.82%(g) (1.53%) 1.72%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.02% 6.35% 6.69% 7.68%+ 8.88% 10.09%(b)
Net expenses 1.81% 1.77% 1.76% 1.76%+ 1.82% 1.79%
Expenses (before reimbursement) 1.82%(e) 1.77% 1.76% 1.76%+ 1.83% 1.83%
Portfolio turnover rate 58% 35% 41% 47% 50% 51%
Net assets at end of period (in 000's) $421,855 $401,923 $419,496 $422,392 $236,791 $174,205
</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) 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.
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
Decrease net investment income ($0.00)(c) ($0.00)(c) ($0.00)(c)
Increase net realized and unrealized gains and losses 0.00 (c) 0.00 (c) 0.00 (c)
Decrease ratio of net investment income (0.04%) (0.04%) (0.04%)
</Table>
<Table>
(c) Less than one cent per share.
(d) Total return is calculated exclusive of sales charges.
(e) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundred of a percent. (See Note 3(B) on page 31.)
(f) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were less than $0.01 per share
on net realized gains on investments, and the effect on total investment return was less
than 0.01%, respectively. (See Note 3(B) on page 31.)
(g) Total return is not annualized.
</Table>
26 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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09
---------- ---------- ---------- ----------- ---------- ----------
0.38 (a) 0.40 0.42(a) 0.36 0.46 0.61 (b)
0.15 (f) (0.08) 0.24 1.12 (0.53) (0.50)(b)
(0.00)(c) 0.00(c) 0.02 0.00 (c) (0.02) 0.00 (c)
---------- ---------- ---------- ----------- ---------- ----------
0.53 0.32 0.68 1.48 (0.09) 0.11
---------- ---------- ---------- ----------- ---------- ----------
(0.37) (0.43) (0.42) (0.38) (0.48) (0.61)
(0.05) -- -- (0.00)(c) (0.04) (0.04)
---------- ---------- ---------- ----------- ---------- ----------
(0.42) (0.43) (0.42) (0.38) (0.52) (0.65)
---------- ---------- ---------- ----------- ---------- ----------
0.00 (c) 0.00(c) 0.00(c) -- -- --
---------- ---------- ---------- ----------- ---------- ----------
$ 6.30 $ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55
========== ========== ========== =========== ========== ==========
8.92%(e)(f) 5.04% 11.65% 30.82%(g) (1.53%) 1.72%
6.02% 6.35% 6.69% 7.68%+ 8.88% 10.09%(b)
1.81% 1.77% 1.76% 1.76%+ 1.82% 1.79%
1.82%(e) 1.77% 1.76% 1.76%+ 1.83% 1.83%
58% 35% 41% 47% 50% 51%
$1,067,018 $2,486,331 $2,814,176 $2,876,134 $2,211,253 $2,475,037
</Table>
<Table>
<Caption>
CLASS I
---------------------------------------------
JANUARY 2,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2006 2005 2004
$ 6.22 $ 6.32 $ 6.24
-------- ------- -----------
0.44 (a) 0.48 0.41(a)
0.16 (f) (0.10) 0.07
(0.00)(c) 0.00(c) 0.00(c)
-------- ------- -----------
0.60 0.38 0.48
-------- ------- -----------
(0.43) (0.48) (0.40)
(0.05) -- --
-------- ------- -----------
(0.48) (0.48) (0.40)
-------- ------- -----------
0.00 (c) 0.00(c) 0.00(c)
-------- ------- -----------
$ 6.34 $ 6.22 $ 6.32
======== ======= ===========
10.02%(d)(e)(f) 6.12% 7.97%(g)
7.03% 7.31% 7.79%+
0.80% 0.81% 0.66%+
0.81%(e) 0.81% 0.66%+
58% 35% 41%
$117,032 $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 27
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises 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 commenced on
January 3, 1995, Class B shares commenced on May 1, 1986, Class C shares
commenced on September 1, 1998 and Class I 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 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 a
1% contingent deferred sales charge may be imposed on redemptions made within
one year of purchase of Class C shares. Class I shares are not subject to a
sales charge. As approved by the Board of Trustees in 1997, Class B shares
convert to Class A shares eight years after the date they were purchased. The
first conversion occurred December 28, 2005. The four classes of shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation, and other rights and conditions. Each class of shares other than
Class I shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are
not subject to a distribution or service fee.
The Fund's investment objective is to seek maximum current income through
investment in a diversified portfolio of high yield debt securities. Capital
appreciation is a secondary objective.
The Fund also invests in high yield securities (sometimes called "junk bonds"),
which are generally considered speculative because they present a greater risk
of loss, including default, than higher quality debt securities. These
securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to 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, as defined in Note 3,
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 trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time).
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("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. Foreign currency forward contracts are valued at their fair
market values determined on the basis of the mean between the last current bid
and ask prices based on dealer or exchange quotations.
Temporary cash investments acquired over 60 days prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At
28 MainStay High Yield Corporate Bond Fund
October 31, 2006, the Fund held securities with a value of $48,140,729 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, as defined in Note 3, conclude that such events may have
affected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain amounts. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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, accumulated net
realized loss on investments and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2006, are not affected.
<Table>
<Caption>
ACCUMULATED
DISTRIBUTIONS IN EXCESS ACCUMULATED NET
OF NET INVESTMENT REALIZED LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN-CAPITAL
$40,235,118 $(6,707,342) $(33,527,776)
-----------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to return of capital, bond
restructuring, premium amortization adjustments, paydown gain (loss), foreign
currency gain (loss), interest write-offs and the reimbursement payment (See
Note 11 on page 35).
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities,
other than short-term securities, purchased for the Fund are accreted and
amortized, respectively, on the effective interest rate 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.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) 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 the
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. For example 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.
(I) 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
valuation date to credit loss in the event of a counterparty's failure to
perform its obligations. (See Note 6 on page 34.)
(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.
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.
30 MainStay High Yield Corporate Bond Fund
(K) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 on page 34.)
(L) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund does not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 6 on page
34.)
(M) 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.
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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,
2006, the Manager earned fees from the Fund in the amount of $24,124,532. It was
not necessary for the Manager to reimburse the Fund for expenses for the year
ended October 31, 2006.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, the Manager pays 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENT FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters". (See Note 11 on
page 35.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $388,736. Additional payments
were made by affiliates relating to the shareholder trading matters. Further
discussion regarding those payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and 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.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $633,428 for the year
ended October 31, 2006. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $17,196, $1,824,958 and $70,385, respectively, for the year ended
October 31, 2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $6,903,812.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $9,914,991 0.4%
-----------------------------------------------------
Class C 105 0.0*
-----------------------------------------------------
Class I 1,190 0.0*
-----------------------------------------------------
</Table>
* Less than one tenth of one percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $120,232.
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 $460,749 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER TOTAL
CAPITAL TEMPORARY UNREALIZED ACCUMULATED
LOSSES DIFFERENCES APPRECIATION LOSS
$(628,629,150) $(8,268,797) $32,304,414 $(604,593,533)
----------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, interest write-offs and mark-to-market of
forward currency contracts.
The other temporary differences are primarily due to distribution payable.
32 MainStay High Yield Corporate Bond Fund
At October 31, 2006, for federal income tax purposes, capital loss carryforwards
of $628,629,150 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
2014 30,786
-------------------------------------------
$628,629
-------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $275,734,953 $310,272,518
Return of Capital 34,341,777 --
--------------------------------------------------------
$310,076,730 $310,272,518
--------------------------------------------------------
</Table>
NOTE 5--COMMITMENTS AND CONTINGENCIES:
At October 31, 2006 the Fund had unfunded loan commitments pursuant to the
following loan agreement:
<Table>
<Caption>
UNFUNDED UNREALIZED
BORROWER COMMITMENT DEPRECIATION
HCA, Inc., due 9/12/07 $39,925,000 $ (199,625)
-----------------------------------------------------
</Table>
The commitment is available until the maturity date of the security.
www.mainstayfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--FUND SECURITIES LOANED, FOREIGN CURRENCY FORWARD CONTRACTS AND
RESTRICTED SECURITIES:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $199,253,873. The Fund received $203,831,940 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.
Securities purchased with collateral received are valued at amortized cost.
Foreign forward currency contracts open at October 31, 2006:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts
- ----------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 1/4/07 E11,198,000 $14,298,166 $ 39,865
- ----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Currency Sale Contracts
- ----------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 1/4/07 E11,198,000 $14,326,273 $ (11,758)
- ----------------------------------------------------------------------------------------------------------------------
Unrealized appreciation on foreign currency forward
contracts $ 28,107
- ----------------------------------------------------------------------------------------------------------------------
</Table>
Restricted securities held at October 31, 2006:
<Table>
<Caption>
NUMBER OF
DATE(S) OF WARRANTS/ 10/31/06 PERCENTAGE OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Colorado Prime Corp.
Preferred Stock 5/6/97-11/10/99 $ 7,232 $23,048,641 $ 72 0.0%(a)
- -------------------------------------------------------------------------------------------------------------------------------
Globix Corp.
Common Stock 10/4/01-10/27/05 5,012,633 2,681,489 15,614,352 0.4
- -------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Preferred Stock 16.00%, 1/22/04-2/3/06 397,662 18,548,475 17,298,297 0.4
Warrants 1/22/04-2/3/06 409,300 4,093 4,093 0.0(a)
Warrants 1/22/04-2/3/06 433 4 4 0.0(a)
- -------------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common Stock 4/21/04 2,156 21 22 0.0(a)
- -------------------------------------------------------------------------------------------------------------------------------
$44,282,723 $32,916,840 0.8%
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
(a) Less than one tenth of a percent.
</Table>
NOTE 7--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of U.S. Government
securities were $151,513 and $150,464, respectively. Purchases and sales of
securities, other than U.S. Government and short-term securities, were
$2,020,298 and $2,130,380, respectively.
34 MainStay High Yield Corporate Bond Fund
NOTE 10--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 130,312 11,677 17,410 8,828
- --------------------------------------------------------------
Shares issued in
reinvestment of
dividend and
distributions 20,298 9,405 2,611 960
- --------------------------------------------------------------
150,610 21,082 20,021 9,788
Shares redeemed (104,833) (77,176) (17,963) (2,357)
- --------------------------------------------------------------
Shares converted (see
Note 1) 175,396 (175,959) -- --
- --------------------------------------------------------------
Net increase
(decrease) 221,173 (232,053) 2,058 7,431
- --------------------------------------------------------------
</Table>
<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>
NOTE 11--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$814,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
www.mainstayfunds.com 35
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, 2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the three-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, 2006, 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,
2006, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended, and
financial highlights for each of the years in the three-year period then ended,
in conformity with U.S. generally accepted accounting principles.
KPMG LLP SIGNATURE
Philadelphia, Pennsylvania
December 21, 2006
36 MainStay High Yield Corporate Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's historical and
continuing favorable investment performance record when compared over several
time periods with groupings of funds having similar investment mandates.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher invest-
www.mainstayfunds.com 37
ment minimums for some share classes. The Trustees discussed additional measures
that may increase average shareholder account size and/or otherwise reduce the
Trust's transfer agency expenses.
The Trustees recognized the large asset size of the Fund relative to other
series of the Trust, and discussed the extent to which economies of scale were
projected by the Manager to be realized as the Fund's assets, or the assets of
the Trust overall, increase. The Trustees noted, in particular, the plans of the
Manager and its affiliates for marketing and distributing the shares of the
various series of the Trust. They noted the contractual breakpoint that would
reduce the Fund's management fee at asset levels above the breakpoint and the
fact that the breakpoint was intended to provide that shareholders would share
in benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund's management fee rate had been reduced
by the breakpoint schedule applicable to the Fund, and reviewed additional
information regarding implementation of breakpoints for a fund having an asset
base as large as that of the Fund. The Trustees reviewed information showing
that the Fund's asset size had decreased based in part on investment trends that
appeared to focus more heavily on other asset classes. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust.
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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
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, 2006,
should be multiplied by 0.3% to arrive at the amount eligible for qualified
dividend income, 78.9% to arrive at the amount eligible for qualified interest
income and 1.8% for the corporate dividends received deduction.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
www.mainstayfunds.com 39
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 High Yield Corporate Bond Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 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>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
42 MainStay High Yield Corporate Bond Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSHY11-12/06
08
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 10
- --------------------------------------------------------------------------------
Portfolio of Investments 12
- --------------------------------------------------------------------------------
Financial Statements 16
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 30
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 31
- --------------------------------------------------------------------------------
Federal Income Tax Information 33
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 33
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 33
- --------------------------------------------------------------------------------
Trustees and Officers 34
</Table>
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.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- --------------------------------------------------
With sales charges 22.01% 14.04% 7.38%
Excluding sales charges 29.11 15.34 7.99
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/96 9450 10000
10213 10463
11249 11472
13702 14115
12234 13706
9985 10289
10111 8930
12092 11344
13920 13480
15785 15920
10/31/06 20380 20301
</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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 23.13% 14.21% 7.20%
Excluding sales charges 28.13 14.45 7.20
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/96 10000 10000
10726 10463
11740 11472
14185 14115
12585 13706
10211 10289
10256 8930
12175 11344
13899 13480
15648 15920
10/31/06 20050 20301
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
With sales charges 27.15% 14.46% 7.20%
Excluding sales charges 28.15 14.46 7.20
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/96 10000 10000
10726 10463
11740 11472
14185 14115
12585 13706
10199 10289
10257 8930
12175 11344
13899 13480
15636 15920
10/31/06 20038 20301
</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 as 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.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT TWO PAGES 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 CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
29.94% 15.80% 8.27%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/96 10000 10000
10809 10463
11928 11472
14547 14115
13012 13706
10626 10289
10774 8930
12912 11344
14941 13480
17030 15920
10/31/06 22129 20301
</Table>
CLASS R1 SHARES--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
29.76% 15.61% 8.11%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/96 10000 10000
10798 10463
11894 11472
14494 14115
12953 13706
10564 10289
10701 8930
12814 11344
14807 13480
16815 15920
10/31/06 21820 20301
</Table>
CLASS R2 SHARES--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
29.53% 15.40% 7.90%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/96 10000 10000
10773 10463
11839 11472
14398 14115
12836 13706
10453 10289
10556 8930
12608 11344
14551 13480
16519 15920
10/31/06 21397 20301
</Table>
Class R3 shares are sold with no initial sales charge or CDSC, have an annual
12b-1 fee of .50%, and are available in certain individual retirement accounts
or in certain retirement plans. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be modified
or terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of any management fee waivers or expense reimbursements from
the Fund pursuant to this agreement if such action does not cause the Fund to
exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense. Prior to 9/1/98
(for Class C), 1/2/04 (for Class I, R1 and R2) and 4/28/06 (for Class R3),
performance for Class C, I, R1, R2, and R3 shares includes the historical
performance of Class B shares adjusted to reflect the applicable sales charge
(or CDSC) and fees and expenses for Class C, I, R1, R2, and R3 shares.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE AND THE NEXT PAGE ARE AN
INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN
CONJUNCTION WITH THEM.
6 MainStay International Equity Fund
CLASS R3 SHARES--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
28.83% 14.94% 7.65%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/96 10000 10000
10769 10463
11834 11472
14357 14115
12788 13706
10417 10289
10506 8930
12521 11344
14351 13480
16222 15920
10/31/06 20899 20301
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -----------------------------------------------------------------------
MSCI EAFE Index(2) 27.52% 14.56% 7.34%
Average Lipper international multicap core
fund(3) 26.57 14.41 8.91
</Table>
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 25
of the Notes to Financial Statements for further explanation). If these
nonrecurring reimbursements had not been made the total return (excluding
sales charges) would have been 28.88% for Class A, 27.88% for Class B, 27.91%
for Class C, 29.71% for Class I, 29.53% for Class R1, and 29.30% for Class
R2. The reimbursement occurred prior to the launch of Class R3 thus there was
no effect to the class.
2. 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 in 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 TWO PRECEDING PAGES ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 7
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,095.30 $ 8.56 $1,016.90 $ 8.24
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,091.75 $12.50 $1,013.15 $12.03
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,091.85 $12.50 $1,013.15 $12.03
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,098.75 $ 5.34 $1,019.95 $ 5.14
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,097.90 $ 5.92 $1,019.40 $ 5.70
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,097.15 $ 7.24 $1,018.15 $ 6.97
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,095.25 $ 8.40 $1,017.05 $ 8.08
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.62% for Class A, 2.37% for Class B and Class C, 1.01% for Class I, 1.12%
for Class R1, 1.37% for Class R2, and 1.59% for R3) multiplied by the average
account value over the period, divided by 365 and multiplied by 184 (to
reflect the one-half year period). In the absence of waivers and/or
reimbursements, expenses would have been higher.
8 MainStay International Equity Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(COMPOSITION PIE CHART)
<Table>
Common Stocks 92.0
Short-Term Investments (collateral from securities lending 12.7
is 12.4%)
Warrants 3.6
Liabilities in Excess of Cash and Other Assets (8.3)
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Tesco PLC
2. Mediaset S.p.A.
3. Ryanair Holdings PLC
4. Nestle S.A.
5. Reed Elsevier N.V.
6. TNT N.V.
7. Diageo PLC(+)
8. Banco Popular Espanol S.A.
9. Novartis AG(+)
10. BP PLC
</Table>
+ Security trades on more than one exchange.
www.mainstayfunds.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Rupal J. Bhansali of MacKay Shields LLC
HOW DID MAINSTAY INTERNATIONAL EQUITY FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay International Equity Fund returned 29.11%
for Class A shares, 28.13% for Class B shares, and 28.15% for Class C shares for
the 12 months ended October 31, 2006. Over the same period, the Fund's Class I
shares returned 29.94%, Class R1 shares returned 29.76%, Class R2 shares
returned 29.53%, and Class R3 shares returned 28.83%.(1) All share classes
outperformed the 27.52% return of the MSCI EAFE(R) Index,(2) the Fund's
broad-based securities-market index, for the 12-month period. All share classes
also outperformed the 26.57% return of the average Lipper(3) international
multi-cap core fund for the 12 months ended October 31, 2006.(4)
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE?
We attribute the Fund's performance to our bottom-up investment approach. We
remained focused on the analysis of individual business models and sought to
invest in quality companies. Our security selection is based on reasonable
valuations rather than market perceptions. This approach pointed the Fund to
companies with solid balance sheets and high returns on invested capital--a
profile that began to see traction in the recent market environment.
DURING THE REPORTING PERIOD, WHICH SECTORS WERE THE FUND'S STRONGEST
CONTRIBUTORS AND WHICH SECTORS WERE THE WEAKEST?
An overweighted position in diversified financials was the biggest contributor
to the Fund's performance. Several names in the industry group benefited from
consolidation among various stock markets. Performance in the technology
hardware & equipment industry group was also strong.
Telecommunication services and energy were the worst-performing industry groups
during the reporting period. Companies in both of these market segments faced
increased costs and competition, which put pressure on profit margins.
DURING THE REPORTING PERIOD, WHICH FUND HOLDINGS DID PARTICULARLY WELL AND WHICH
FUND HOLDINGS WERE WEAK?
The strongest individual contributors to the Fund's performance included Man
Group, a U.K. capital markets firm that benefited from a fast-growing asset
management environment and strong fund perform-ance. TNT, a Netherlands-based
logistics and mail company, also performed well. The company's earnings
surpassed market expectations. Shares of Canon also advanced with rapid
expansion in the digital camera market.
The Fund's weakest holdings during the reporting period were all quality
companies, including Canadian food & staples retailer Loblaw, U.S. supplemental
insurance company AFLAC, and regulated electric-utility monopoly HongKong
Electric. The Fund continues to hold these names.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund added Nokian Renkaat, a Finland-based manufacturer of top-quality
automobile tires. We increased the Fund's position in Mediaset, an Italian media
firm that recently underperformed because of election results in Italy.
We sold the Fund's position in Australian Gas Light at a profit after Alinta
Limited attempted a hostile takeover and Australian Gas Light's shares rallied
beyond what we believed to be their intrinsic value. We reduced the Fund's
position in HongKong Electric because the natural monopoly was struggling under
new regulatory challenges, including pressure to keep the electric tariff low.
HOW WAS THE FUND POSITIONED RELATIVE TO THE MSCI EAFE(R) INDEX AT THE END OF THE
REPORTING PERIOD?
Our bottom-up investment approach directed the Fund toward consumer staples
companies and higher-dividend-yielding utilities at the expense of industrials,
materials, and telecommunication services stocks. As of October 31, 2006, the
Fund held significantly overweighted positions relative to the
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 more than 100% and may generate taxable short-term
capital gains.
1. Class R3 shares were first offered on April 28, 2006.
2. See footnote on page 7 for more information on the MSCI EAFE(R) Index.
3. See footnote on page 7 for more information on Lipper Inc.
4. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 7.
10 MainStay International Equity Fund
MSCI EAFE(R) Index in diversified financials, food & staples retailing, and
media, as well as a more modestly overweighted position in health care. On the
same date, the Fund was underweighted relative to the Index in telecommunication
services, materials, and energy. The Fund held a market-weighted position in
automobiles & components.
WHERE HAVE YOU FOUND THE MOST COMPELLING OPPORTUNITIES?
During the reporting period, we found fewer compelling investment opportunities
among Japanese companies than we did in Europe and the rest of Asia. We did,
however, find some Japanese businesses that met all of our criteria for
ownership, and we modestly reduced the Fund's underweighted position 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 forecast 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 11
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (92.0%)+
- ----------------------------------------------------------------------------
CANADA (3.4%)
Bank of Montreal (commercial banks) 24,700 $ 1,527,597
Cognos, Inc. (software) (a) 201,500 7,339,018
Loblaw Cos., Ltd. (food & staples retailing) (b) 413,600 17,086,161
------------
25,952,776
------------
FINLAND (1.8%)
Nokian Renkaat Oyj (auto components) (b) 615,702 11,787,307
TietoEnator Oyj (IT Services) (b) 71,800 1,990,385
------------
13,777,692
------------
FRANCE (2.7%)
Air Liquide S.A. (chemicals) 14,059 2,992,976
BNP Paribas S.A. (commercial banks) 66,780 7,342,678
Total S.A. (oil, gas & consumable fuels) (b) 150,000 10,156,157
------------
20,491,811
------------
GERMANY (6.9%)
Allianz AG (insurance) 33,200 6,161,905
Bayerische Motoren Werke AG (automobiles) 304,438 17,484,940
Hannover Rueckversicherung AG (insurance) (a) 407,148 17,283,326
Muenchener Rueckversicherungs--Gesellschaft AG
Registered (insurance) 30,409 4,935,984
Puma AG Rudolf Dassler Sport (textiles, apparel &
luxury goods) 2,500 886,486
Rational AG (household durables) 2,000 425,008
Siemens AG (industrial conglomerates) 56,500 5,083,822
------------
52,261,471
------------
GREECE (0.6%)
OPAP S.A. (hotels, restaurants & leisure) 123,749 4,419,185
------------
HONG KONG (3.0%)
Esprit Holdings, Ltd. (specialty retail) 1,785,000 17,282,634
HongKong Electric Holdings, Ltd. (electric
utilities) 789,600 3,715,908
Yue Yuen Industrial Holdings, Ltd. (textiles,
apparel & luxury goods) 619,500 1,875,897
------------
22,874,439
------------
IRELAND (1.2%)
Bank of Ireland (commercial banks) 457,203 9,202,240
------------
ITALY (12.2%)
Assicurazioni Generali S.p.A. (insurance) 259,500 10,297,003
Enel S.p.A. (electric utilities) (b) 1,825,900 17,524,579
ENI S.p.A. (oil, gas & consumable fuels) (b) 345,100 10,407,860
</Table>
<Table>
<Caption>
SHARES VALUE
ITALY (CONTINUED)
ENI S.p.A., Sponsored ADR (oil, gas & consumable
fuels) (b)(c) 17,200 $ 1,044,212
V Mediaset S.p.A. (media) 2,698,568 30,274,363
Snam Rete Gas S.p.A. (gas utilities) 3,349,381 17,056,512
Terna S.p.A. (electric utilities) 1,811,060 5,501,265
------------
92,105,794
------------
JAPAN (7.3%)
Acom Co., Ltd. (consumer finance) (b) 104,970 4,038,861
Canon, Inc. (office electronics) 261,150 14,000,346
Canon, Inc., Sponsored ADR (office electronics)
(c) 73,984 3,950,006
FamilyMart Co., Ltd. (food & staples retailing) 35,900 973,049
Keyence Corp. (electronic equipment & instruments) 2,800 620,068
OBIC Co., Ltd. (IT Services) 25,620 5,437,035
RICOH Co., Ltd. (office electronics) 556,400 10,989,560
Takeda Pharmaceutical Co., Ltd. (pharmaceuticals) 212,500 13,645,205
Tokyo Gas Co., Ltd. (gas utilities) (b) 323,000 1,648,762
------------
55,302,892
------------
NETHERLANDS (6.6%)
V Reed Elsevier N.V. (media) 1,451,470 24,953,325
V TNT N.V. (air freight & logistics) 636,046 24,483,451
------------
49,436,776
------------
NORWAY (0.5%)
Tandberg Television ASA (communications equipment)
(a)(b) 325,100 3,366,953
------------
SINGAPORE (2.2%)
DBS Group Holdings, Ltd. (commercial banks) 475,000 6,224,306
Venture Corp., Ltd. (electronic equipment &
instruments) 1,084,600 9,962,603
------------
16,186,909
------------
SPAIN (3.2%)
V Banco Popular Espanol S.A. (commercial banks) 1,318,970 22,860,591
Enagas (gas utilities) 38,400 931,188
------------
23,791,779
------------
SWEDEN (4.0%)
Assa Abloy AB Class B (building products) 430,800 8,291,039
Atlas Copco AB Class B (machinery) (a)(b) 14,600 416,427
Munters AB (machinery) 9,700 376,052
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. One of
the ten largest holdings may be a security traded on more than one exchange.
May be subject to change daily.
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>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ----------------------------------------------------------------------------
SWEDEN (CONTINUED)
Svenska Handelsbanken Class A (commercial banks) 217,900 $ 5,641,795
Telefonaktiebolaget LM Ericsson Class B
(communications equipment) 1,754,800 6,657,277
Telefonaktiebolaget LM Ericsson, Sponsored ADR
(communications equipment) (b)(c) 239,200 9,046,544
------------
30,429,134
------------
SWITZERLAND (11.4%)
Logitech International S.A. Registered (computers
& peripherals) (b) 364,720 9,646,844
V Nestle S.A. Registered (food products) 76,310 26,069,491
V Novartis AG Registered (pharmaceuticals) 113,848 6,909,308
V Novartis AG, ADR (pharmaceuticals) (c) 187,300 11,374,729
Roche Holding AG Genusscheine (pharmaceuticals) 93,213 16,311,619
Swiss Reinsurance (insurance) 192,200 15,758,531
------------
86,070,522
------------
UNITED KINGDOM (22.7%)
ARM Holdings PLC (semiconductors & semiconductor
equipment) 643,400 1,445,167
V BP PLC, Sponsored ADR (oil, gas & consumable
fuels) (c) 270,233 18,132,634
V Diageo PLC (beverages) 1,053,261 19,488,736
V Diageo PLC, Sponsored ADR (beverages) (c) 47,216 3,516,176
GlaxoSmithKline PLC, ADR (pharmaceuticals) (b)(c) 142,700 7,598,775
HSBC Holdings PLC, Sponsored ADR (commercial
banks) (b)(c) 36,700 3,503,749
Lloyds TSB Group PLC (commercial banks) 1,343,200 14,335,627
Lloyds TSB Group PLC, Sponsored ADR (commercial
banks) (c) 52,910 2,267,723
Man Group PLC (capital markets) 451,686 4,204,675
Provident Financial PLC (consumer finance) 1,385,956 16,378,219
Rolls-Royce Group PLC (aerospace & defense) (a) 8,699 77,949
Rolls-Royce Group PLC B Share (aerospace &
defense) (d) 319,253 609
Royal Bank of Scotland Group PLC (commercial
banks) 262,000 9,335,855
Royal Dutch Shell PLC Class A, ADR (oil, gas &
consumable fuels) (b)(c) 51,000 3,550,620
Scottish & Southern Energy PLC (electric
utilities) 224,330 5,622,878
Smith & Nephew PLC (health care equipment &
supplies) 1,088,741 10,638,551
</Table>
<Table>
<Caption>
SHARES VALUE
UNITED KINGDOM (CONTINUED)
V Tesco PLC (food & staples retailing) 4,752,573 $ 35,673,807
Vodafone Group PLC, ADR (wireless
telecommunication services) (b)(c) 599,824 15,505,450
------------
171,277,200
------------
UNITED STATES (2.3%)
AFLAC, Inc. (insurance) 389,857 17,512,376
------------
Total Common Stocks
(Cost $587,363,073) 694,459,949
------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (3.6%)
- ----------------------------------------------------------------------------
IRELAND (3.6%)
V Ryanair Holdings PLC
Strike Price E0.000001
Expire 3/21/08 (airlines) (a)(e) 2,347,636 26,782,319
------------
Total Warrants
(Cost $19,350,164) 26,782,319
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (12.7%)
- ----------------------------------------------------------------------------
COMMERCIAL PAPER (2.7%)
UNITED STATES (2.7%)
Fairway Finance Corp.
5.289%, due 11/20/06 (capital markets) (f) $1,655,426 1,655,426
Greyhawk Funding
5.286%, due 11/13/06 (capital markets) (f) 2,207,235 2,207,235
Jupiter Securitization Corp.
5.303%, due 11/14/06 (capital markets) (f) 2,714,700 2,714,700
Lexington Parker Capital Co.
5.282%, due 11/8/06 (capital markets) (f) 2,207,235 2,207,235
Liberty Street Funding Co.
5.286%, due 11/27/06 (capital markets) (f) 2,732,437 2,732,437
Old Line Funding LLC
5.287%, due 11/15/06 (capital markets) (f) 2,207,235 2,207,235
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (capital markets) (f) 2,207,235 2,207,235
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ----------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
UNITED STATES (CONTINUED)
UBS Finance LLC
5.28%, due 11/1/06 (capital markets) $2,370,000 $ 2,370,000
Yorktown Capital LLC
5.282%, due 11/16/06 (capital markets) (f) 1,931,330 1,931,330
------------
Total Commercial Paper
(Cost $20,232,833) 20,232,833
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.6%)
UNITED STATES (0.6%)
BGI Institutional Money Market Fund (capital
markets) (f) 4,764,934 4,764,934
------------
Total Investment Company
(Cost $4,764,934) 4,764,934
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.3%)
UNITED STATES (0.3%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $2,599,939 (Collateralized
by various Corporate Bonds,
with rates between 0%-8.0% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$2,629,358 and a Market Value
of $2,702,893) (capital markets) (f) $2,599,548 2,599,548
------------
Total Repurchase Agreement
(Cost $2,599,548) 2,599,548
------------
TIME DEPOSITS (9.1%)
UNITED STATES (9.1%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07
(capital markets) (f) 4,414,470 4,414,470
Bank of America
5.27%, due 11/21/06
(capital markets) (f)(g) 6,069,896 6,069,896
Bank of Montreal
5.28%, due 11/27/06
(capital markets) (f) 4,414,470 4,414,470
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
UNITED STATES (CONTINUED)
Bank of Nova Scotia
5.30%, due 11/10/06
(capital markets) (f) $4,414,470 $ 4,414,470
Barclays
5.32%, due 1/18/07
(capital markets) (f) 4,414,470 4,414,470
Deutsche Bank AG
5.27%, due 11/9/06
(capital markets) (f) 4,414,469 4,414,469
Fortis Bank
5.27%, due 11/6/06
(capital markets) (f) 9,601,471 9,601,471
Halifax Bank of Scotland
5.30%, due 1/10/07
(capital markets) (f) 4,414,469 4,414,469
Lloyds TSB Bank PLC
5.30%, due 12/21/06
(capital markets) (f) 4,414,470 4,414,470
Royal Bank of Canada
5.30%, due 12/22/06
(capital markets) (f) 4,414,470 4,414,470
Royal Bank of Scotland
5.29%, due 12/12/06
(capital markets) (f) 4,414,469 4,414,469
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06
(capital markets) (f) 4,414,469 4,414,469
Societe Generale North America, Inc.
5.28%, due 12/6/06
(capital markets) (f) 4,414,470 4,414,470
UBS AG
5.28%, due 12/5/06
(capital markets) (f) 4,414,469 4,414,469
------------
Total Time Deposits
(Cost $68,645,002) 68,645,002
------------
Total Short-Term Investments
(Cost $96,242,317) 96,242,317
------------
Total Investments
(Cost $702,955,554) (h) 108.3% 817,484,585(i)
Liabilities in Excess of
Cash and Other Assets (8.3) (62,917,501)
--------- ------------
Net Assets 100.0% $754,567,084
========= ============
</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.
<Table>
+++ Fifty percent of the Fund's assets are maintained to cover "senior
securities transactions" which may include, but are not limited to,
forwards, TBA's, options and futures. This percentage is marked-to-market
daily against the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan.
(c) ADR--American Depositary Receipt.
(d) Fair valued security. The total market value of these securities at October
31, 2006 is $609, which reflects 0.0% of the Fund's net assets.
(e) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(f) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(g) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(h) The cost for federal income tax purposes is $703,947,211.
(i) At October 31, 2006 net unrealized appreciation for securities was
$113,537,374, 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 $118,462,463 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $4,925,089.
The following abbreviations are used in the above portfolio:
E--Euro
</Table>
The table below sets forth the diversification of MainStay International Equity
Fund investments by industry.
INDUSTRY DIVERSIFICATION
<Table>
<Caption>
VALUE PERCENT+
Aerospace & Defense $ 78,558 0.0%*
Air Freight & Logistics 24,483,451 3.2
Airlines 26,782,319 3.5
Auto Components 11,787,307 1.6
Automobiles 17,484,940 2.3
Beverages 23,004,912 3.0
Building Products 8,291,039 1.1
Capital Markets 100,446,992 13.3
Chemicals 2,992,976 0.4
Commercial Banks 82,242,161 10.9
Communications Equipment 19,070,774 2.5
Computers & Peripherals 9,646,844 1.3
Consumer Finance 20,417,080 2.7
Electric Utilities 32,364,630 4.3
Electronic Equipment & Instruments 10,582,671 1.4
Food & Staples Retailing 53,733,017 7.1
Food Products 26,069,491 3.5
Gas Utilities 19,636,462 2.6
Health Care Equipment & Supplies 10,638,551 1.4
Hotels, Restaurants & Leisure 4,419,185 0.6
Household Durables 425,008 0.1
Industrial Conglomerates 5,083,822 0.7
Insurance 71,949,125 9.5
IT Services 7,427,420 1.0
Machinery 792,479 0.1
Media 55,227,688 7.3
Office Electronics 28,939,912 3.8
Oil, Gas & Consumable Fuels 43,291,483 5.7
Pharmaceuticals 55,839,636 7.4
Semiconductors & Semiconductor Equipment 1,445,167 0.2
Software 7,339,018 1.0
Specialty Retail 17,282,634 2.3
Textiles, Apparel & Luxury Goods 2,762,383 0.4
Wireless Telecommunication Services 15,505,450 2.1
------------ ----------
817,484,585 108.3
Liabilities in Excess of
Cash and Other Assets (62,917,501) (8.3)
------------ ----------
Net Assets $754,567,084 100.0%
============ ==========
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
* Less than one tenth of a percent.
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost
$702,955,554) including $89,791,961 market
value of securities loaned $817,484,585
Cash denominated in foreign currencies
(identified cost $36,926,910) 37,194,529
Cash 1,158
Receivables:
Dividends and interest 1,128,647
Fund shares sold 713,025
Other assets 15,657
Unrealized appreciation on foreign currency
forward contracts 1,345,400
-------------
Total assets 857,883,001
-------------
LIABILITIES:
Securities lending collateral 93,872,317
Payables:
Investment securities purchased 5,056,657
Fund shares redeemed 499,195
Manager (See Note 3) 372,485
Transfer agent (See Note 3) 147,985
NYLIFE Distributors (See Note 3) 102,149
Custodian 83,709
Professional fees 60,128
Shareholder communication 56,298
Trustees 9,081
Accrued expenses 16,182
Unrealized depreciation on foreign currency
forward contracts 3,039,731
-------------
Total liabilities 103,315,917
-------------
Net assets $754,567,084
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 87,478
Class B 42,551
Class C 10,798
Class I 309,776
Class R1 2,330
Class R2 173
Class R3 7
Additional paid-in capital 583,677,012
Accumulated undistributed net investment
income 6,845,067
Accumulated undistributed net realized gain on
investments and foreign currency
transactions 50,477,571
Net unrealized appreciation on investments 114,529,031
Net unrealized depreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts (1,414,710)
-------------
Net assets $754,567,084
=============
CLASS A
Net assets applicable to outstanding shares $145,964,223
=============
Shares of beneficial interest outstanding 8,747,814
=============
Net asset value per share outstanding $ 16.69
Maximum sales charge (5.50% of offering price) 0.97
-------------
Maximum offering price per share outstanding $ 17.66
=============
CLASS B
Net assets applicable to outstanding shares $ 67,150,489
=============
Shares of beneficial interest outstanding 4,255,052
=============
Net asset value and offering price per share
outstanding $ 15.78
=============
CLASS C
Net assets applicable to outstanding shares $ 17,026,000
=============
Shares of beneficial interest outstanding 1,079,761
=============
Net asset value and offering price per share
outstanding $ 15.77
=============
CLASS I
Net assets applicable to outstanding shares $520,232,702
=============
Shares of beneficial interest outstanding 30,977,619
=============
Net asset value and offering price per share
outstanding $ 16.79
=============
CLASS R1
Net assets applicable to outstanding shares $ 3,893,386
=============
Shares of beneficial interest outstanding 233,000
=============
Net asset value and offering price per share
outstanding $ 16.71
=============
CLASS R2
Net assets applicable to outstanding shares $ 289,340
=============
Shares of beneficial interest outstanding 17,303
=============
Net asset value and offering price per share
outstanding $ 16.72
=============
CLASS R3
Net assets applicable to outstanding shares $ 10,944
=============
Shares of beneficial interest outstanding 655
=============
Net asset value and offering price per share
outstanding $ 16.70*
=============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 18,070,924
Income from securities loaned--net 502,663
Interest 283,273
-------------
Total income 18,856,860
-------------
EXPENSES:
Manager (See Note 3) 5,139,109
Transfer agent--Classes A, B and C (See Note
3) 760,207
Transfer agent--Classes I, R1, R2 and R3
(See Note 3) 86,196
Distribution--Class B (See Note 3) 493,202
Distribution--Class C (See Note 3) 102,718
Distribution--Class R3 (See Note 3) 13
Distribution/Service--Class A (See Note 3) 315,115
Service--Class B (See Note 3) 164,401
Service--Class C (See Note 3) 34,239
Distribution/Service--Class R2 (See Note 3) 956
Distribution/Service--Class R3 (See Note 3) 13
Custodian 297,345
Shareholder communication 214,221
Professional fees 163,343
Registration 95,748
Recordkeeping 84,386
Trustees 36,646
Shareholder service--Class R1 (See Note 3) 3,572
Shareholder service--Class R2 (See Note 3) 382
Shareholder service--Class R3 (See Note 3) 5
Miscellaneous 53,495
-------------
Total expenses before waiver/reimbursement 8,045,312
Expense waiver from Manager (See Note 3) (326,007)
Reimbursement from Manager for professional
fees (See Note 3(B) on page 25) (34,636)
-------------
Net expenses 7,684,669
-------------
Net investment income 11,172,191
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions 50,572,183
Foreign currency transactions (3,014,846)
-------------
Net realized gain on investments and foreign
currency transactions 47,557,337
-------------
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 25) 772,000
-------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 84,722,472
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts (610,232)
-------------
Net change in unrealized appreciation on
investments and foreign currency
transactions 84,112,240
-------------
Net realized and unrealized gain on
investments and foreign currency
transactions 132,441,577
-------------
Net increase in net assets resulting from
operations $143,613,768
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$1,671,317.
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 CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 11,172,191 $ 2,664,014
Net realized gain on investments
and foreign currency transactions 47,557,337 15,152,803
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 25.) 772,000 --
Net change in unrealized
appreciation on investments and
foreign currency transactions 84,112,240 7,541,183
----------------------------
Net increase in net assets
resulting from operations 143,613,768 25,358,000
----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (290,676) (124,050)
Class I (1,466,906) (315,680)
Class R1 (26,140) (7)
Class R2 (1,818) (5)
From net realized gain on investments:
Class A (3,820,332) --
Class B (4,019,174) --
Class C (517,420) --
Class I (6,453,914) --
Class R1 (141,124) --
Class R2 (18,053) --
----------------------------
Total dividends and distributions
to shareholders (16,755,557) (439,742)
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 50,984,117 31,994,008
Class B 14,395,425 22,268,445
Class C 5,741,503 5,607,703
Class I 345,724,455 104,105,747
Class R1 74,325 3,402,303
Class R2 137,858 812,060
Class R3 10,000 --
</Table>
<Table>
<Caption>
2006 2005
Net asset value of shares issued to shareholders
in reinvestment of dividends and distributions:
Class A $ 3,389,808 $ 104,879
Class B 3,798,490 --
Class C 396,465 --
Class I 6,548,809 315,680
Class R1 167,264 8
Class R2 19,871 5
----------------------------
431,388,390 168,610,838
Cost of shares redeemed+:
Class A (56,057,665) (24,514,014)
Class B (18,383,500) (12,671,567)
Class C (3,601,393) (1,620,586)
Class I (51,440,637) (13,757,168)
Class R1 (436,028) (103,598)
Class R2 (359,225) (383,485)
----------------------------
(130,278,448) (53,050,418)
Net asset value of shares converted (See Note 1):
Class A 33,509,731 --
Class B (33,509,731) --
Increase in net assets derived
from capital share transactions 301,109,942 115,560,420
----------------------------
Net increase in net assets 427,968,153 140,478,678
NET ASSETS:
Beginning of year 326,598,931 186,120,253
----------------------------
End of year $ 754,567,084 $326,598,931
============================
Accumulated undistributed net
investment income at end of year $ 6,845,067 $ 1,743,616
============================
</Table>
+ Cost of shares redeemed net of redemption fee of $12,195 and $15,431 for the
years ended October 31, 2006 and 2005, respectively.
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.
This page intentionally left blank
www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 13.53 $ 11.95 $ 10.50 $ 8.73 $ 9.11 $ 10.98
-------- ------- ------- ----------- ------- -------
Net investment income (loss) (a) 0.24 0.15 0.07 0.08 (0.00)(b) (0.01)
Net realized and unrealized gain (loss) on
investments 3.65(e) 1.59 1.48 1.63 (0.43) (1.82)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.10) (0.14) 0.03 0.04 0.05 0.11
-------- ------- ------- ----------- ------- -------
Total from investment operations 3.79 1.60 1.58 1.75 (0.38) (1.72)
-------- ------- ------- ----------- ------- -------
Less dividends and distributions:
From net investment income (0.04) (0.02) (0.13) -- -- (0.09)
From net realized gain on investments (0.59) -- -- -- -- (0.06)
-------- ------- ------- ----------- ------- -------
Total dividends and distributions (0.63) (0.02) (0.13) -- -- (0.15)
-------- ------- ------- ----------- ------- -------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.02 -- --
-------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 16.69 $ 13.53 $ 11.95 $ 10.50 $ 8.73 $ 9.11
======== ======= ======= =========== ======= =======
Total investment return (c) 29.11%(d)(e) 13.40% 15.11% 20.27%(f) (4.17%) (15.70%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 1.65% 1.15% 0.60% 0.99%+ (0.05%) (0.07%)
Net expenses 1.62% 1.74% 1.90% 2.27%+ 2.26% 2.17%
Expenses (before waiver/reimbursement) 1.67%(d) 1.76% -- -- -- --
Portfolio turnover rate 50% 51% 54% 71% 102% 129%
Net assets at end of period (in 000's) $145,964 $87,204 $70,252 $43,747 $30,084 $25,470
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 12.87 $ 11.44 $10.09 $ 8.44 $ 8.87 $10.70
------- ------- ------ ----------- ------ ------
Net investment income (loss) (a) 0.13 0.05 (0.02) 0.02 (0.08) (0.07)
Net realized and unrealized gain (loss) on
investments 3.45(e) 1.52 1.41 1.57 (0.40) (1.80)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.09) (0.14) 0.03 0.04 0.05 0.11
------- ------- ------ ----------- ------ ------
Total from investment operations 3.49 1.43 1.42 1.63 (0.43) (1.76)
------- ------- ------ ----------- ------ ------
Less dividends and distributions:
From net investment income -- -- (0.07) -- -- (0.01)
From net realized gain on investments (0.59) -- -- -- -- (0.06)
------- ------- ------ ----------- ------ ------
Total dividends and distributions (0.59) -- (0.07) -- -- (0.07)
------- ------- ------ ----------- ------ ------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.02 -- --
------- ------- ------ ----------- ------ ------
Net asset value at end of period $ 15.77 $ 12.87 $11.44 $10.09 $ 8.44 $ 8.87
======= ======= ====== =========== ====== ======
Total investment return (c) 28.15%(d)(e) 12.50% 14.16% 19.55%(f) (4.85%) (16.44%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.91% 0.40% (0.15%) 0.24%+ (0.80%) (0.82%)
Net expenses 2.37% 2.49% 2.65% 3.02%+ 3.01% 2.92%
Expenses (before waiver/reimbursement) 2.42%(d) 2.51% -- -- -- --
Portfolio turnover rate 50% 51% 54% 71% 102% 129%
Net assets at end of period (in 000's) $17,026 $11,600 $6,718 $2,715 $1,284 $ 371
</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) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges. Class I, R1, R2 and R3 are not
subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundred of a percent. (See Note 3(B) on page 25.)
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were $0.02 per share on net
realized gains on investments; and the effect on total investment return was less than
0.01%, respectively. (See Note 3(B) on page 25.)
(f) Total return is not annualized.
</Table>
20 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*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 12.88 $ 11.44 $ 10.09 $ 8.44 $ 8.88 $ 10.70
------- ------- ------- ----------- ------- -------
0.15 0.05 (0.02) 0.02 (0.08) (0.07)
3.43(e) 1.53 1.41 1.57 (0.41) (1.79)
(0.09) (0.14) 0.03 0.04 0.05 0.11
------- ------- ------- ----------- ------- -------
3.49 1.44 1.42 1.63 (0.44) (1.75)
------- ------- ------- ----------- ------- -------
-- -- (0.07) -- -- (0.01)
(0.59) -- -- -- -- (0.06)
------- ------- ------- ----------- ------- -------
(0.59) -- (0.07) -- -- (0.07)
------- ------- ------- ----------- ------- -------
0.00(b) 0.00(b) 0.00(b) 0.02 -- --
------- ------- ------- ----------- ------- -------
$ 15.78 $ 12.88 $ 11.44 $ 10.09 $ 8.44 $ 8.88
======= ======= ======= =========== ======= =======
28.13%(d)(e) 12.59% 14.16% 19.55%(f) (4.95%) (16.34%)
1.11% 0.40% (0.15%) 0.24%+ (0.80%) (0.82%)
2.37% 2.49% 2.65% 3.02%+ 3.01% 2.92%
2.41%(d) 2.51% -- -- -- --
50% 51% 54% 71% 102% 129%
$67,150 $88,410 $69,882 $56,490 $46,779 $51,887
</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,
2006 2005 2004 2006 2005 2004 2006 2005 2004
$ 13.60 $ 12.02 $ 11.40 $13.54 $12.00 $11.40 $13.55 $11.99 $11.40
-------- -------- ----------- ------ ------ ----------- ------ ------ -----------
0.33 0.23 0.12 0.32 0.22 0.12 0.31 0.19 0.09
3.66(e) 1.59 0.49 3.64(e) 1.54 0.47 3.62 (e) 1.57 0.49
(0.10) (0.14) 0.01 (0.10) (0.14) 0.01 (0.10) (0.14) 0.01
-------- -------- ----------- ------ ------ ----------- ------ ------ -----------
3.89 1.68 0.62 3.86 1.62 0.60 3.83 1.62 0.59
-------- -------- ----------- ------ ------ ----------- ------ ------ -----------
(0.11) (0.10) -- (0.10) (0.08) -- (0.07) (0.06) --
(0.59) -- -- (0.59) -- -- (0.59) -- --
-------- -------- ----------- ------ ------ ----------- ------ ------ -----------
(0.70) (0.10) -- (0.69) (0.08) -- (0.66) (0.06) --
-------- -------- ----------- ------ ------ ----------- ------ ------ -----------
0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b)
-------- -------- ----------- ------ ------ ----------- ------ ------ -----------
$ 16.79 $ 13.60 $ 12.02 $16.71 $13.54 $12.00 $16.72 $13.55 $11.99
======== ======== =========== ====== ====== =========== ====== ====== ===========
29.94%(d)(e) 13.98% 5.44%(f) 29.76%(d)(e) 13.57% 5.26%(f) 29.53%(d)(e) 13.52% 5.18%(f)
2.22% 1.72% 1.33%+ 2.19% 1.62% 1.23%+ 2.07% 1.37% 0.98%+
1.01% 1.17% 1.17%+ 1.12% 1.27% 1.27%+ 1.37% 1.52% 1.52%+
1.08%(d) 1.19% -- 1.17%(d) 1.29% -- 1.42%(d) 1.54% --
50% 51% 54% 50% 51% 54% 50% 51% 54%
$520,233 $135,643 $39,266 $3,893 $3,325 $ 1 $ 289 $ 416 $ 1
<Caption>
CLASS R3
-----------
APRIL 28,
2006**
THROUGH
OCTOBER 31,
2006
$15.26
-----------
0.13
1.35(e)
(0.04)
-----------
1.44
-----------
--
--
-----------
--
-----------
0.00(b)
-----------
$16.70
===========
9.44%(f)
1.60%+
1.59%+
1.70%(d)+
50%
$ 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 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
International Equity Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares commenced on
January 3, 1995, Class B shares commenced on September 13, 1994, and Class C
shares commenced on September 1, 1998, Class I shares, Class R1 shares and Class
R2 shares commenced on January 2, 2004 and Class R3 shares commenced on April
28, 2006. 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 a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I, Class R1, Class R2
and Class R3 shares are not subject to a sales charge. As approved by the Board
of Trustees in 1997, Class B shares convert to Class A shares eight years after
the date they were purchased. The first conversion occurred December 28, 2005.
The seven 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, Class R2 and Class R3 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, Class R2 and Class
R3 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, Class R2 or Class R3 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 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. 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund held one security with a value of $609
that was 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 ask 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
22 MainStay International Equity Fund
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, as defined in Note 3, conclude that
such events may have affected the accuracy of the last price reported on the
local foreign market, the Manager or Subadvisor may, pursuant to procedures
adopted by the Fund, adjust the value of the local price to reflect the impact
on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain amounts. In such cases, the securities are fair
valued by applying factors provided by a third party vendor in accordance with
the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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 undistributed net investment income, undistributed net realized gain
on investments and additional paid-in-capital arising from permanent
differences; net assets at October 31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED UNDISTRIBUTED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN ON PAID-IN-
INCOME INVESTMENTS CAPITAL
$(4,285,200) $2,242,846 $2,042,354
-------------------------------------------
</Table>
The reclassification for the Fund is primarily due to foreign currency gain
(loss), reimbursement payment and utilization of earnings and profits on
shareholder redemptions.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities,
other than short-term securities, purchased for the Fund are accreted and
amortized, respectively, on the effective interest rate 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.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(H) 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 5 on page 27.)
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at
the mean between the buying and selling rates last quoted by any major U.S. bank
at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing 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) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 27.)
(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 any class. 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) 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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves
24 MainStay International Equity Fund
as subadvisor to the Fund and 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 the
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 $500 million.
In addition, 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 ordinary operating expenses (total annual 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, 1.60% 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 written expense limitation 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, 2006, this limit was 1.75% of the average daily net assets of the Class A
shares. For the year ended October 31, 2006 the Manager earned fees from the
Fund in the amount of $5,139,109. and waived its fees in the amount of $326,007.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$33,294 $326,007 $359,301
- -----------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, the Manager pays the Subadvisor a monthly fee of 0.60% of the
average daily net assets of the Fund. To the extent the Manager has agreed to
reimburse expenses of the Fund, the Subadvisor has voluntarily agreed to do so
proportionately.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 10 on
page 28.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $34,636. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) 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, Class R2 and Class R3 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
and Class C shares of the Fund. Pursuant to the Class R3 Plan, the Distributor
receives a monthly fee from the Fund at the annual rate of 0.50% of the average
daily net assets of the Fund's Class R3 shares, which is an expense of the Class
R3 shares of the Fund for distribution or service activities as designated by
the Distributor. Class I 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, Class
R2 and Class R3 shares. Under the terms of this plan, Class R1, Class R2 and
Class R3 shares are authorized to pay to NYLIM, its affiliates, or
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, Class R2 and Class R3 shares.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $70,495 for the year ended
October 31, 2006. 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 $6,803, $72,155 and $4,859, respectively, for the year ended October
31, 2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006 amounted
to $846,403.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 240 0.0*%
-------------------------------------------------------------
Class C 157 0.0*
-------------------------------------------------------------
Class I 76,452,177 14.7
-------------------------------------------------------------
Class R1 1,551 0.0*
-------------------------------------------------------------
Class R2 1,547 0.5
-------------------------------------------------------------
Class R3 10,944 100.0
-------------------------------------------------------------
</Table>
* Less than one tenth of a percent
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $11,177.
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 $84,386 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$19,768,924 $36,851,040 $113,816,995 $170,436,959
-------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale loss deferrals and the mark-to-market of forward
currency contracts.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $ 3,637,724 $439,742
Long-Term Capital Gains 13,117,833 --
- ---------------------------------------------------------
$16,755,557 $439,742
- ---------------------------------------------------------
</Table>
26 MainStay International Equity Fund
NOTE 5--FUND SECURITIES LOANED AND FOREIGN CURRENCY FORWARD CONTRACTS:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $89,791,961. The Fund received $93,872,317 in cash as collateral for
securities on
loan which was used to purchase highly liquid short-term investments in
accordance with the Fund's securities lending procedures. Securities purchased
with collateral received are valued at amortized cost.
Foreign Currency forward contracts held at October 31, 2006:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts
- ------------------------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring 11/30/06 A$ 4,361,143 $ 3,275,000 $ 99,761
- ------------------------------------------------------------------------------------------------------------------------
Japanese Yen vs. U.S. Dollar, expiring 3/5/07 Y 773,580,600 $ 6,760,000 (35,651)
- ------------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 12/18/06 L 3,359,155 $ 6,250,000 160,103
- ------------------------------------------------------------------------------------------------------------------------
</Table>
1
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale Contracts
- ------------------------------------------------------------------------------------------------------------------------
Australian Dollar vs. Canadian Dollar, expiring 2/9/07 A$ 2,468,393 C$ 2,050,000 $ (75,526)
- ------------------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. Australian Dollar, expiring 11/30/06 C$ 24,645,000 A$ 29,588,098 930,821
- ------------------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. Australian Dollar, expiring 2/9/07 C$ 13,514,000 A$ 15,827,822 154,715
- ------------------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. Swedish Krona, expiring 12/8/06 C$ 1,720,000 SK 10,970,160 (10,659)
- ------------------------------------------------------------------------------------------------------------------------
Euro Dollar vs. Japanese Yen, expiring 11/27/06 E 30,658,000 Y 4,348,530,720 (1,872,831)
- ------------------------------------------------------------------------------------------------------------------------
Euro Dollar vs. Japanese Yen, expiring 1/12/07 E 15,227,921 Y 2,239,048,125 (174,275)
- ------------------------------------------------------------------------------------------------------------------------
Swiss Franc vs. Japanese Yen, expiring 12/6/06 CF 45,185,000 Y 4,153,016,428 (767,839)
- ------------------------------------------------------------------------------------------------------------------------
Swedish Krona vs. Japanese Yen, expiring 3/14/07 KR102,000,000 Y 1,624,466,280 (102,950)
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on foreign currency forward
contracts: $(1,694,331)
- ------------------------------------------------------------------------------------------------------------------------
</Table>
Foreign Currency held at October 31, 2006:
<Table>
<Caption>
CURRENCY COST VALUE
Canadian Dollar C$ 8,842,515 $ 7,926,029 $ 7,874,363
Danish Krone DK 17,248 2,963 2,953
Euro E 10,489,344 13,288,184 13,387,550
Japanese Yen Y 859,854,124 7,230,011 7,352,008
Pound Sterling L 4,430,594 8,354,452 8,451,579
Swiss Franc CF 156,845 125,271 126,076
- -------------------------------------------------------------------
$36,926,910 $37,194,529
- -------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $562,846 and $271,490, respectively.
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS R1 CLASS R2 CLASS R3*
Shares sold 3,443 1,012 405 23,888 5 9 1
- --------------------------------------------------------------------------------------------------------------------------
Shares issued in reinvestment of dividends and
distributions 251 296 31 481 12 1 --
- --------------------------------------------------------------------------------------------------------------------------
3,694 1,308 436 24,369 17 10 1
Shares redeemed (3,861) (1,325) (257) (3,366) (30) (24) --(a)
- --------------------------------------------------------------------------------------------------------------------------
Shares converted (See Note 1) 2,468 (2,594) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) 2,301 (2,611) 179 21,003 (13) (14) 1
- --------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I CLASS R1 CLASS R2
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>
* Commencement of Operations on April 28, 2006.
(a) Less than one thousand shares.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$772,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim
28 MainStay International Equity Fund
periods within those fiscal years. The changes to current generally accepted
accounting principles from the application of this Statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. As of October 31, 2006, the
Funds do not believe the adoption of SFAS No. 157 will impact the amounts
reported in the financial statements, however, additional disclosures may be
required about the inputs used to develop the measurements and the effect of
certain measurements reported in the financial statements for a fiscal period.
www.mainstayfunds.com 29
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,
2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the three-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, 2006, 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, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
KPMG SIGNATURE
Philadelphia, Pennsylvania
December 21, 2006
30 MainStay International Equity Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the nature of the Fund's
investment program as managed by the Subadvisor, including certain aspects of
its specific investment focus on parts of Europe, the apparent confidence of
certain institutional investors in the investment program, the Fund's very
recent and significant improvement in its shorter-term relative investment
performance during a period of volatile markets, and the favorable effect of the
recent performance on the longer-term relative performance data relating to the
Fund.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense
www.mainstayfunds.com 31
ratios. Noting that the Trust historically permitted smaller investor accounts,
the Trustees discussed that the Board had approved certain measures and the
Manager had taken certain actions intended to increase the average size of
shareholder accounts, including imposing higher investment minimums for some
share classes. The Trustees discussed additional measures that may increase
average shareholder account size and/or otherwise reduce the Trust's transfer
agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that, during the past year, the Fund's assets have increased to a
level such that the management fee rate had been reduced by the breakpoint
schedule applicable to the Fund. The Trustees reviewed information about the
potential effect of asset growth on Fund expenses, the difficulty of forecasting
its effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds in
comparison groups. It was noted that, to the extent the Fund's gross expenses
currently were higher than its net expenses, the reduction of the Fund's gross
expenses through the achievement of economies of scale might benefit the Manager
by reducing the expenses the Manager must reimburse to the Fund rather than
directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to further lower the limit
on the Fund's net expenses to a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
32 MainStay International Equity 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, 2006 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 $13,117,833.
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, 2006:
- -- the total amount of taxes paid to foreign countries was $1,671,317
- -- the total amount of income sourced from foreign countries was $19,742,241
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 2006 calendar year with form 1099-DIV, which will be mailed during January
2007.
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 31.1% to arrive at the amount eligible for qualified
dividend income and 0.6% to arrive at the amount eligible for qualified interest
income.
In January 2007, 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 2007. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
www.mainstayfunds.com 33
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 International Equity Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 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>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
36 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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08961 (RECYCLE LOGO) MS377-06 MSIE11-12/06
10
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 25
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 26
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 28
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 28
- --------------------------------------------------------------------------------
Trustees and Officers 29
</Table>
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 3.37% 9.49% 2.85%
Excluding sales charges 9.39 10.73 3.86
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP S&P MIDCAP 400 RUSSELL 2500 GROWTH RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- -------------- ------------------- --------------
1/2/01 9450 10000 10000 10000
7078 8797 7781 6945
5916 8377 6175 5722
7777 10941 8938 7970
8590 12148 9487 8669
10773 14292 10798 10048
10/31/06 11784 16212 12479 11506
</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 3.83% 9.67% 2.95%
Excluding sales charges 8.83 9.94 3.10
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP S&P MIDCAP 400 RUSSELL 2500 GROWTH RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- -------------- ------------------- --------------
1/2/01 10000 10000 10000 10000
7440 8797 7781 6945
6170 8377 6175 5722
8050 10941 8938 7970
8820 12148 9487 8669
10980 14292 10798 10048
10/31/06 11850 16212 12479 11506
</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 7.64% 9.92% 3.09%
Excluding sales charges 8.64 9.92 3.09
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP S&P MIDCAP 400 RUSSELL 2500 GROWTH RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- -------------- ------------------- --------------
1/2/01 10000 10000 10000 10000
7440 8797 7781 6945
6170 8377 6175 5722
8050 10941 8938 7970
8820 12148 9487 8669
10990 14292 10798 10048
10/31/06 11940 16212 12479 11506
</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 as 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. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to this agreement if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense. 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 R3 shares are sold with no initial sales charge
or CDSC, have an annual 12b-1 fee of .50%, and are available in certain
individual retirement accounts or in certain retirement plans. 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. Prior to
4/28/06, performance for
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
- -------------------------------------------------
9.89% 11.08% 4.17%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID CAP S&P MIDCAP 400 RUSSELL 2500 GROWTH RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- -------------- ------------------- --------------
1/2/01 10000 10000 10000 10000
7506 8797 7781 6945
6289 8377 6175 5722
8288 10941 8938 7970
9178 12148 9487 8669
11552 14292 10798 10048
10/31/06 12694 16212 12479 11506
</Table>
CLASS R3 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
9.11% 10.37% 3.51%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH S&P MIDCAP 400 RUSSELL 2500 RUSSELL MIDCAP
FUND INDEX GROWTH INDEX GROWTH INDEX
------------ -------------- ------------ -------------
1/2/01 10000 10000 10000 10000
7468 8797 7781 6945
6220 8377 6175 5722
8149 10941 8938 7970
8969 12148 9487 8669
11209 14292 10798 10048
10/31/06 12230 16212 12479 11506
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Russell Midcap(R) Growth Index(1) 14.51% 10.62% 2.43%
Russell 2500(TM) Growth Index(2) 15.56 9.91 3.87
S&P MidCap 400(R) Index(3) 13.43 13.03 8.65
Average Lipper mid-cap growth
fund(4) 11.51 7.79 0.65
</Table>
Class R3 shares includes the historical performance of Class A shares adjusted
to reflect the applicable sales charge (or CDSC) and fees and expenses for Class
R3 shares.
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
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 companies based on total market
capitalization. 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 in 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
unmanaged index that measures the performance of the 2,500 smallest companies
in the Russell 3000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly in 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 in 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.
6 MainStay Mid Cap Growth Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $941.50 $ 7.34 $1,017.50 $ 7.63
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $938.15 $10.99 $1,013.75 $11.42
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $938.15 $10.99 $1,013.75 $11.42
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $943.35 $ 5.24 $1,019.65 $ 5.45
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $940.70 $ 7.92 $1,016.90 $ 8.24
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.50% for Class A, 2.25% for Class B and Class C, 1.07% for Class I and
1.62% for Class R3) multiplied by the average account value over the period,
divided by 365 and multiplied by 184 (to reflect the one-half year period).
In the absence of waivers and/or reimbursements, expenses would have been
higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 93.1
Short-Term Investments (collateral from securities lending 24.5
is 18.1%)
Liabilities in Excess of Cash and Other Assets (17.6)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Allegheny Technologies, Inc.
2. American Eagle Outfitters, Inc.
3. Garmin, Ltd.
4. Affiliated Managers Group, Inc.
5. FactSet Research Systems, Inc.
6. Coach, Inc.
7. W.R. Berkley Corp.
8. Amphenol Corp. Class A
9. Terex Corp.
10. Tesoro Corp.
</Table>
8 MainStay Mid Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Edmund C. Spelman of MacKay Shields LLC
HOW DID MAINSTAY MID CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Mid Cap Growth Fund returned 9.39% for
Class A shares, 8.83% for Class B shares, and 8.64% for Class C shares for the
12 months ended October 31, 2006. Over the same period, Class I shares returned
9.89% and Class R3 shares returned 9.11%.(1) All share classes underperformed
the 14.51% return of the Russell Midcap(R) Growth Index,(2) the Fund's broad-
based securities-market index, for the 12-month period. All share classes also
underperformed the 11.51% return of the average Lipper(3) mid-cap growth fund
for the 12 months ended October 31, 2006.
WHAT FACTORS HAD THE GREATEST IMPACT ON THE FUND'S RELATIVE PERFORMANCE?
During the reporting period, the Fund's underperformance relative to its peers
and the Russell Midcap(R) Growth Index resulted primarily from ineffective
individual stock selection in the industrials, financials, and health care
sectors. The Fund's overweighted positions in the materials and energy sectors
contributed positively to the Fund's performance relative to the Index, as did
an underweighted position in the information technology sector.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG PERFORMERS AND WHICH ONES
WERE WEAK?
There were several strong performers. Specialty metals producer Allegheny
Technologies benefited from solid end-market demand, higher selling prices, and
improved productivity. Apparel retailer American Eagle Outfitters advanced on
record sales and earnings. Las Vegas Sands benefited from strong gaming revenue,
increased market share in Macao, and the popularity of Las Vegas as a vacation
destination. Garmin, a leader in GPS-enabled navigation and communications
devices, advanced on strong sales and profits. Diversified equipment
manufacturer Terex saw strong earnings from operations and benefited from the
sale of the company's interest in Tetra, a Czech trucking company. Terex's gains
were partially offset by increases in working capital and other factors. During
the reporting period, independent petroleum refiner and marketer Holly benefited
from rising prices for refined products.
Major detractors from the Fund's performance included specialty retailer Chico's
FAS, which suffered from weaker-than-expected same-store sales in recent months.
Leading coal producers Massey Energy and Arch Coal weakened when mild weather
and an economic slowdown sliced into electricity demand. Omnicare, a leading
provider of pharmaceutical care for the elderly, saw its stock price decline
because of litigation with UnitedHealth Group and a mislabeling mishap that led
to a product recall. A slowdown in the housing market hurt performance at
building-products company Simpson Manufacturing and at homebuilder and
mortgage-finance company The Ryland Group.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund initiated new positions in Internet services company Akamai
Technologies, steel producer Oregon Steel Mills, clothing company Phillips Van
Heusen, entertainment and telecommunications company Cablevision Systems, and
property & casualty insurance holding company W.R. Berkley.
The Fund sold its positions in Chico's FAS, Massey Energy, Omnicare, Simpson
Manufacturing, and The Ryland Group, all of which detracted from the Fund's
performance during the reporting period. We also eliminated a position in health
care products manufacturer Cooper Companies when the stock under-performed.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
During the reporting period, the Fund increased its weightings relative to the
Russell Midcap(R) Growth Index in information technology and materials. The Fund
decreased its weightings in the energy, consumer discretionary, and health care
sectors.
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of large companies. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. The Fund may experience a portfolio turnover rate of more
than 100% and may generate taxable short-term capital gains.
1. Class R3 shares were first offered on April 28, 2006.
2. See footnote on page 6 for more information on the Russell Midcap(R) Growth
Index.
3. See footnote on page 6 for more information on Lipper Inc.
www.mainstayfunds.com 9
At the end of October 2006, the Fund was over-weighted relative to the Russell
Midcap(R) Growth Index in energy, financials, health care, and materials. At the
same time, the Fund was underweighted in the consumer discretionary,
industrials, and information technology sectors. At the end of the reporting
period, the Fund had no holdings in consumer staples, telecommunication
services, or utilities.
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 forecast 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, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (93.1%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.1%)
Alliant Techsystems, Inc. (a)(b) 47,950 $ 3,702,219
L-3 Communications Holdings, Inc. 42,100 3,389,892
------------
7,092,111
------------
BIOTECHNOLOGY (2.7%)
Cephalon, Inc. (a)(b) 38,000 2,666,840
MannKind Corp. (a)(b) 166,700 3,375,675
------------
6,042,515
------------
BUILDING PRODUCTS (0.9%)
Lennox International, Inc. 75,300 2,030,088
------------
CAPITAL MARKETS (2.1%)
V Affiliated Managers Group, Inc. (a)(b) 48,600 4,866,804
------------
CHEMICALS (1.5%)
Scotts Miracle-Gro Co. (The) Class A 69,600 3,442,416
------------
COMMUNICATIONS EQUIPMENT (0.8%)
Avocent Corp. (a)(b) 49,600 1,820,816
------------
COMPUTERS & PERIPHERALS (1.8%)
QLogic Corp. (a) 170,800 3,515,064
Synaptics, Inc. (a) 23,000 652,280
------------
4,167,344
------------
CONSTRUCTION & ENGINEERING (1.6%)
Fluor Corp. 45,300 3,552,879
------------
CONSUMER FINANCE (1.7%)
AmeriCredit Corp. (a)(b) 59,500 1,521,415
Capital One Financial Corp. 28,400 2,252,972
------------
3,774,387
------------
DIVERSIFIED FINANCIAL SERVICES (1.8%)
IntercontinentalExchange, Inc. (a) 21,300 1,798,146
Nasdaq Stock Market, Inc. (The) (a) 62,400 2,229,552
------------
4,027,698
------------
ELECTRICAL EQUIPMENT (1.3%)
Roper Industries, Inc. 63,100 3,019,335
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.4%)
V Amphenol Corp. Class A 64,600 4,386,340
Avnet, Inc. (a) 92,900 2,199,872
CDW Corp. 16,500 1,083,555
------------
7,669,767
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (4.8%)
Atwood Oceanics, Inc. (a) 76,100 $ 3,515,820
ENSCO International, Inc. 67,300 3,295,681
National-Oilwell Varco, Inc. (a) 69,000 4,167,600
------------
10,979,101
------------
HEALTH CARE EQUIPMENT & SUPPLIES (4.3%)
Cytyc Corp. (a) 147,500 3,896,950
Hospira, Inc. (a) 66,400 2,413,640
Varian Medical Systems, Inc. (a) 63,900 3,505,554
------------
9,816,144
------------
HEALTH CARE PROVIDERS & SERVICES (9.0%)
Caremark Rx, Inc. 52,800 2,599,344
Coventry Health Care, Inc. (a) 85,250 4,002,488
DaVita, Inc. (a) 42,800 2,380,964
Health Net, Inc. (a) 70,100 2,909,851
Henry Schein, Inc. (a)(b) 73,200 3,637,308
Quest Diagnostics, Inc. 46,400 2,307,936
Sierra Health Services, Inc. (a) 75,600 2,588,544
------------
20,426,435
------------
HOTELS, RESTAURANTS & LEISURE (3.5%)
Boyd Gaming Corp. 22,900 903,863
Las Vegas Sands Corp. (a)(b) 45,900 3,497,580
Penn National Gaming, Inc. (a) 94,400 3,452,208
------------
7,853,651
------------
HOUSEHOLD DURABLES (4.3%)
V Garmin, Ltd. (b) 97,000 5,180,770
Harman International Industries, Inc. 22,700 2,323,345
Stanley Works (The) 48,200 2,296,730
------------
9,800,845
------------
INSURANCE (2.0%)
V W.R. Berkley Corp. 126,550 4,664,633
------------
INTERNET SOFTWARE & SERVICES (2.6%)
Akamai Technologies, Inc. (a)(b) 73,600 3,448,896
j2 Global Communications, Inc. (a)(b) 85,900 2,357,096
------------
5,805,992
------------
IT SERVICES (1.1%)
Alliance Data Systems Corp. (a) 40,600 2,465,232
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES (3.9%)
Fisher Scientific International, Inc. (a) 46,600 $ 3,989,892
Invitrogen Corp. (a)(b) 27,600 1,601,076
Pharmaceutical Product Development, Inc. 101,900 3,225,135
------------
8,816,103
------------
MACHINERY (4.5%)
Joy Global, Inc. 70,500 2,757,255
Oshkosh Truck Corp. 71,100 3,214,431
V Terex Corp. (a) 83,300 4,311,608
------------
10,283,294
------------
MEDIA (1.4%)
Cablevision Systems Corp. Class A 111,300 3,093,027
------------
METALS & MINING (6.1%)
V Allegheny Technologies, Inc. (b) 81,100 6,385,003
Commercial Metals Co. 127,700 3,398,097
Oregon Steel Mills, Inc. (a) 76,200 4,145,280
------------
13,928,380
------------
OIL, GAS & CONSUMABLE FUELS (6.4%)
Arch Coal, Inc. 24,000 831,120
CONSOL Energy, Inc. (b) 35,200 1,245,728
Holly Corp. 33,900 1,612,284
Newfield Exploration Co. (a) 95,000 3,875,050
Peabody Energy Corp. 62,800 2,635,716
V Tesoro Corp. 67,400 4,309,556
------------
14,509,454
------------
PHARMACEUTICALS (1.0%)
Endo Pharmaceuticals Holdings, Inc. (a) 78,200 2,231,828
------------
REAL ESTATE INVESTMENT TRUSTS (0.9%)
CapitalSource, Inc. (b) 73,600 2,041,664
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.5%)
Diodes, Inc. (a) 27,000 1,189,080
Intersil Corp. Class A (b) 55,600 1,303,820
MEMC Electronic Materials, Inc. (a)(b) 59,000 2,094,500
Trident Microsystems, Inc. (a) 48,800 1,031,632
------------
5,619,032
------------
SOFTWARE (5.4%)
Amdocs, Ltd. (a) 94,900 3,678,324
Autodesk, Inc. (a) 80,500 2,958,375
Citrix Systems, Inc. (a) 33,200 980,396
V FactSet Research Systems, Inc. 93,000 4,733,700
------------
12,350,795
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (2.3%)
V American Eagle Outfitters, Inc. (b) 114,100 $ 5,225,780
------------
TEXTILES, APPAREL & LUXURY GOODS (3.4%)
V Coach, Inc. (a) 117,800 4,669,592
Phillips-Van Heusen Corp. 67,800 3,102,528
------------
7,772,120
------------
TRADING COMPANIES & DISTRIBUTORS (1.0%)
WESCO International, Inc. (a) 35,700 2,330,139
------------
Total Common Stocks
(Cost $176,971,486) 211,519,809
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (24.5%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (9.9%)
Bank of America
5.24%, due 11/14/06 $1,680,000 1,676,821
Deutsche Bank Financial LLC
5.25%, due 11/13/06 3,210,000 3,204,382
Fairway Finance Corp.
5.289%, due 11/20/06 (c) 726,024 726,024
Goldman Sachs Group
5.25%, due 11/2/06 2,190,000 2,189,681
Greyhawk Funding
5.286%, due 11/13/06 (c) 968,032 968,032
Jupiter Securitization Corp.
5.303%, due 11/14/06 (c) 1,190,592 1,190,592
Lexington Parker Capital Co.
5.282%, due 11/8/06 (c) 968,032 968,032
Liberty Street Funding Co.
5.286%, due 11/27/06 (c) 1,198,372 1,198,372
Old Line Funding LLC
5.287%, due 11/15/06 (c) 968,032 968,032
Prudential Funding Corp.
5.23%, due 11/6/06 1,900,000 1,898,620
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (c) 968,032 968,032
Societe Generale North America, Inc.
5.29%, due 11/1/06 3,130,000 3,130,000
Toyota Motor Credit Corp.
5.22%, due 11/3/06 2,500,000 2,499,275
Yorktown Capital LLC
5.282%, due 11/16/06 (c) 847,028 847,028
------------
Total Commercial Paper
(Cost $22,432,923) 22,432,923
------------
</Table>
12 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
INVESTMENT COMPANY (0.9%)
BGI Institutional Money Market Fund (c) 2,089,768 $ 2,089,768
------------
Total Investment Company
(Cost $2,089,768) 2,089,768
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.5%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $1,140,262
(Collateralized by various Corporate Bonds, with
rates between 0%-8.40% and maturity dates between
1/30/07-6/15/34, with a Principal Amount of
$1,153,164 and a Market Value
of $1,185,414) (c) $1,140,090 1,140,090
------------
Total Repurchase Agreement
(Cost $1,140,090) 1,140,090
------------
TIME DEPOSITS (13.2%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (c) 1,936,064 1,936,064
Bank of America
5.27%, due 11/21/06 (c)(d) 2,662,089 2,662,089
Bank of Montreal
5.28%, due 11/27/06 (c) 1,936,064 1,936,064
Bank of Nova Scotia
5.30%, due 11/10/06 (c) 1,936,064 1,936,064
Barclays
5.32%, due 1/18/07 (c) 1,936,064 1,936,064
Deutsche Bank AG
5.27%, due 11/9/06 (c) 1,936,064 1,936,064
Fortis Bank
5.27%, due 11/6/06 (c) 4,210,940 4,210,940
Halifax Bank of Scotland
5.30%, due 1/10/07 (c) 1,936,064 1,936,064
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (c) $1,936,065 $ 1,936,065
Royal Bank of Canada
5.30%, due 12/22/06 (c) 1,936,065 1,936,065
Royal Bank of Scotland
5.29%, due 12/12/06 (c) 1,936,065 1,936,065
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (c) 1,936,064 1,936,064
Societe Generale North America, Inc.
5.28%, due 12/6/06 (c) 1,936,064 1,936,064
UBS AG
5.28%, due 12/5/06 (c) 1,936,064 1,936,064
------------
Total Time Deposits
(Cost $30,105,800) 30,105,800
------------
Total Short-Term Investments
(Cost $55,768,581) 55,768,581
------------
Total Investments
(Cost $232,740,067) (e) 117.6% 267,288,390(f)
Liabilities in Excess of Cash and Other Assets (17.6) (40,065,184)
---------- ------------
Net Assets 100.0% $227,223,206
========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan.
(c) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(d) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(e) The cost for federal income tax purposes is $232,956,888.
(f) At October 31, 2006 net unrealized appreciation was $34,331,502, based on
cost for federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $37,994,114 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $3,662,612.
</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, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $232,740,067) including $39,840,118
market value of securities loaned $267,288,390
Cash 4,040
Receivables:
Investment securities sold 2,696,614
Fund shares sold 544,617
Dividends and interest 22,497
Other assets 19,646
-------------
Total assets 270,575,804
-------------
LIABILITIES:
Securities lending collateral 41,169,802
Payables:
Investment securities purchased 1,147,877
Fund shares redeemed 612,809
Transfer agent (See Note 3) 128,914
NYLIFE Distributors (See Note 3) 114,735
Manager (See Note 3) 84,283
Shareholder communication 47,187
Professional fees 31,548
Custodian 4,060
Trustees 2,861
Accrued expenses 8,522
-------------
Total liabilities 43,352,598
-------------
Net assets $227,223,206
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 100,002
Class B 48,110
Class C 35,700
Class I 1,294
Class R3 612
Additional paid-in capital 183,315,109
Accumulated net realized gain on investments 9,174,056
Net unrealized appreciation on investments 34,548,323
-------------
Net assets $227,223,206
=============
CLASS A
Net assets applicable to outstanding shares $124,741,418
=============
Shares of beneficial interest outstanding 10,000,234
=============
Net asset value per share outstanding $ 12.47
Maximum sales charge (5.50% of offering price) 0.73
-------------
Maximum offering price per share outstanding $ 13.20
=============
CLASS B
Net assets applicable to outstanding shares $ 57,468,647
=============
Shares of beneficial interest outstanding 4,811,032
=============
Net asset value and offering price per share
outstanding $ 11.95
=============
CLASS C
Net assets applicable to outstanding shares $ 42,624,902
=============
Shares of beneficial interest outstanding 3,570,032
=============
Net asset value and offering price per share
outstanding $ 11.94
=============
CLASS I
Net assets applicable to outstanding shares $ 1,626,059
=============
Shares of beneficial interest outstanding 129,420
=============
Net asset value and offering price per share
outstanding $ 12.56
=============
CLASS R3
Net assets applicable to outstanding shares $ 762,180
=============
Shares of beneficial interest outstanding 61,159
=============
Net asset value and offering price per share
outstanding $ 12.46
=============
</Table>
14 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 953,364
Interest 506,593
Income from securities loaned--net 194,758
------------
Total income 1,654,715
------------
EXPENSES:
Manager (See Note 3) 1,543,360
Transfer agent--Classes A, B and C (See Note
3) 705,738
Transfer agent--Class I and R3 (See Note 3) 5,466
Distribution--Class B (See Note 3) 456,133
Distribution--Class C (See Note 3) 243,373
Distribution--Class R3 (See Note 3) 103
Distribution/Service--Class A (See Note 3) 269,776
Service--Class B (See Note 3) 152,044
Service--Class C (See Note 3) 81,125
Distribution/Service--Class R3 (See Note 3) 103
Shareholder communication 150,174
Registration 77,623
Professional fees 76,342
Recordkeeping 47,246
Custodian 22,360
Trustees 12,743
Shareholder service--Class R3 (See Note 3) 41
Miscellaneous 15,617
------------
Total expenses before waiver 3,859,367
Expense waiver from Manager (See Note 3) (95,745)
------------
Net expenses 3,763,622
------------
Net investment loss (2,108,907)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 11,990,917
------------
Net change in unrealized appreciation on
investments 1,465,538
------------
Net realized and unrealized gain on investments 13,456,455
------------
Net increase in net assets resulting from
operations $11,347,548
============
</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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (2,108,907) $ (1,422,180)
Net realized gain on investments 11,990,917 7,771,775
Net change in unrealized
appreciation on investments 1,465,538 15,714,290
---------------------------
Net increase in net assets
resulting from operations 11,347,548 22,063,885
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 92,764,837 29,925,427
Class B 20,942,802 25,818,352
Class C 35,341,857 11,154,690
Class I 8,177,597 4,306,166
Class R3 769,866 --
---------------------------
157,996,959 71,204,635
Cost of shares redeemed:
Class A (37,039,473) (38,926,734)
Class B (15,094,102) (8,421,676)
Class C (7,839,063) (1,660,218)
Class I (11,898,521) (7,898)
Class R3 (25,913) --
---------------------------
(71,897,072) (49,016,526)
Net asset value of shares
converted (See Note 1):
Class A 16,051,062 --
Class B (16,051,062) --
Increase in net assets derived
from capital share transactions 86,099,887 22,188,109
---------------------------
Net increase in net assets 97,447,435 44,251,994
NET ASSETS:
Beginning of year 129,775,771 85,523,777
---------------------------
End of year $227,223,206 $129,775,771
===========================
</Table>
16 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------------
JANUARY 1, JANUARY 2,
2003* YEAR 2001**
THROUGH ENDED THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 11.40 $ 9.09 $ 8.23 $ 5.86 $ 8.25 $ 10.00
-------- ------- ------- ----------- ------------ ------------
Net investment loss (a) (0.09) (0.10) (0.09) (0.07) (0.09) (0.09)
Net realized and unrealized gain (loss) on
investments 1.16 2.41 0.95 2.44 (2.30) (1.66)
-------- ------- ------- ----------- ------------ ------------
Total from investment operations 1.07 2.31 0.86 2.37 (2.39) (1.75)
-------- ------- ------- ----------- ------------ ------------
Net asset value at end of period $ 12.47 $ 11.40 $ 9.09 $ 8.23 $ 5.86 $ 8.25
======== ======= ======= =========== ============ ============
Total investment return (b) 9.39% 25.41% 10.45% 40.44% (c) (28.97%) (17.50%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.69%) (0.91%) (0.99%) (1.21%)+ (1.22%) (1.01%)
Net expenses 1.50% 1.50% 1.50% 1.50% + 1.50% 1.50%
Expenses (before waiver) 1.55% 1.63% 1.69% 1.95% + 1.81% 1.87%
Portfolio turnover rate 52% 44% 52% 42% 188% 127%
Net assets at end of period (in 000's) $124,741 $48,597 $46,234 $35,473 $18,523 $22,965
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------------------
JANUARY 1, JANUARY 2,
2003* 2001**
THROUGH YEAR ENDED THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 10.99 $ 8.82 $ 8.05 $ 5.77 $ 8.18 $ 10.00
------- ------- ------ ------------ ------------ ------------
Net investment loss (a) (0.17) (0.17) (0.15) (0.11) (0.13) (0.14)
Net realized and unrealized
gain (loss) on investments 1.12 2.34 0.92 2.39 (2.28) (1.68)
------- ------- ------ ------------ ------------ ------------
Total from investment
operations 0.95 2.17 0.77 2.28 (2.41) (1.82)
------- ------- ------ ------------ ------------ ------------
Net asset value at end of
period $ 11.94 $ 10.99 $ 8.82 $ 8.05 $ 5.77 $ 8.18
======= ======= ====== ============ ============ ============
Total investment return (b) 8.64% 24.60% 9.57% 39.51% (c) (29.46%) (18.20%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.44%) (1.66%) (1.74%) (1.96%)+ (1.97%) (1.76%)
Net expenses 2.25% 2.25% 2.25% 2.25% + 2.25% 2.25%
Expenses (before waiver) 2.30% 2.38% 2.44% 2.70% + 2.56% 2.62%
Portfolio turnover rate 52% 44% 52% 42% 188% 127%
Net assets at end of period
(in 000's) $42,625 $14,181 $3,580 $2,148 $ 871 $ 258
</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 and R3 are not subject to
sales charges.
(c) Total return is not annualized.
(d) The amount shown for a share outstanding does not correspond with aggregate net realized
and unrealized gain (loss) on investments due to the timing of purchases and redemptions
of Fund shares in relation to fluctuating market values of the investments of the Fund
during the period.
</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**
THROUGH YEAR ENDED THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 10.98 $ 8.82 $ 8.05 $ 5.77 $ 8.18 $10.00
------- ------- ------- ----------- ------------ ------------
(0.17) (0.17) (0.15) (0.11) (0.13) (0.14)
1.14 2.33 0.92 2.39 (2.28) (1.68)
------- ------- ------- ----------- ------------ ------------
0.97 2.16 0.77 2.28 (2.41) (1.82)
------- ------- ------- ----------- ------------ ------------
$ 11.95 $ 10.98 $ 8.82 $ 8.05 $ 5.77 $ 8.18
======= ======= ======= =========== ============ ============
8.83% 24.49% 9.57% 39.51%(c) (29.46%) (18.20%)
(1.44%) (1.66%) (1.74%) (1.96%)+ (1.97%) (1.76%)
2.25% 2.25% 2.25% 2.25%+ 2.25% 2.25%
2.30% 2.38% 2.44% 2.70%+ 2.56% 2.62%
52% 44% 52% 42% 188% 127%
$57,469 $62,792 $35,710 $21,189 $7,899 $5,299
</Table>
<Table>
<Caption>
CLASS I CLASS R3
------------------------------- -----------
MARCH 29, APRIL 28,
2005** 2006**
YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2006 2005 2006
$11.43 $10.45 $13.24
----------- ----------- -----------
(0.04) (0.03) (0.08)
1.17 1.01 (0.70)(d)
----------- ----------- -----------
1.13 0.98 (0.78)
----------- ----------- -----------
$12.56 $11.43 $12.46
=========== =========== ===========
9.89% 9.38% (c) (5.89%)(c)
(0.28%) (0.51%)+ (1.27%)(d)+
1.07% 1.10% + 1.62% +
1.04% 1.23% + 1.75% +
52% 44% 52%
$1,626 $4,205 $ 762
</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 five classes of shares. Class A shares, Class B shares
and Class C shares commenced on January 2, 2001, Class I shares commenced on
March 29, 2005 and Class R3 shares commenced on April 28, 2006. 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 a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares and Class R3 shares are not
subject to sales charge. As approved by the Board of Trustees in 1997, Class B
shares convert to Class A shares eight years after the date they were purchased.
The first conversion occurred December 28, 2005. The five 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 R3 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. Class R3
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 R3 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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 rear reclassifications between
accumulated net investment income and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2006, are not affected.
<Table>
<Caption>
ACCUMULATED NET ADDITIONAL
INVESTMENT PAID-IN-
INCOME CAPITAL
$2,108,907 $ (2,108,907)
---------------------------------
</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.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 23.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
as subadvisor to the Fund and 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 the
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.
In addition the Manager has entered into a written expense limitation agreement,
under which the Manager has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the Fund so that the total operating expenses
(total annual 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, 1.50% 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 written expense limitation
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. For the year ended October 31, 2006, the
Manager earned fees from the Fund in the amount of $1,543,360 and waived its
fees in the amount of $95,745.
As of October 31, 2006, the amount of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$64,788 $95,745 $160,533
----------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the
recoupments will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, the Manager pays the Subadvisor a monthly fee at an annual rate of
0.375% of the average daily net assets of the Fund. To the extent the manager
has agreed to reimburse expenses of the Fund, the Subadvisor has voluntarily
agreed to do so proportionately.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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 R3 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 and Class C shares of the Fund.
Pursuant to the Class R3 Plan, the Distributor receives a monthly fee from the
Fund at the annual rate of 0.50% of the average daily net assets of the Fund's
Class R3 shares, which is an expense of the Class R3 shares of the Fund for
distribution or service activities as designated by the Distributor. 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 R3
shares. Under the terms of this plan, Class R3 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 R3 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 $126,720 for the year
ended October 31, 2006. 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 $13,740, $78,477 and $18,645, respectively, for the year ended October
31, 2006.
(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 pursuant to which
it
22 MainStay Mid Cap Growth Fund
performs certain services for which NYLIM Service is responsible. Transfer agent
expenses incurred by the Fund, for the year ended October 31, 2006, amounted to
$711,204.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $245 0.0*%
- -----------------------------------------------------------------
Class C 119 0.0*
- -----------------------------------------------------------------
Class I 2,404 0.1
- -----------------------------------------------------------------
Class R3 9,411 1.2
- -----------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $4,394.
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 $47,246 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
CAPITAL UNREALIZED ACCUMULATED
GAINS APPRECIATION GAIN
$9,390,877 $34,331,502 $43,722,379
----------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
The Fund utilized $2,604,998 of capital loss carryforwards during the year ended
October 31, 2006.
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $39,840,118. The Fund received $41,169,802 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $169,160 and $101,623, respectively.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
PERIOD ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS R3*
Shares sold 7,429 1,749 2,948 651 63
- ------------------------------------------------------------------------
Shares redeemed (3,021) (1,276) (669) (890) (2)
- ------------------------------------------------------------------------
Shares converted (See
Note 1) 1,328 (1,379) -- -- --
- ------------------------------------------------------------------------
Net increase
(decrease) 5,736 (906) 2,279 (239) 61
- ------------------------------------------------------------------------
</Table>
<Table>
<Caption>
PERIOD 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>
* Commenced operations on April 28, 2006.
** Commenced operations on March 29, 2005.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
24 MainStay Mid Cap Growth 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 Growth Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2006, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's excellent performance
over the medium- and longer-term and its weaker recent performance.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
26 MainStay Mid Cap Growth Fund
discussed additional measures that may increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at asset levels above the breakpoints, and the fact
that the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees acknowledged the Fund's recent asset growth but noted that
the Fund had not reached the asset level at which breakpoints would reduce the
Fund's management fee rate. The Trustees reviewed information about the
potential effect of asset growth on Fund expenses, the difficulty of forecasting
its effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to maintain the Fund's net
expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
www.mainstayfunds.com 27
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
28 MainStay Mid Cap Growth Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
30 MainStay Mid Cap Growth Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSMG11-12/06
11
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 9
- --------------------------------------------------------------------------------
Financial Statements 12
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 22
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 23
- --------------------------------------------------------------------------------
Federal Income Tax Information 25
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 25
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 25
- --------------------------------------------------------------------------------
Trustees and Officers 26
</Table>
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.
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
- ----------------------------------------------
4.18% 1.77% 3.36%
7--DAY CURRENT YIELD: 4.59%
</Table>
<Table>
</Table>
CLASS B SHARES(1)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
4.18% 1.77% 3.36%
7--DAY CURRENT YIELD: 4.59%
</Table>
<Table>
</Table>
CLASS C SHARES(1)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
4.18% 1.77% 3.36%
7--DAY CURRENT YIELD: 4.59%
</Table>
<Table>
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Average Lipper money market fund(2) 3.99% 1.64% 3.26%
</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. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only with
the approval of the Board of Trustees. The Manager may recoup the amount of any
management fee waivers or expense reimbursements from the Fund pursuant to this
agreement if such action does not cause the Fund to exceed existing expense
limitations and the recoupment is made within three years after the year in
which the Manager incurred the expense. Prior to 9/1/98, the performance of
Class C shares includes the historical performance of Class B shares.
1. As of 10/31/06, MainStay Money Market Fund had an effective 7-day yield of
4.71% and a 7-day current yield of 4.59% 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 4.44% and the
current 7-day yield would have been 4.42%. These 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.
www.mainstayfunds.com 5
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,022.90 $3.57 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,022.90 $3.57 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,022.90 $3.57 $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, Class B and Class C) multiplied by the average account
value over the period, divided by 365 and multiplied by 184 (to reflect the
one-half year period). In the absence of waivers and/or reimbursements,
expenses would have been higher.
6 MainStay Money Market Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Commercial Paper 44.8
Federal Agencies 35.2
Corporate Bonds 14.4
Medium-Term Notes 3.3
Foreign Government Bonds 1.1
Certificate of Deposit 0.8
Asset-Backed Security 0.4
Liabilities in Excess of Cash and Other Assets (0.0)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 9 for specific holdings within these
categories.
www.mainstayfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Claude Athaide, Ph.D., CFA, of MacKay
Shields LLC
HOW DID MAINSTAY MONEY MARKET FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
As of October 31, 2006, MainStay Money Market Fund Class A, Class B, and Class C
shares had a 7-day current yield of 4.59% and a 7-day effective yield of 4.71%.
For the 12 months ended October 31, 2006, MainStay Money Market Fund returned
4.18% for Class A, Class B, and Class C shares. All share classes outperformed
the 3.99% return of the average Lipper(1) money market fund for the 12 months
ended October 31, 2006.
WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
According to preliminary estimates by the Bureau of Economic Analysis, real
gross domestic product (GDP) increased by 3.05% during the four quarters ended
September 30, 2006. The economy grew at a robust 5.6% seasonally adjusted
annualized rate in the first quarter of 2006. Since then, growth has moderated,
in part because of the slowdown in the housing sector. Real gross domestic
product increased at a 2.6% seasonally adjusted annualized rate in the second
quarter and by 2.2% in the third quarter. Residential investment declined at an
18.0% seasonally adjusted annualized rate in the third quarter, the fourth
consecutive quarter in which the sector has made a negative contribution to GDP
growth.
At the end of October 2005, the targeted federal funds rate was 3.75%. The
Federal Open Market Committee (FOMC) met nine times during the 12 months ended
October 31, 2006, and it raised the targeted federal funds rate by 25 basis
points at each of the first six meetings. (A basis point is one-hundredth of a
percentage point.) That brought the federal funds target rate to 5.25% in June
2006. Since then, the FOMC has opted to leave the federal funds target
unchanged. Another significant Federal Reserve development came in February
2006, when Dr. Bernanke succeeded Dr. Greenspan as chairman of the Federal
Reserve Board of Governors.
Robust economic growth in the first quarter of 2006 and a string of
higher-than-expected monthly inflation data contributed to a rise Treasury
yields across the maturity spectrum. Yields climbed above 5% in the spring of
2006. The deceleration in economic growth during the summer prompted a sharp
decline in yields and raised investors' expectations of interest-rate cuts.
The yield on the three-month Treasury bill was 5.08% at the end of October 2006,
120 basis points higher than a year earlier, while three-month LIBOR(2) was
5.37% at the end of October, up from 5.26% a year ago.
HOW DID THE FUND INVEST DURING THE REPORTING PERIOD?
The Fund's returns were boosted by the Federal Reserve's decision to raise the
targeted federal funds rate from 3.75% to 5.25%. As a result, the Fund's
lower-yielding investments were reinvested in higher-yielding securities as they
matured. The Fund invested in securities issued by U.S. government sponsored
agencies such as Fannie Mae, Freddie Mac, the Federal Home Loan Bank, and TVA
(Tennessee Valley Authority), as well as first-tier securities issued by
finance, insurance, brokerage, and industrial companies as well as banks and
bank holding companies.
WHAT WAS THE FUND'S DOLLAR-WEIGHTED AVERAGE MATURITY AT THE END OF THE REPORTING
PERIOD?
As of October 31, 2006, the dollar-weighted average maturity of the Fund was
approximately 62 days.
WHAT OTHER EVENTS AFFECTED THE MONEY MARKET DURING THE REPORTING PERIOD?
Expectations of short-term rate cuts in the first half of 2007 have receded
following the release of the October 2006 Labor Department report. The report
revealed that 470,000 new jobs were created during the August-October period and
that the unemployment rate fell to 4.4% in October.
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. See footnote on page 5 for more information about Lipper Inc.
2. London interbank offered rates (LIBOR) are floating interest rates that are
widely used as a reference rates in bank, corporate, and government lending
agreements.
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 Money Market Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (100.0%)+
- -----------------------------------------------------------------------------
ASSET-BACKED SECURITY (0.4%)
USAA Auto Owner Trust Series 2006-3, Class A1
5.405%, due 8/15/07 $2,019,940 $ 2,019,940
------------
CERTIFICATE OF DEPOSIT (0.8%)
Wachovia Bank N.A.
5.327%, due 3/30/07 (a) 4,000,000 3,999,619
------------
COMMERCIAL PAPER (44.8%)
Abbey National North America LLC
5.19%, due 4/20/07 4,500,000 4,389,712
ABN-AMRO N.A. Finance, Inc.
5.25%, due 11/24/06 5,000,000 4,983,229
5.32%, due 11/3/06 4,500,000 4,498,670
AIG Funding, Inc.
5.24%, due 11/28/06 5,000,000 4,980,350
American Express Credit Corp.
5.24%, due 12/19/06 4,500,000 4,468,560
5.25%, due 11/21/06 4,370,000 4,357,254
American General Finance Corp.
5.26%, due 11/17/06 4,800,000 4,788,778
ANZ Delaware, Inc.
5.20%, due 12/5/06 4,225,000 4,204,251
Atlantis One Funding Corp.
5.26%, due 11/28/06 (b) 3,500,000 3,486,193
Bank of America Corp.
5.23%, due 12/18/06 5,200,000 5,164,494
Barclays U.S. Funding Corp.
5.25%, due 11/21/06 2,075,000 2,068,948
5.27%, due 11/15/06 3,650,000 3,642,520
5.27%, due 11/21/06 2,125,000 2,118,779
ChevronTexaco Funding Corp.
5.19%, due 2/13/07 4,500,000 4,432,530
5.21%, due 12/7/06 5,000,000 4,973,950
Dexia Delaware LLC
5.25%, due 11/10/06 4,500,000 4,494,094
5.27%, due 11/10/06 5,975,000 5,967,128
General Electric Capital Corp.
5.25%, due 11/14/06 2,350,000 2,345,545
5.25%, due 12/4/06 4,500,000 4,478,344
HBOS Treasury Services PLC
5.265%, due 11/22/06 5,550,000 5,532,955
5.27%, due 11/29/06 5,000,000 4,979,505
ING U.S. Funding LLC
5.205%, due 3/19/07 4,500,000 4,410,214
5.26%, due 11/16/06 3,750,000 3,741,781
5.38%, due 11/7/06 2,025,000 2,023,185
KfW International Finance, Inc.
4.80%, due 11/3/06 (b) 4,650,000 4,648,760
5.33%, due 12/15/06 (b) 4,800,000 4,768,731
Lloyds TSB Bank PLC
5.24%, due 12/4/06 5,000,000 4,975,983
Merrill Lynch & Co., Inc.
5.23%, due 12/14/06 4,500,000 4,471,889
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
COMMERCIAL PAPER (CONTINUED)
Metlife Funding, Inc.
5.23%, due 1/16/07 $4,500,000 $ 4,450,315
5.25%, due 11/21/06 5,230,000 5,214,746
Minnesota Mining & Manufacturing Co.
5.20%, due 11/27/06 4,350,000 4,333,663
5.20%, due 12/11/06 3,350,000 3,330,644
Nationwide Building Society
5.27%, due 1/8/07 (b) 4,500,000 4,455,205
5.32%, due 11/6/06 (b) 4,500,000 4,496,675
Nestle Capital Corp.
5.24%, due 11/2/06 (b) 4,500,000 4,499,345
5.25%, due 11/13/06 (b) 5,375,000 5,365,593
Private Export Funding Corp.
5.22%, due 2/8/07 (b) 2,675,000 2,636,600
5.26%, due 2/15/07 (b) 3,000,000 2,953,536
5.37%, due 11/2/06 (b) 3,875,000 3,874,422
Prudential Funding LLC
5.20%, due 12/28/06 5,800,000 5,752,247
5.20%, due 3/12/07 4,100,000 4,022,419
San Paolo IMI U.S. Financial Co.
5.37%, due 1/16/07 5,600,000 5,536,514
Societe Generale North America, Inc.
5.26%, due 11/17/06 4,500,000 4,489,480
5.36%, due 4/20/07 4,500,000 4,389,727
Svenska Handelsbanken AB
5.33%, due 12/15/06 4,500,000 4,500,000
Toyota Motor Credit Corp.
5.26%, due 11/28/06 4,000,000 3,984,220
5.27%, due 11/16/06 4,300,000 4,290,558
UBS Finance Delaware LLC
5.145%, due 3/26/07 5,125,000 5,018,795
5.22%, due 1/8/07 3,450,000 3,415,983
5.25%, due 11/3/06 1,400,000 1,399,592
------------
211,806,611
------------
CORPORATE BONDS (14.4%)
Abbott Laboratories
6.40%, due 12/1/06 5,375,000 5,381,790
Bayerische Landesbank/NY
5.419%, due 6/25/07 (a) 4,200,000 4,201,237
BP Capital Markets PLC
2.625%, due 3/15/07 4,025,000 3,988,644
2.75%, due 12/29/06 5,800,000 5,780,475
FleetBoston Financial Corp.
4.875%, due 12/1/06 5,750,000 5,750,572
Goldman Sachs Group, Inc.
5.497%, due 7/2/07 (a) 4,500,000 4,505,117
Harvard University
8.125%, due 4/15/07 7,805,000 7,898,856
</Table>
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
CORPORATE BONDS (CONTINUED)
International Business Machines Corp.
6.45%, due 8/1/07 $2,587,000 $ 2,607,300
Morgan Stanley
5.512%, due 1/12/07 (a) 5,000,000 5,001,342
5.55%, due 11/24/06 (a) 4,000,000 4,000,366
Pfizer, Inc.
2.50%, due 3/15/07 5,075,000 5,024,149
Wachovia Corp.
4.95%, due 11/1/06 5,000,000 4,999,943
Wal-Mart Stores, Inc.
5.261%, due 3/28/07 (a) 4,500,000 4,499,107
Wells Fargo & Co.
5.449%, due 3/23/07 (a) 4,500,000 4,501,907
------------
68,140,805
------------
FEDERAL AGENCIES (35.2%)
Federal Home Loan Bank
(Discount Notes)
5.08%, due 2/22/07 8,400,000 8,399,718
5.12%, due 1/24/07 4,500,000 4,446,240
Federal Home Loan Mortgage Corporation
5.26%, due 6/19/07 (a) 5,700,000 5,700,000
(Discount Notes)
5.06%, due 2/6/07 3,850,000 3,797,510
5.06%, due 1/30/07 5,000,000 4,936,750
5.07%, due 3/27/07 4,900,000 4,799,248
5.08%, due 3/20/07 4,000,000 3,921,542
5.081%, due 1/31/07 6,075,000 5,996,975
5.09%, due 2/14/07 5,600,000 5,516,863
5.09%, due 2/20/07 3,700,000 3,641,932
5.10%, due 12/27/06 3,200,000 3,174,613
5.10%, due 2/16/07 4,400,000 4,333,303
5.13%, due 1/26/07 3,400,000 3,358,333
5.135%, due 1/23/07 1,600,000 1,581,057
5.137%, due 1/26/07 3,100,000 3,061,958
5.145%, due 12/19/06 2,200,000 2,184,908
5.26%, due 11/14/06 2,300,000 2,295,632
5.29%, due 12/12/06 5,200,000 5,168,671
Federal National Mortgage Association
(Discount Notes)
5.049%, due 2/9/07 4,800,000 4,732,676
5.05%, due 2/21/07 2,000,000 1,968,578
5.05%, due 3/7/07 5,500,000 5,402,788
5.06%, due 2/23/07 4,000,000 3,935,907
5.08%, due 2/21/07 6,200,000 6,102,012
5.08%, due 2/28/07 4,400,000 4,326,114
5.095%, due 12/20/06 4,500,000 4,468,793
5.12%, due 1/22/07 5,000,000 4,941,689
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
FEDERAL AGENCIES (CONTINUED)
5.12%, due 2/23/07 $4,000,000 $ 3,935,147
5.13%, due 11/15/06 1,850,000 1,846,310
5.13%, due 1/8/07 4,550,000 4,505,911
5.13%, due 1/17/07 4,500,000 4,450,624
5.14%, due 11/22/06 6,275,000 6,256,185
5.14%, due 12/13/06 1,025,000 1,018,853
5.14%, due 1/10/07 3,375,000 3,341,269
5.15%, due 11/29/06 4,350,000 4,332,576
5.15%, due 12/6/06 3,275,000 3,258,602
5.15%, due 12/11/06 5,415,000 5,384,014
5.18%, due 11/29/06 6,000,000 5,975,826
5.24%, due 11/10/06 5,250,000 5,243,123
5.25%, due 1/19/07 4,875,000 4,815,952
------------
166,558,202
------------
FOREIGN GOVERNMENT BONDS (1.1%)
Quebec Province
5.25%, due 11/3/06 (b) 1,360,000 1,359,603
5.28%, due 11/3/06 (b) 4,000,000 3,998,827
------------
5,358,430
------------
MEDIUM-TERM NOTES (3.3%)
Goldman Sachs Group, Inc.
Series B
5.504%, due 5/11/07 (a) 4,200,000 4,202,144
International Business Machines Corp.
2.375%, due 11/1/06 4,500,000 4,500,322
Merrill Lynch & Co., Inc.
Series C
5.48%, due 4/26/07 (a) 4,200,000 4,202,506
Toyota Motor Credit Corp.
Series E
5.43%, due 12/18/06 (a) 2,580,000 2,580,518
------------
15,485,490
------------
Total Short-Term Investments
(Amortized Cost $473,369,097) (c) 100.0% 473,369,097
Liabilities in Excess of Cash and Other Assets (0.0) (205,802)
---------- ------------
Net Assets 100.0% $473,163,295
========== ============
</Table>
<Table>
(a) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(b) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(c) The cost stated also represents the aggregate cost for federal income tax
purposes.
</Table>
+ Percentages indicated are based on Fund net assets.
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.
The table below sets forth the diversification of the Money Market Fund
investments by industry.
INDUSTRY DIVERSIFICATION
<Table>
<Caption>
AMORTIZED
COST PERCENT+
Automobile ABS $ 2,019,940 0.4%
Banks 85,330,688 18.0
Commercial Services 7,899,429 1.7
Computers 7,107,375 1.5
Diversified Financial Services 6,823,889 1.4
Federal Agencies 166,558,202 35.2
Finance--Auto Loans 10,855,307 2.3
Finance--Consumer Loans 4,788,778 1.0
Finance--Credit Card 8,825,814 1.9
Finance--Investment Banker/Broker 36,558,625 7.7
Finance--Mortgage Loan/Broker 8,951,880 1.9
Finance--Other Services 18,946,458 4.0
Insurance 4,980,350 1.0
Manufacturing 7,664,308 1.6
Oil & Gas 19,175,887 4.1
Pharmaceuticals 10,405,797 2.2
Regional (State & Province) 5,358,430 1.1
Retail 4,499,101 1.0
Special Purpose Entity 56,618,839 12.0
------------ ----------
473,369,097 100.0
Liabilities in Excess of Cash and Other Assets (205,802) (0.0)
------------ ----------
Net Assets $473,163,295 100.0%
============ ==========
</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 11
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $473,369,097) $473,369,097
Cash 57,784
Receivables:
Interest 989,824
Fund shares sold 960,120
Other assets 38,161
-------------
Total assets 475,414,986
-------------
LIABILITIES:
Payables:
Fund shares redeemed 1,755,873
Transfer agent (See Note 3) 248,053
Shareholder communication 67,763
Manager (See Note 3) 65,579
Professional fees 43,852
Trustees 6,013
Custodian 4,306
Accrued expenses 11,585
Dividend payable 48,667
-------------
Total liabilities 2,251,691
-------------
Net assets $473,163,295
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 2,606,378
Class B 1,892,107
Class C 233,059
Additional paid-in capital 468,425,790
Accumulated undistributed net investment
income 5,961
-------------
Net assets $473,163,295
=============
CLASS A
Net assets applicable to outstanding shares $260,641,598
=============
Shares of beneficial interest outstanding 260,637,807
=============
Net asset value per share outstanding $ 1.00
=============
CLASS B
Net assets applicable to outstanding shares $189,215,860
=============
Shares of beneficial interest outstanding 189,210,743
=============
Net asset value and offering price per share
outstanding $ 1.00
=============
CLASS C
Net assets applicable to outstanding shares $ 23,305,837
=============
Shares of beneficial interest outstanding 23,305,892
=============
Net asset value and offering price per share
outstanding $ 1.00
=============
</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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $21,915,493
------------
EXPENSES:
Manager (See Note 3) 2,199,024
Transfer agent--Classes A, B and C (See Note
3) 1,501,404
Shareholder communication 204,456
Registration 109,288
Professional fees 87,063
Recordkeeping 72,201
Trustees 27,039
Custodian 16,399
Miscellaneous 29,684
------------
Total expenses before waiver 4,246,558
Expense waiver from Manager (See Note 3) (1,058,259)
------------
Net expenses 3,188,299
------------
Net investment income 18,727,194
------------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 12,032
------------
Net increase in net assets resulting from
operations $18,739,226
============
</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 CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 18,727,194 $ 10,605,791
Net realized gain (loss) on
investments 12,032 (5,053)
-----------------------------
Net increase in net assets
resulting from operations 18,739,226 10,600,738
-----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (9,523,752) (4,221,699)
Class B (8,410,003) (6,009,713)
Class C (794,462) (374,379)
From net realized gain on
investments:
Class A -- (606)
Class B -- (918)
Class C -- (43)
-----------------------------
Total dividends and distributions
to shareholders (18,728,217) (10,607,358)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 332,769,725 291,874,794
Class B 84,374,168 186,570,959
Class C 44,576,284 48,715,706
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions:
Class A 9,181,874 4,012,463
Class B 7,930,635 5,339,159
Class C 727,816 325,068
-----------------------------
479,560,502 536,838,149
Cost of shares redeemed:
Class A (300,271,912) (288,043,004)
Class B (135,396,642) (241,762,842)
Class C (42,424,586) (59,887,177)
-----------------------------
(478,093,140) (589,693,023)
Net asset value of shares converted (See Note 1):
Class A 13,802,543 --
Class B (13,802,543) --
Increase (decrease) in net
assets derived from capital
share transactions 1,467,362 (52,854,874)
-----------------------------
Net increase (decrease) in net
assets 1,478,371 (52,861,494)
NET ASSETS:
Beginning of year 471,684,924 524,546,418
-----------------------------
End of year $ 473,163,295 $ 471,684,924
=============================
Accumulated undistributed net
investment income $ 5,961 $ --
=============================
</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.
This page intentionally left blank
www.mainstayfunds.com 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ----------- -------- --------
Net investment income 0.04 0.02 0.01 0.00 (a) 0.01 0.04
Net realized and unrealized gain on
investments 0.00(a) 0.00(a) 0.00 (a) -- 0.00 (a) --
-------- -------- -------- ----------- -------- --------
Total from investment operations 0.04 0.02 0.01 0.00 (a) 0.01 0.04
-------- -------- -------- ----------- -------- --------
Less dividends and distributions:
From net investment income (0.04) (0.02) (0.01) (0.00)(a) (0.01) (0.04)
From net realized gain on investments -- -- (0.00)(a) -- (0.00)(a) --
-------- -------- -------- ----------- -------- --------
Total dividends and distributions (0.04) (0.02) (0.01) (0.00)(a) (0.01) (0.04)
-------- -------- -------- ----------- -------- --------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== =========== ======== ========
Total investment return 4.18% 2.20% 0.54% 0.44%(b) 1.22% 3.72%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.14% 2.21% 0.54% 0.53%+ 1.20% 3.59%
Net expenses 0.70% 0.70% 0.70% 0.70%+ 0.70% 0.70%
Expenses (before waiver) 0.93% 0.99% 1.02% 1.01%+ 0.94% 0.90%
Net assets at end of period (in 000's) $260,642 $205,154 $197,310 $173,978 $221,106 $223,807
</Table>
<Table>
<Caption>
CLASS C
----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ----------- ------- -------
Net investment income 0.04 0.02 0.01 0.00 (a) 0.01 0.04
Net realized and unrealized gain on
investments 0.00(a) 0.00(a) 0.00 (a) -- 0.00 (a) --
------- ------- ------- ----------- ------- -------
Total from investment operations 0.04 0.02 0.01 0.00 (a) 0.01 0.04
------- ------- ------- ----------- ------- -------
Less dividends and distributions:
From net investment income (0.04) (0.02) (0.01) (0.00)(a) (0.01) (0.04)
From net realized gain on investments -- -- (0.00)(a) -- (0.00)(a) --
------- ------- ------- ----------- ------- -------
Total dividends and distributions (0.04) (0.02) (0.01) (0.00)(a) (0.01) (0.04)
------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =========== ======= =======
Total investment return 4.18% 2.20% 0.54% 0.44%(b) 1.22% 3.72%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.14% 2.21% 0.54% 0.53%+ 1.20% 3.59%
Net expenses 0.70% 0.70% 0.70% 0.70%+ 0.70% 0.70%
Expenses (before waiver) 0.93% 0.99% 1.02% 1.01%+ 0.94% 0.90%
Net assets at end of period (in 000's) $23,306 $20,426 $31,273 $16,958 $11,207 $16,706
</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 not annualized.
</Table>
16 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*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ----------- -------- --------
0.04 0.02 0.01 0.00 (a) 0.01 0.04
0.00(a) 0.00(a) 0.00 (a) -- 0.00 (a) --
-------- -------- -------- ----------- -------- --------
0.04 0.02 0.01 0.00 (a) 0.01 0.04
-------- -------- -------- ----------- -------- --------
(0.04) (0.02) (0.01) (0.00)(a) (0.01) (0.04)
-- -- (0.00)(a) -- (0.00)(a) --
-------- -------- -------- ----------- -------- --------
(0.04) (0.02) (0.01) (0.00) (0.01) (0.04)
-------- -------- -------- ----------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== =========== ======== ========
4.18% 2.20% 0.54% 0.44%(b) 1.22% 3.72%
4.14% 2.21% 0.54% 0.53%+ 1.20% 3.59%
0.70% 0.70% 0.70% 0.70%+ 0.70% 0.70%
0.93% 0.99% 1.02% 1.01%+ 0.94% 0.90%
$189,216 $246,104 $295,963 $354,215 $429,488 $439,927
</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 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 Money
Market Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares commenced on
January 3, 1995, Class B shares commenced on May 1, 1986 and Class C shares
commenced on September 1, 1998. As approved by the Board of Trustees in 1997,
Class B shares convert to Class A shares eight years after the date they were
purchased. The first conversion occurred December 28, 2005. The three classes of
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. 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 the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(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 accounting principles generally accepted in
the United States of America.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized gain
on investment and additional paid-in-capital arising from permanent differences;
net assets at October 31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED NET REALIZED
UNDISTRIBUTED NET GAIN ON ADDITIONAL
INVESTMENT INCOME INVESTMENTS PAID-IN-CAPITAL
$6,984 $(6,979) $(5)
----------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to distribution reclasses
and miscellaneous adjustments.
(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) are allocated to separate classes of shares
based upon their relative net
18 MainStay Money Market Fund
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. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. 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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or 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 written expense limitation 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. For the year
ended October 31, 2006, the Manager earned fees from the Fund in the amount of
$2,199,024 and waived its fees in the amount of $1,058,259.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Investment Manager, and the related expiration dates are as
follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$232,330 $1,058,259 $1,290,589
----------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2006, in the
amount of $445,861.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $1,501,404.
(D) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $565 0.0*%
- -------------------------------------------------------------------
Class B 10 0.0*
- -------------------------------------------------------------------
Class C 109 0.0*
- -------------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(F) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $12,973.
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 $72,201 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
TOTAL
ORDINARY OTHER TEMPORARY ACCUMULATED
INCOME DIFFERENCES GAIN
$54,629 $(48,667) $5,962
----------------------------------------
</Table>
The other temporary differences are primarily due to distributions payable.
At October 31, 2006, for federal income tax purposes capital loss carryforwards
of $5,053 have been utilized.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statements of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $18,721,237 $10,605,791
Long-term Capital Gains 6,979 1,567
- -----------------------------------------------------------
$18,728,216 $10,607,358
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
IBT 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.
20 MainStay Money Market Fund
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C
Shares sold 332,769 84,374 44,576
- -----------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions 9,182 7,931 728
- -----------------------------------------------------------------------
341,951 92,305 45,304
Shares redeemed (300,272) (135,396) (42,424)
- -----------------------------------------------------------------------
Shares converted (See Note 1) 13,803 (13,803) --
- -----------------------------------------------------------------------
Net increase (decrease) 55,482 (56,894) 2,880
- -----------------------------------------------------------------------
</Table>
<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>
NOTE 7--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 8--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
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 Money Market Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2006, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
22 MainStay Money Market Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Manager, the Subadvisor and certain other service providers,
and the Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's mid-range performance
relative to certain measures over various periods of time and the sensitivity of
money market funds' relative net performance to their expense ratios.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of
www.mainstayfunds.com 23
shareholder accounts, including imposing higher investment minimums for some
share classes. The Trustees discussed additional measures that may increase
average shareholder account size and/or otherwise reduce the Trust's transfer
agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at asset levels above the breakpoints, and the fact
that the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund's management fee rate had been reduced
by the breakpoint schedule applicable to the Fund. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other registered money market fund clients of the Manager and Subadvisor, and
took account of explanations and other information relating to the fees and
expenses of those other funds and accounts. The Trustees considered the current
and proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust. The
Trustees noted the Manager's agreement to maintain a limit on the Fund's net
expenses at a certain level. The Trustees considered other actions by the
Manager within the last year to reduce other expenses of the Fund.
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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
24 MainStay Money Market 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, 2006) 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 $6,979.
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 100% to arrive at the amount eligible for qualified
interest income.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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.
www.mainstayfunds.com 25
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 Money Market Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 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>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
28 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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE SYMBOL) MS377-06 MSMM11-12/06
12
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 16
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 28
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 29
- --------------------------------------------------------------------------------
Federal Income Tax Information 31
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 31
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 31
- --------------------------------------------------------------------------------
Trustees and Officers 32
</Table>
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(1) YEARS YEARS
- --------------------------------------------------------------------------------
With sales charges 0.68% 2.77% 4.00%
Excluding sales charges 5.43 3.72 4.48
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND LEHMAN BROTHERS TAX FREE BOND
FUND MUNICIPAL BOND INDEX COMPOSITE INDEX
---------------------- -------------------- ---------------
10/31/96 9550 10000 10000
10346 10849 10857
11047 11719 11754
10332 11512 11472
11181 12491 12507
12332 13803 13861
12839 14613 14695
13177 15361 15476
13797 16287 16424
14042 16700 16832
10/31/06 14804 17660 17832
</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(1) YEARS YEARS
- --------------------------------------------------------------------------------
With sales charges 0.16% 3.11% 4.22%
Excluding sales charges 5.16 3.46 4.22
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND LEHMAN BROTHERS TAX FREE BOND
FUND MUNICIPAL BOND INDEX COMPOSITE INDEX
---------------------- -------------------- ---------------
10/31/96 10000 10000 10000
10814 10849 10857
11522 11719 11754
10750 11512 11472
11593 12491 12507
12757 13803 13861
13246 14613 14695
13561 15361 15476
14177 16287 16424
14377 16700 16832
10/31/06 15120 17660 17832
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- --------------------------------------------------------------------------------
With sales charges 4.16% 3.46% 4.22%
Excluding sales charges 5.16 3.46 4.22
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND LEHMAN BROTHERS TAX FREE BOND
FUND MUNICIPAL BOND INDEX COMPOSITE INDEX
---------------------- -------------------- ---------------
10/31/96 10000 10000 10000
10814 10849 10857
11522 11719 11754
10750 11512 11472
11593 12491 12507
12757 13803 13861
13246 14613 14695
13561 15361 15476
14177 16287 16424
14377 16700 16832
10/31/06 15120 17660 17832
</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 as 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. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to this agreement if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense. Prior to 9/1/98 (for Class C
shares) and 12/31/03 (for Class I shares), performance for Class C and Class 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 C and
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 5
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Lehman Brothers(R) Municipal Bond Index(2) 5.75% 5.05% 5.85%
Tax Free Bond Composite Index(3) 5.95 5.17 5.95
Average Lipper general municipal debt fund(4) 5.41 4.34 4.99
</Table>
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 25
of the Notes to Financial Statements for further explanation). The effect on
total return (excluding sales charges) was less than 0.01%.
2. The Lehman Brothers(R) Municipal Bond Index is an unmanaged index that
consists of 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 in an index.
3. The Fund's Tax Free Bond Composite Index is an unmanaged index that consists
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 in an index or a composite.
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.
6 MainStay Tax Free Bond Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,044.45 $4.59 $1,020.55 $4.53
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,043.20 $5.87 $1,019.30 $5.80
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,043.20 $5.87 $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, 1.14% for Class B and Class C) multiplied by the average
account value over the period, divided by 365 and, multiplied by 184 (to
reflect the one-half year period). In the absence of waivers and/or
reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
LIABILITIES IN EXCESS
SHORT-TERM CUMULATIVE OF CASH AND OTHER
LONG-TERM MUNICIPAL BONDS INVESTMENTS PREFERRED STOCK FUTURES CONTRACTS ASSETS
- ------------------------- ----------- --------------- ----------------- ---------------------
90.7 7.4 3.8 0.0* (1.9)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Puerto Rico Public Buildings Authority Revenue
Guaranteed Government Facilities, Series I,
5.00%, due 7/1/36
2. Golden State Tobacco Securitization Corp.,
5.00%, due 6/1/45
3. Charter Mac Equity Issuer Trust Series A-1,
7.10%, due 6/30/09
4. New York City, New York, Series C, 5.00%, due
8/1/26
5. North Carolina Municipal Power Agency N1,
Catawba Electric Revenue Series B, 6.50%, due
1/1/20
6. Chicago, Illinois, Housing Authority Capital
Program Revenue, Insured: FSA, 5.00%, due 7/1/23
7. Illinois State Toll Highway Authority, Insured:
FSA, 5.00%, due 1/1/26
8. Los Angeles, California, Unified School District
Series D, Insured: MBIA, 5.75%, due 7/1/16
9. Seattle, Washington, Municipal Light & Power
Revenue, 6.00%, due 10/1/15
10. Liberty, New York, Development Corp., Goldman
Sachs Group, Inc., 5.25%, due 10/1/35
</Table>
8 MainStay Tax Free Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers John Fitzgerald, CFA, and Laurie
Walters, CFA, of MacKay Shields LLC
HOW DID MAINSTAY TAX FREE BOND FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Tax Free Bond Fund returned 5.43% for
Class A shares, 5.16% for Class B shares, and 5.16% for Class C shares for the
12 months ended October 31, 2006. All share classes underperformed the 5.75%
return of the Lehman Brothers(R) Municipal Bond Index,(1) the Fund's broad-
based securities-market index, for the 12-month period. Class A shares
outperformed--and Class B and Class C shares underperformed--the 5.41% return of
the average Lipper(2) general municipal debt fund for the 12 months ended
October 31, 2006.(3)
WHAT FACTORS IN THE MUNICIPAL BOND MARKET AFFECTED THE FUND DURING THE 12-MONTH
REPORTING PERIOD?
Shorter- and longer-term municipal yields diverged during the reporting period.
Yields on securities with shorter maturities closely tracked the rising targeted
federal funds rate, while yields on 10- and 30-year bonds declined. At the end
of the reporting period, the slope of the municipal yield curve flattened
dramatically as the spread(3) between two-year and 30-year municipal bond yields
narrowed. A variety of factors contributed to the shallowness of the yield
curve, including the market's anticipation of a cooling economy and the Federal
Reserve's resolve to keep inflation in check.
WHAT WAS THE FUND'S DURATION STRATEGY DURING THE REPORTING PERIOD?
During the 12-month reporting period, we kept the Fund's duration longer than
that of the Lehman Brothers(R) Municipal Bond Index. Our view was that the
Federal Reserve would eventually pause from raising short-term interest rates.
We felt that a slow-ing housing market would make it more difficult for
consumers to extract equity from their homes, which, in turn, would weaken the
broader economy. Unfortunately, interest rates rose higher than we anticipated
from March through June, which detracted from performance. The Fund recouped
these losses, however, and closed the year with a net gain from duration as our
economic thesis gained credibility and interest rates fell sharply in the third
quarter of 2006.
WHAT POSITIONING DECISIONS AFFECTED THE FUND'S PERFORMANCE?
As yields declined, investors were drawn to sectors that offered additional
yield. The Fund's overweighted position in A-rated health care securities helped
performance when spreads contracted during the reporting period. We added
California Healthcare for Kaiser Permanente bonds to take advantage of the
hospital's consistent profitability. We liquidated a Wisconsin Wheaton
Healthcare holding when profits declined and leverage increased. We completed
the sale before the bonds were downgraded.
In the housing sector, we purchased a Chicago Housing Authority issue backed by
federal government subsidies to improve public housing. We continued to hold
preferred stock in Charter Mac Equity Issuer Trust, which maintains a portfolio
of multifamily housing units. Although single-family home construction slowed,
rental units remained scarce in many parts of the country, which helped the
Fund's housing positions.
Transactions during the reporting period focused on adding incremental yield in
sectors--such as health care, housing, and industrial development bonds--that
offered appropriate compensation for any additional risk. We also added new
credits, such as Tennessee Energy Acquisition, that had solid revenues and
attractive spreads.
We reduced exposure to electric utilities, prerefund-ed issues, and lease
revenue bonds because they offered little in terms of incremental yields when
compared with other credits. The Fund was underweighted in tobacco-settlement
bonds, since they were trading at tight spreads and remained subject to a
variety of legal risks. We also reduced exposure to the five-year maturity range
in favor of 15-year and
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. The Fund may experience a
portfolio turnover rate of more than 100% and may generate taxable short-term
capital gains.
1. See footnote on page 6 for more information on the Lehman Brothers(R)
Municipal Bond Index.
2. See footnote on page 6 for more information on Lipper Inc.
3. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 6.
4. 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.
www.mainstayfunds.com 9
longer maturities, which offered incremental yield and greater performance
potential. These changes enhanced the Fund's results as credit spreads tightened
and longer maturities outperformed short maturities after the end of the first
quarter of 2006.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2006, the Fund was overweighted relative to the Lehman
Brothers(R) Municipal Bond Index in health care, housing, and industrial
development bonds. The Fund was underweighted in prerefunded, education, and
lease revenue bonds.
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 Tax Free Bond Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (90.7%)+
- ------------------------------------------------------------------------------
ALABAMA (2.9%)
Birmingham, Alabama Waterworks & Sewer Board
Series A, Insured: FSA
5.00%, due 1/1/43 (a) $ 3,500,000 $ 3,690,575
Huntsville, Alabama Health Care Authority
Series A, LOC: Regions Bank
5.00%, due 6/1/34 (b) 1,000,000 1,016,710
Series A
5.75%, due 6/1/31 2,500,000 2,674,650
------------
7,381,935
------------
CALIFORNIA (10.7%)
California State Economic Recovery
Series A
5.00%, due 7/1/17 2,000,000 2,132,040
California State Various Purposes
5.25%, due 4/1/34 2,040,000 2,186,370
California Statewide Communities Development
Authority, Kaiser
Foundation Hospitals
Series B
5.00%, due 3/1/41 5,000,000 5,202,050
V Golden State Tobacco Securitization Corp.
5.00%, due 6/1/45 10,000,000 10,343,700
V Los Angeles, California Unified School District
Series D, Insured: MBIA
5.75%, due 7/1/16 (c) 6,000,000 7,015,560
------------
26,879,720
------------
DELAWARE (0.9%)
Delaware State Economic Development Authority
Revenue Pollution
Control, Delmarva Power
Series C, Insured: AMBAC
4.90%, due 5/1/26 (d) 2,250,000 2,354,152
------------
FLORIDA (6.7%)
Highlands County Florida Health Facilities
Authority Revenue Hospital,
Adventist Health Systems
Series D
5.375%, due 11/15/35 (p) 5,000,000 5,514,750
Meadow Pointe III Community Development District
of Florida
Capital Improvement Revenue
Series B
5.25%, due 11/1/07 300,000 300,000
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FLORIDA (CONTINUED)
Miami-Dade County Florida Solid Waste System
Revenue, Insured: MBIA
5.00%, due 10/1/19 (c) $ 1,735,000 $ 1,874,390
Oakstead Florida Community Development District
Capital Improvement Revenue
Series B
5.90%, due 5/1/07 30,000 30,000
Orange County Florida Health Facilities Authority
Revenue Hospital,
Adventist Health Systems
5.625%, due 11/15/32 3,000,000 3,246,720
South Florida Water Management District
5.00%, due 10/1/20 5,245,000 5,695,336
Waterchase Community Development District of
Florida Capital
Improvement Revenue
Series B
5.90%, due 5/1/08 125,000 125,592
------------
16,786,788
------------
ILLINOIS (11.6%)
V Chicago, Illinois Housing Authority Capital
Program Revenue, Insured: FSA
5.00%, due 7/1/23 (a) 7,100,000 7,579,037
Chicago, Illinois Waterworks Revenue, Insured:
FGIC
6.50%, due 11/1/15 (e) 3,005,000 3,625,713
Illinois Health Facilities Authority Revenue, Lake
Forest Hospital
Series A
5.75%, due 7/1/29 2,000,000 2,153,200
Illinois State Sales Tax Revenue Second Series,
Insured: FGIC
5.50%, due 6/15/17 (e) 4,000,000 4,569,280
V Illinois State Toll Highway Authority, Insured:
FSA
Series A-1
5.00%, due 1/1/26 (a) 7,000,000 7,483,840
Kane McHenry Cook & De Kalb Counties Illinois Unit
School District No. 300, Insured: XLCA
5.00%, due 12/1/20 (f) 3,500,000 3,776,710
------------
29,187,780
------------
KANSAS (1.0%)
Geary County Kansas Unified School District No.
475, Insured: MBIA
5.25%, due 9/1/22 (c) 2,275,000 2,498,064
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- ------------------------------------------------------------------------------
KENTUCKY (2.1%)
Louisville & Jefferson County Metropolitan
Government Health System Revenue
5.00%, due 10/1/30 $ 5,000,000 $ 5,177,800
------------
LOUISIANA (1.7%)
State of Louisiana Offshore Terminal Authority
Deepwater Port Revenue
Series C
5.25%, due 9/1/16 3,970,000 4,254,609
------------
MASSACHUSETTS (1.1%)
Massachusetts Bay Transportation Authority Revenue
Assessment
Series A
5.75%, due 7/1/18 (g) 2,290,000 2,462,071
5.75%, due 7/1/18 210,000 224,734
------------
2,686,805
------------
NEBRASKA (0.1%)
Nebraska Investment Finance Authority, Single
Family Housing Revenue
Series C
6.30%, due 9/1/28 (h) 380,000 384,093
------------
NEVADA (0.8%)
Clark County Nevada Industrial Development Revenue
Southwest Gas Corp.
Series A, Insured: FGIC
4.75%, due 9/1/36 (e)(h) 1,000,000 1,013,520
Series A, Insured: AMBAC
4.85%, due 10/1/35 (d)(h) 1,000,000 1,021,750
------------
2,035,270
------------
NEW JERSEY (1.7%)
New Jersey State Trust Fund Transportation
Authority System
Series C, Insured: FSA
5.50%, due 12/15/17 (a)(p) 3,810,000 4,380,205
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NEW MEXICO (1.2%)
New Mexico Finance Authority State Transportation
Revenue Series Lien
Series A, Insured: MBIA
5.00%, due 6/15/22 (c) $ 2,750,000 $ 2,937,412
------------
NEW YORK (16.1%)
V Liberty, New York Development Corp., Goldman
Sachs Group, Inc.
5.25%, due 10/1/35 5,000,000 5,822,950
Metropolitan Transportation Authority of New York
Revenue
Series A, Insured: FGIC
5.00%, due 11/15/25 (e) 1,500,000 1,596,300
Series B, Insured: MBIA
5.00%, due 11/15/25 (c) 2,000,000 2,152,860
New York City Industrial Development Agency
Revenue Queens
Baseball Stadium
5.00%, due 1/1/20 250,000 272,777
New York City Industrial Development Agency
Revenue Yankee Stadium
5.00%, due 3/1/31 1,000,000 1,070,090
V New York City, New York
Series C
5.00%, due 8/1/26 8,500,000 8,977,190
New York State Dormitory Authority Lease Revenue
Court Facilities
City of New York
7.375%, due 5/15/10 3,685,000 3,921,466
7.50%, due 5/15/11 1,740,000 1,932,218
New York State Dormitory Authority Revenue
Series A, Insured: MBIA
6.00%, due 7/1/19 (c) 3,700,000 4,485,103
Series B
7.50%, due 5/15/11 (g) 1,880,000 2,087,928
New York State Environmental Facilities Corp.
Pollution Control Revenue,
State Water Revolving Fund
Series A
7.50%, due 6/15/12 185,000 189,875
New York State Thruway Authority Highway & Bridge
Trust Fund
Series B, Insured: AMBAC
5.00%, due 4/1/21 (d) 4,000,000 4,314,520
Triborough Bridge & Tunnel Authority New York
Revenues, Insured: MBIA
5.00%, due 11/15/32 (c) 3,500,000 3,660,265
------------
40,483,542
------------
</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)
- ------------------------------------------------------------------------------
NORTH CAROLINA (5.5%)
North Carolina Eastern Municipal Power Agency
Systems Revenue
Series A
5.50%, due 1/1/12 $ 2,000,000 $ 2,155,600
Series D
6.75%, due 1/1/26 2,000,000 2,176,760
North Carolina Housing Finance Agency Home
Ownership
Series 13-A
4.25%, due 1/1/28 (h) 2,025,000 2,027,612
V North Carolina Municipal Power Agency N1,
Catawba Electric Revenue
Series B
6.50%, due 1/1/20 (p) 7,000,000 7,615,090
------------
13,975,062
------------
OHIO (1.0%)
Lorain County Ohio Hospital Revenue, Catholic
Healthcare
5.375%, due 10/1/30 2,300,000 2,437,103
------------
PENNSYLVANIA (3.4%)
Allegheny County Pennsylvania Sanitary Authority
Sewer Revenue
Series A, Insured: MBIA
5.00%, due 12/1/23 (c) 5,000,000 5,351,950
Philadelphia, Pennsylvania School District
Series A, Insured: FSA
5.75%, due 2/1/11 (a) 3,000,000 3,248,820
------------
8,600,770
------------
PUERTO RICO (5.9%)
Puerto Rico Commonwealth Infrastructure Financing
Special Authority
Series A
5.50%, due 10/1/17 1,500,000 1,620,525
Puerto Rico Electric Power Authority Revenue
Series HH, Insured: FSA
5.25%, due 7/1/29 (a) 2,750,000 2,915,880
V Puerto Rico Public Buildings Authority Revenue
Guaranteed
Government Facilities
Series I
5.00%, due 7/1/36 10,000,000 10,429,300
------------
14,965,705
------------
SOUTH CAROLINA (2.9%)
Charleston County South Carolina Public
Improvement
6.125%, due 9/1/11 2,425,000 2,608,961
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SOUTH CAROLINA (CONTINUED)
South Carolina Jobs Economic Development Authority
Revenue, Bon Secours Health Systems, Inc.
5.625%, due 11/15/30 $ 4,500,000 $ 4,817,790
------------
7,426,751
------------
TENNESSEE (2.2%)
Tennessee Energy Acquisition Corp., Gas Revenue
Series A
5.25%, due 9/1/24 5,000,000 5,637,200
------------
TEXAS (7.8%)
Dallas Fort Worth Texas International Airport
Facilities
Improvement Revenue
Series A, Insured: FGIC
6.00%, due 11/1/28 (e)(h)(p) 4,000,000 4,246,960
Gainesville, Texas Independent School District,
Insured: PSFG
5.00%, due 2/15/32 (i) 1,000,000 1,058,180
5.25%, due 2/15/36 (i) 2,925,000 3,167,219
Jefferson County Texas Health Facility Development
Corp., Texas Baptist Hospitals, Insured: AMBAC
5.20%, due 8/15/21 (d) 1,090,000 1,146,909
San Antonio, Texas Electric & Gas
Series 2000
5.00%, due 2/1/17 (p) 5,040,000 5,450,861
Tarrant Regional Water District Texas Water
Revenue, Insured: FSA
5.25%, due 3/1/17 (a) 2,500,000 2,702,950
Texas State College Student Loan
5.50%, due 8/1/10 (h) 1,760,000 1,867,835
------------
19,640,914
------------
WASHINGTON (2.8%)
V Seattle, Washington Municipal Light & Power
Revenue
6.00%, due 10/1/15 (g)(p) 6,500,000 6,998,810
------------
WEST VIRGINIA (0.6%)
Kanawha Mercer Nicholas Counties West Virginia
Single Family
Mortgage Revenue
(zero coupon), due 2/1/15 (g)(j) 2,230,000 1,497,824
------------
Total Long-Term Municipal Bonds
(Cost $216,174,678) 228,608,314
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
CUMULATIVE PREFERRED STOCK (3.8%)
- ------------------------------------------------------------------------------
V Charter Mac Equity Issuer Trust
Series A-1
7.10%, due 6/30/09 (k)(p) 9,000,000 $ 9,637,650
------------
Total Cumulative Preferred Stock
(Cost $9,011,806) 9,637,650
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (7.4%)
- ------------------------------------------------------------------------------
ALASKA (1.6%)
Valdez, Alaska Marine Term Revenue, ExxonMobil
Corp.
3.52%, due 12/1/29 (l) $ 3,950,000 3,950,000
------------
IDAHO (2.2%)
Idaho Health Facilities Authority Revenue, St.
Luke's Regional Medical Center, Insured: FSA
3.56%, due 7/1/35 (a)(l) 5,470,000 5,470,000
------------
ILLINOIS (1.2%)
Illinois Finance Authority, St. Francis Hospital
Franciscan Sisters
Series B
2.30%, due 5/15/35 (l) 1,310,000 1,310,000
Joliet Regional Port District, ExxonMobil Corp.
1.16%, due 10/1/24 (l) 1,805,000 1,805,000
------------
3,115,000
------------
NEW YORK (1.3%)
Jay Street Development Corp.
Series A-2
2.879%, due 5/1/20 (l) 2,300,000 2,300,000
New York City Transitional Finance Authority
2.29%, due 8/1/31 (l) 1,100,000 1,100,000
------------
3,400,000
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
WYOMING (1.1%)
Lincoln County Wyoming Pollution Control Revenue,
ExxonMobil Corp.
Series C
3.52%, due 11/1/14 (l) $ 2,725,000 $ 2,725,000
------------
Total Short-Term Investments
(Cost $18,660,000) 18,660,000
------------
Total Investments
(Cost $243,846,484) (m) 101.9% 256,905,964(n)
Liabilities in Excess of
Cash and Other Assets (1.9) (4,834,970)
----------- ------------
Net Assets 100.0% $252,070,994
=========== ============
</Table>
<Table>
<Caption>
UNREALIZED
CONTRACTS APPRECIATION/
SHORT (DEPRECIATION) (O)
FUTURES CONTRACTS (0.0%)++
- -----------------------------------------------------------------------------
United States Treasury Bond
December 2006 (Long Bond) (150) $ 4,688
United States Treasury Note
December 2006 (10 Year) (150) (171,094)
-------------------
Total Futures Contracts
(Settlement Value $33,131,251) $ (166,406)
===================
</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.
<Table>
++ Less than one tenth of a percent.
+++ Fifty percent of the Fund's assets are maintained to cover "senior
securities transactions" which may include, but are not limited to,
forwards, TBA's, options and futures. This percentage is marked-to-market
daily against the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) FSA--Financial Security Assurance, Inc.
(b) LOC--Letter of Credit
(c) MBIA--MBIA Insurance Corp.
(d) AMBAC--Ambac Assurance Corp.
(e) FGIC--Financial Guaranty Insurance Co.
(f) XLCA--XL Capital Assurance, Inc.
(g) 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.
(h) Interest on these securities is subject to alternative minimum tax.
(i) PSFG--Permanent School Fund Guaranteed
(j) Non-income producing security.
(k) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(l) Variable rate securities that may be tendered back to the issuer at any
time prior to maturity at par.
(m) The cost for federal income tax purposes is $243,867,722.
(n) At October 31, 2006 net unrealized appreciation for securities was
$13,038,242, 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 $13,110,754 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $72,512.
(o) Represents the difference between the value of the contracts at the time
they were opened and the value at October 31, 2006.
(p) Segregated, partially segregated or designated as collateral for futures
contracts.
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value
(identified cost $243,846,484) $256,905,964
Cash 47,791
Receivables:
Interest 3,656,276
Fund shares sold 14,510
Other assets 18,128
-------------
Total assets 260,642,669
-------------
LIABILITIES:
Payables:
Investment securities purchased 7,699,112
Variation margin on futures contracts 182,813
Fund shares redeemed 143,135
Manager (See Note 3) 122,980
NYLIFE Distributors (See Note 3) 66,444
Transfer agent (See Note 3) 40,878
Professional fees 38,798
Shareholder communication 32,880
Trustees 3,233
Custodian 3,049
Accrued expenses 8,153
Dividend payable 230,200
-------------
Total liabilities 8,571,675
-------------
Net assets $252,070,994
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 205,729
Class B 46,704
Class C 6,101
Additional paid-in capital 268,014,869
Accumulated distributions in excess of net
investment income (249,684)
Accumulated net realized loss on investments
and futures transactions (28,845,799)
Net unrealized appreciation on investments and
futures contracts 12,893,074
-------------
Net assets $252,070,994
=============
CLASS A
Net assets applicable to outstanding shares $200,592,769
=============
Shares of beneficial interest outstanding 20,572,941
=============
Net asset value per share outstanding $ 9.75
Maximum sales charge (4.50% of offering price) 0.46
-------------
Maximum offering price per share outstanding $ 10.21
=============
CLASS B
Net assets applicable to outstanding shares $ 45,529,063
=============
Shares of beneficial interest outstanding 4,670,371
=============
Net asset value and offering price per share
outstanding $ 9.75
=============
CLASS C
Net assets applicable to outstanding shares $ 5,949,162
=============
Shares of beneficial interest outstanding 610,132
=============
Net asset value and offering price per share
outstanding $ 9.75
=============
</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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $12,588,782
------------
EXPENSES:
Manager (See Note 3) 1,564,622
Distribution/Service--Class A (See Note 3) 436,036
Service--Class B (See Note 3) 200,419
Service--Class C (See Note 3) 15,472
Transfer agent (See Note 3) 249,669
Distribution--Class B (See Note 3) 200,419
Distribution--Class C (See Note 3) 15,472
Shareholder communication 112,306
Professional fees 107,004
Recordkeeping 52,744
Registration 50,062
Trustees 15,444
Custodian 12,518
Miscellaneous 22,079
------------
Total expenses before waiver/reimbursement 3,054,266
Reimbursement from Manager for professional
fees (see Note 3(B) on page 25.) (35,010)
Expense waiver from Manager (See Note 3) (482,508)
------------
Net expenses 2,536,748
------------
Net investment income 10,052,034
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Security transactions 3,249,157
Futures transactions (813,886)
------------
Net realized gain on investments and futures
transactions 2,435,271
------------
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 25.) 50,000
------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 167,804
Futures contracts 605,469
------------
Net change in unrealized appreciation
(depreciation) on investments and futures
contracts 773,273
------------
Net realized and unrealized gain on investments
and futures transactions 3,258,544
------------
Net increase in net assets resulting from
operations $13,310,578
============
</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
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 10,052,034 $ 10,739,267
Net realized gain on investments
and futures transactions 2,435,271 4,503,944
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 25.) 50,000 --
Net change in unrealized
appreciation (depreciation) on
investments and futures contracts 773,273 (10,734,934)
----------------------------
Net increase in net assets
resulting from operations 13,310,578 4,508,277
----------------------------
Dividends to shareholders:
From net investment income:
Class A (6,785,506) (1,540,417)
Class B (3,026,250) (9,181,448)
Class C (227,488) (237,572)
----------------------------
Total dividends to shareholders (10,039,244) (10,959,437)
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 15,344,321 9,015,292
Class B 1,504,896 2,697,162
Class C 933,439 1,495,256
Net asset value of shares issued to
shareholders in reinvestment of dividends:
Class A 4,666,979 1,028,049
Class B 1,747,422 6,225,273
Class C 170,427 169,857
----------------------------
24,367,484 20,630,889
Cost of shares redeemed:
Class A (26,064,368) (8,585,569)
Class B (20,983,964) (36,917,542)
Class C (1,464,518) (1,285,982)
----------------------------
(48,512,850) (46,789,093)
Net asset value of shares converted (see Note 1):
Class A 166,833,101 --
Class B (166,833,101) --
Decrease in net assets derived
from capital share transactions (24,145,366) (26,158,204)
----------------------------
Net decrease in net assets (20,874,032) (32,609,364)
</Table>
<Table>
<Caption>
2006 2005
NET ASSETS:
Beginning of year $ 272,945,026 $305,554,390
----------------------------
End of year $ 252,070,994 $272,945,026
============================
Accumulated distributions in excess
of net investment income at end of
year $ (249,684) $ (262,474)
============================
</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.
This page intentionally left blank
www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 9.62 $ 9.84 $ 9.75 $ 10.02 $ 9.62 $ 9.68
-------- ------- ------- ----------- ------- -------
Net investment income 0.38 (a) 0.38 0.38 0.30 0.41 0.45
Net realized and unrealized
gain (loss) on investments 0.13 (e) (0.21) 0.07 (0.25) 0.40 (0.06)
-------- ------- ------- ----------- ------- -------
Total from investment
operations 0.51 0.17 0.45 0.05 0.81 0.39
-------- ------- ------- ----------- ------- -------
Less dividends:
From net investment income (0.38) (0.39) (0.36) (0.32) (0.41) (0.45)
-------- ------- ------- ----------- ------- -------
Net asset value at end of
period $ 9.75 $ 9.62 $ 9.84 $ 9.75 $ 10.02 $ 9.62
======== ======= ======= =========== ======= =======
Total investment return (b) 5.43%(d)(e) 1.77% 4.71% 0.54%(c) 8.61% 4.04%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.93% 3.92% 3.88% 3.64%+ 4.19% 4.59%
Net expenses 0.89% 0.89% 1.02% 1.04%+ 1.03% 1.03%
Expenses (before
waiver/reimbursement) 1.09%(d) 1.06% 1.06% -- -- --
Portfolio turnover rate 55% 26% 18% 34% 39% 57%
Net assets at end of period
(in 000's) $200,593 $38,508 $37,936 $42,712 $46,131 $39,760
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 9.62 $ 9.85 $ 9.75 $10.02 $ 9.62 $ 9.68
------ ------ ------ ----------- ------ ------
Net investment income 0.36 (a) 0.36 0.36 0.28 0.39 0.42
Net realized and unrealized
gain (loss) on investments 0.13 (e) (0.22) 0.08 (0.25) 0.40 (0.06)
------ ------ ------ ----------- ------ ------
Total from investment
operations 0.49 0.14 0.44 0.03 0.79 0.36
------ ------ ------ ----------- ------ ------
Less dividends:
From net investment income (0.36) (0.37) (0.34) (0.30) (0.39) (0.42)
------ ------ ------ ----------- ------ ------
Net asset value at end of
period $ 9.75 $ 9.62 $ 9.85 $ 9.75 $10.02 $ 9.62
====== ====== ====== =========== ====== ======
Total investment return (b) 5.16%(d)(e) 1.41% 4.55% 0.32%(c) 8.34% 3.79%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.68% 3.67% 3.63% 3.39%+ 3.94% 4.34%
Net expenses 1.14% 1.14% 1.27% 1.29%+ 1.28% 1.28%
Expenses (before
waiver/reimbursement) 1.34%(d) 1.31% 1.31% -- -- --
Portfolio turnover rate 55% 26% 18% 34% 39% 57%
Net assets at end of period
(in 000's) $5,949 $6,231 $5,992 $5,840 $7,555 $1,586
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges.
(c) Total return is not annualized.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundred of a percent. (See Note 3 (B) on page 25.)
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were less than $0.01 per share
on net realized gains on investments; and the effect on total investment return was less
than 0.01%. (See Note 3(B) on page 25.)
</Table>
20 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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 9.62 $ 9.85 $ 9.75 $ 10.02 $ 9.62 $ 9.68
------- -------- -------- ----------- -------- --------
0.36 (a) 0.36 0.36 0.28 0.39 0.42
0.13 (e) (0.22) 0.08 (0.25) 0.40 (0.06)
------- -------- -------- ----------- -------- --------
0.49 0.14 0.44 0.03 0.79 0.36
------- -------- -------- ----------- -------- --------
(0.36) (0.37) (0.34) (0.30) (0.39) (0.42)
------- -------- -------- ----------- -------- --------
$ 9.75 $ 9.62 $ 9.85 $ 9.75 $ 10.02 $ 9.62
======= ======== ======== =========== ======== ========
5.16%(d)(e) 1.41% 4.55% 0.32%(c) 8.34% 3.79%
3.68% 3.67% 3.63% 3.39%+ 3.94% 4.34%
1.14% 1.14% 1.27% 1.29%+ 1.28% 1.28%
1.34%(d) 1.31% 1.31% -- -- --
55% 26% 18% 34% 39% 57%
$45,529 $228,206 $261,626 $297,458 $323,349 $314,867
</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 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 Tax Free
Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares commenced on
January 3, 1995, Class B shares commenced on May 1, 1986 and Class C shares
commenced 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 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 a 1% contingent deferred sales charge may be
imposed on redemptions made within one year of purchase of Class C shares. As
approved by the Board of Trustees in 1997, Class B shares convert to Class A
shares eight years after the date they were purchased. The first conversion
occurred December 28, 2005. The three 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 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, as defined in Note 3,
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 trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time). 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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund did not hold securities that were valued
in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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 reclassification between
accumulated net realized gain and additional
22 MainStay Tax Free Bond Fund
paid-in-capital, arising from permanent differences; net assets at October 31,
2006 are not affected.
<Table>
<Caption>
ACCUMULATED ADDITIONAL
NET REALIZED PAID-IN-
LOSS CAPITAL
$ (49,999) $49,999
-------------------------
</Table>
The reclassification for the Fund is primarily due to the reimbursement payment
(See Note 9 on page 26).
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued as earned, using the effective interest rate method. Discounts and
premiums on securities, other than short-term securities, purchased for the Fund
are accreted and amortized, respectively, on the effective interest rate method
over the life of the respective securities or, in the case of a callable
security, over the period to the first date of call. Discounts and premiums on
short-term securities are accreted and amortized, respectively, on the straight
line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) 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 price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. 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.
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.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(I) 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.
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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 voluntarily agreed to
waive its management fee by 0.15% to 0.45% on assets up to $1.0 billion, and
0.40% on assets in excess of $1.0 billion.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total operating
expenses (total annual 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, 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 written expense limitation
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. For the year ended October 31, 2006, the
Manager earned fees from the Fund in the amount of $1,564,622 and waived its
fees in the amount of $482,508.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$30,280 $91,353 $121,633
- -------------------------------------------------------------
</Table>
*The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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
24 MainStay Tax Free Bond Fund
to reimburse expenses of the Fund, the Subadvisor has voluntarily agreed to do
so proportionately.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 9 on page
26).
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Tax Free Bond Fund was $35,010. Additional
payments were made by affiliates relating to the shareholder trading matters.
Further discussion regarding these payments by affiliates can be found below in
the footnote relating to "Other Matters."
(C) 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 and 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.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $21,300 for the year ended
October 31, 2006. 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 $715, $69,471 and $1,238, respectively, for the year ended October 31,
2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $249,669.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 52,277 0.0*%
- ---------------------------------------------------------------
Class C 106 0.0*
- ---------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $7,417.
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
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $52,744 for the year
ended October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
The Fund has maintained a year end of December 31 for federal income tax
purposes.
As of October 31, 2006, 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
$1,754 $(29,012,205) $(230,200) $13,038,242 $(16,202,409)
--------------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to the tax treatment of futures transactions.
The other temporary differences are primarily due to distribution payable.
At October 31, 2006, for federal income tax purposes, capital loss carryforwards
of $29,012,205 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 $ 4,964
2008 15,453
2011 8,117
2012 478
-------------------------------------------
$29,012
-------------------------------------------
</Table>
The Fund utilized $3,032,928 of capital loss carryforwards during the year ended
October 31, 2006.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary income $ 3,255 $ --
Exempt Interest Dividends 10,035,989 10,959,437
- -------------------------------------------------------------
$10,039,244 $10,959,437
- -------------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
IBT 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.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $143,458 and $159,515, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C
Shares sold 1,521 156 97
- ---------------------------------------------------------------------
Shares issued in reinvestment of
dividends 485 182 18
- ---------------------------------------------------------------------
2,006 338 115
Shares redeemed (2,635) (2,182) (152)
- ---------------------------------------------------------------------
Shares converted (See Note 1) 17,199 (17,199) --
- ---------------------------------------------------------------------
Net increase (decrease) 16,570 (19,043) (37)
- ---------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
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>
NOTE 9--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005
26 MainStay Tax Free Bond Fund
financial statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$50,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
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 Tax Free Bond Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2006, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
28 MainStay Tax Free Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, underperformance when compared
over various time periods with groupings of funds having similar mandates, and
measures that the Subadvisor had taken with respect to enhancing its credit
analysis processes.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher invest-
www.mainstayfunds.com 29
ment minimums for some share classes. The Trustees discussed additional measures
that may increase average shareholder account size and/or otherwise reduce the
Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund had not reached the asset level at which the
breakpoint would reduce the Fund's management fee rate. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including separate institutional
accounts having investment strategies similar to that of the Fund, and took
account of explanations and other information relating to the fees and expenses
of those other funds and accounts. The Trustees considered the current and
proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust. The
Trustees noted the Manager's agreement to waive a certain portion of its
management fee, and to maintain a limit on the Fund's net expenses at a certain
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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
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, 2006
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 AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
www.mainstayfunds.com 31
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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."
32 MainStay Tax Free Bond Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 33
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
34 MainStay Tax Free Bond Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO9806 (RECYCLE LOGO) MS377-06 MST11-12/06
13
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TOTAL RETURN FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TOTAL RETURN FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 23
- --------------------------------------------------------------------------------
Notes to Financial Statements 28
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 35
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 36
- --------------------------------------------------------------------------------
Federal Income Tax Information 38
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 38
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 38
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 39
- --------------------------------------------------------------------------------
Trustees and Officers 40
</Table>
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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 4.45% 3.33% 5.28%
Excluding sales charges 10.53 4.50 5.88
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN CORE TOTAL RETURN GROWTH
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ----------------- ------------------- -------------
10/31/96 9450 10000 10000 10000
11187 12243 12175 13211
12809 14221 14494 16117
15424 16375 17394 20253
17018 17787 18987 21487
13422 15774 14999 16136
11767 14784 13575 13698
13415 17059 15627 16548
13958 18400 16304 18107
15135 19644 17252 19686
10/31/06 16728 21928 18740 22903
</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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 4.74% 3.38% 5.13%
Excluding sales charges 9.74 3.72 5.13
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN CORE TOTAL RETURN GROWTH
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ----------------- ------------------- -------------
10/31/96 10000 10000 10000 10000
11785 12243 12175 13211
13385 14221 14494 16117
16002 16375 17394 20253
17545 17787 18987 21487
13740 15774 14999 16136
11947 14784 13575 13698
13522 17059 15627 16548
13963 18400 16304 18107
15033 19644 17252 19686
10/31/06 16496 21928 18740 22903
</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 as 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. These fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of any management fee
waivers or expense reimbursements from the Fund pursuant to this agreement if
such action does not cause the Fund to exceed existing expense limitations and
the recoupment is made within three years after the year in which the Manager
incurred the expense. Prior to 9/1/98 (for Class C shares) and 12/31/03 (for
Class I shares), performance for Class C and Class 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 C and 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 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
With sales charges 8.69% 3.70% 5.12%
Excluding sales charges 9.69 3.70 5.12
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN CORE TOTAL RETURN GROWTH
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ----------------- ------------------- -------------
10/31/96 10000 10000 10000 10000
11785 12243 12175 13211
13385 14221 14494 16117
16002 16375 17394 20253
17545 17787 18987 21487
13740 15774 14999 16136
11947 14784 13575 13698
13522 17059 15627 16548
13963 18400 16304 18107
15025 19644 17252 19686
10/31/06 16480 21928 18740 22903
</Table>
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
11.11% 4.97% 6.29%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN CORE TOTAL RETURN GROWTH
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ----------------- ------------------- -------------
10/31/96 10000 10000 10000 10000
11904 12243 12175 13211
13661 14221 14494 16117
16493 16375 17394 20253
18263 17787 18987 21487
14447 15774 14999 16136
12684 14784 13575 13698
14507 17059 15627 16548
15128 18400 16304 18107
16567 19644 17252 19686
10/31/06 18408 21928 18740 22903
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Total Return Growth Composite Index(2) 8.62% 4.55% 6.48%
Total Return Core Composite Index(3) 11.62 6.81 8.17
S&P 500(R) Index(4) 16.34 7.26 8.64
Average Lipper mixed-asset target allocation growth
fund(5) 12.47 6.59 7.21
</Table>
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 32
of the Notes to Financial Statements for further explanation). The effect on
total return (excluding sales charges) was less than 0.01%.
2. The Fund's Total Return Growth Composite Index consists 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 consists 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
in an index.
3. The Fund's Total Return Core Composite Index consists 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 in an index.
4. "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 in an index.
5. 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.
6 MainStay Total Return Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,024.55 $6.07 $1,019.05 $6.06
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,020.70 $9.88 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,020.70 $9.88 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,026.40 $3.78 $1,021.30 $3.77
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.19% for Class A, 1.94% for Class B and Class C, and 0.74% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period). In the absence of
waivers and/or reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-
TERM
INVESTMENTS
(COLLATERAL
U.S. FROM
GOVERNMENT SECURITIES
& LENDING MORTGAGE- ASSET-
COMMON FEDERAL IS CORPORATE FOREIGN BACKED CONVERTIBLE BACKED INVESTMENT
STOCKS AGENCIES 9.3%) BONDS BONDS SECURITIES BONDS SECURITIES COMPANY
- ------ ---------- ----------- --------- ------- ---------- ----------- ---------- ----------
62 23.1 13.2** 5.1 2.6 2.1 1.2 1.1 0.2
<Caption>
LIABILITIES
IN
EXCESS
OF
LOAN CASH
ASSIGNMENTS CONVERTIBLE AND
& MUNICIPAL YANKEE PREFERRED PREFERRED OTHER
PARTICIPATIONS BOND BONDS STOCKS STOCK ASSETS
-------------- --------- ------ ----------- --------- -----------
0.1 0.1 0.1 0.0* 0.0* (10.9)
</Table>
* Less than one-tenth of a percent.
** Includes 0.5% in Investment Company securities.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Bank of America Corp.
2. Citigroup, Inc.
3. Pfizer, Inc.
4. United States Treasury Note, 4.50%, due 2/15/09
5. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 6/1/33
6. Johnson & Johnson
7. PMI Group, Inc. (The)
8. JPMorgan Chase & Co.
9. Federal National Mortgage Association, 4.00%,
due 9/2/08
10. Federal Home Loan Mortgage Corporation (Mortgage
Pass-Through Security), 5.50%, due 1/1/21
</Table>
8 MainStay Total Return Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Edmund C. Spelman, Richard A. Rosen,
CFA, Joseph Portera, and Gary Goodenough of MacKay Shields LLC
HOW DID MAINSTAY TOTAL RETURN FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Total Return Fund returned 10.53% for
Class A shares, 9.74% for Class B shares, and 9.69% for Class C shares for the
12 months ended October 31, 2006. Over the same period, the Fund's Class I
shares returned 11.11%. All share classes underperformed the 11.62% return of
the Total Return Core Composite Index,(1) the Fund's broad-based
securities-market index, for the 12-month period. All share classes also
underperformed the 12.47% return of the average Lipper(2) mixed-asset target
allocation growth fund for the 12 months ended October 31, 2006.(3)
WHAT WERE THE STRONGEST-PERFORMING SECTORS IN THE EQUITY PORTION OF THE FUND
DURING THE REPORTING PERIOD AND WHICH SECTORS WERE THE WEAKEST?
The Fund invests in growth and value stocks. Effective stock selection in the
industrials, energy, and materials sectors made the greatest positive
contributions to the Fund's results relative to the Russell 1000(R) Index,(4)
the equity component of the Fund's broad-based securities-market index, the
Total Return Core Composite Index. The sectors that detracted the most from
relative performance in the equity portion of the Fund were financials,
telecommunication services, and consumer discretionary.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE
FUND'S PERFORMANCE AND WHICH STOCKS DETRACTED?
Among the Fund's strongest-performing equity holdings was mining company Inco,
which advanced on rising nickel prices and a series of acquisition bids. Another
strong equity holding was Comcast, which benefited from its "triple-play"
offering of video, high-speed Internet service, and phone service. Other
positive contributors to equity performance included Bank of America in the
financials sector, Pfizer in the pharmaceuticals industry, and Transocean in the
energy sector.
The biggest detractors from relative performance in the equity portion of the
Fund were in the telecommunication services sector, largely because of weakness
at wireless carrier Sprint Nextel. Other equity holdings that hurt the Fund's
relative performance included UnitedHealth Group, Omnicare, Yahoo!, and BJ
Services.
WERE THERE ANY SIGNIFICANT EQUITY PURCHASES OR SALES DURING THE REPORTING
PERIOD?
In the information technology sector, the Fund initiated new positions in Akamai
Technologies and Cisco Systems during the reporting period. In the consumer
discretionary sector, we added Comcast and News Corp.
The Fund sold its position in Inco when the company's shares moved to our price
target. The Fund also eliminated its positions in Yahoo!, eBay, D.R. Horton,
Chico's FAS, and Lennar. We reduced the Fund's positions in Comcast and
Transocean as these stocks neared our price targets. We also reduced the Fund's
exposure to Sprint Nextel in light of the company's disappointing acquisition
integration.
HOW DID YOU POSITION THE BOND PORTION OF THE FUND DURING THE REPORTING PERIOD?
We maintained an overweighted position in bonds relative to the Total Return
Core Composite Index. We particularly favored mortgage-backed and asset-backed
securities, which we expected to perform well for two reasons. First, interest
rates clung to a rather narrow range during the reporting period. Second,
collateral--or the properties or assets used to secure loans or other
credits--remained generally healthy. The latter was especially true of
commercial
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 principal risk of investing in value
stocks is that they may never reach what the portfolio manager believes is their
full value or they may even go down in value. The principal risk of growth
stocks is that investors expect growth companies to increase their earnings at a
certain rate that is generally higher than the rate expected for nongrowth
companies. If these expectations are not met, the market price of the stock may
decline significantly, even if earnings showed an absolute increase. The Fund
may experience a portfolio turnover rate of more than 100% and may generate
taxable short-term capital gains. Funds that invest in bonds are subject to
credit, inflation, and interest-rate risk and can lose principal value when
interest rates rise.
1. See footnote on page 6 for more information on the Fund's Total Return Core
Composite Index.
2. See footnote on page 6 for more information on Lipper Inc.
3. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 6.
4. See footnote 3 on page 6 for more information on the Russell 1000(R) Index.
www.mainstayfunds.com 9
real estate, where fundamentals held firm. We expected slower price appreciation
in the housing market to help residential mortgage-backed securities, since
borrowers would have fewer refinancing options and underlying future cash flows
would tend to stabilize.
DID THE FUND'S BOND-SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
Throughout the reporting period, we maintained overweighted positions in
securitized holdings, including mortgage-backed and asset-backed securities. The
Fund's positions in commercial mortgage-backed securities and asset-backed
securities added value. The Fund's overweighted position in Ginnie Mae
securities proved less successful. Reduced demand from foreign investors caused
the price of these residential mortgage-backed securities to decline. We reduced
the Fund's exposure to Ginnie Mae securities by the end of October 2006.
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 forecast
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 Total Return Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (35.5%)+
ASSET-BACKED SECURITIES (1.1%)
- ------------------------------------------------------------------------------
CONSUMER FINANCE (0.3%)
Harley-Davidson Motorcycle Trust Series 2004-1,
Class A2
2.53%, due 11/15/11 $ 2,349,804 $ 2,288,329
------------
CONSUMER LOANS (0.2%)
Atlantic City Electric Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 1,600,000 1,640,676
------------
DIVERSIFIED FINANCIAL SERVICES (0.4%)
Bank of America Credit Card Trust Series 2006-C4,
Class C4
5.55%, due 11/15/11 (a) 745,000 744,810
Dunkin Securitization
Series 2006-1, Class A2
5.779%, due 6/20/31 (b) 630,000 640,593
Murcie Lago International, Ltd.
Series 2006-1X, Class A
5.556%, due 3/27/11 (a) 505,000 505,591
Structured Asset Investment Loan Trust Series
2006-3, Class A4
5.42%, due 6/25/36 (a) 710,000 710,664
------------
2,601,658
------------
ELECTRIC (0.1%)
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 121,030 132,527
Public Service New Hampshire Funding LLC
Pass-Through Certificates
Series 2002-1, Class A
4.58%, due 2/1/10 601,858 599,032
------------
731,559
------------
HOME EQUITY (0.1%)
Citicorp Residential Mortgage Securities, Inc.
Series 2006-1, Class A3
5.706%, due 7/25/36 (a) 765,000 769,267
------------
Total Asset-Backed Securities
(Cost $8,042,443) 8,031,489
------------
CONVERTIBLE BONDS (1.2%)
- ------------------------------------------------------------------------------
BIOTECHNOLOGY (0.1%)
Amgen, Inc.
0.125%, due 2/1/11 (b) 890,000 932,275
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DISTRIBUTION & WHOLESALE (0.1%)
Costco Wholesale Corp.
(zero coupon), due 8/19/17 $ 725,000 $ 882,687
------------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
Merrill Lynch & Co., Inc.
(zero coupon), due 3/13/32 765,000 960,763
------------
INSURANCE (0.0%)++
Conseco, Inc.
3.50%, due 9/30/35
(zero coupon), beginning 9/30/10 65,000 66,219
------------
LODGING (0.1%)
Hilton Hotels Corp.
3.375%, due 4/15/23 680,000 915,450
------------
MEDIA (0.1%)
Liberty Media Corp.
3.50%, due 1/15/31 790,000 827,525
------------
OIL & GAS SERVICES (0.3%)
Halliburton Co.
3.125%, due 7/15/23 455,000 801,369
Schlumberger, Ltd.
1.50%, due 6/1/23 525,000 928,594
------------
1,729,963
------------
PHARMACEUTICALS (0.3%)
ALZA Corp.
(zero coupon), due 7/28/20 970,000 903,312
Teva Pharmaceutical Finance LLC
Series C
0.25%, due 2/1/26 600,000 579,750
Wyeth
5.109%, due 1/15/24 (a) 795,000 870,684
------------
2,353,746
------------
Total Convertible Bonds
(Cost $8,220,445) 8,668,628
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (5.1%)
- ------------------------------------------------------------------------------
ADVERTISING (0.0%)++
Lamar Media Corp.
6.625%, due 8/15/15 $ 75,000 $ 72,187
------------
AEROSPACE & DEFENSE (0.0%)++
Sequa Corp.
8.875%, due 4/1/08 95,000 98,562
------------
AGRICULTURE (0.0%)++
Reynolds American, Inc.
7.625%, due 6/1/16 (b) 45,000 47,780
7.75%, due 6/1/18 (b) 55,000 58,736
------------
106,516
------------
AIRLINES (0.1%)
Delta Air Lines, Inc.
8.30%, due 12/15/29 (c) 40,000 14,600
10.375%, due 12/15/22 (c) 100,000 36,000
Southwest Airlines Co.
5.125%, due 3/1/17 800,000 760,802
------------
811,402
------------
AUTO PARTS & EQUIPMENT (0.1%)
Collins & Aikman Products Co.
12.875%, due 8/15/12 (b)(c)(d) 75,000 94
FleetPride Corp.
11.50%, due 10/1/14 (b) 140,000 140,350
Goodyear Tire & Rubber Co. (The)
11.25%, due 3/1/11 80,000 88,000
Tenneco Automotive, Inc.
8.625%, due 11/15/14 (e) 80,000 80,600
------------
309,044
------------
BANKS (0.2%)
HSBC Bank USA N.A.
4.625%, due 4/1/14 1,005,000 963,428
USB Capital IX
6.189%, due 4/15/11 (a) 200,000 204,203
------------
1,167,631
------------
BEVERAGES (0.0%)++
Constellation Brands, Inc.
7.25%, due 9/1/16 80,000 81,300
------------
BUILDING MATERIALS (0.0%)++
U.S. Concrete, Inc.
8.375%, due 4/1/14 45,000 43,200
------------
CHEMICALS (0.1%)
Equistar Chemicals, L.P.
7.55%, due 2/15/26 90,000 82,800
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CHEMICALS (CONTINUED)
IMC Global, Inc.
Series B
10.875%, due 6/1/08 $ 100,000 $ 107,875
Lyondell Chemical Co.
9.50%, due 12/15/08 150,000 153,937
Millennium America, Inc.
7.625%, due 11/15/26 110,000 97,075
Reichhold Industries, Inc.
9.00%, due 8/15/14 (b) 20,000 19,900
Terra Capital, Inc.
12.875%, due 10/15/08 60,000 67,050
Tronox Worldwide LLC/
Tronox Finance Corp.
9.50%, due 12/1/12 70,000 72,275
------------
600,912
------------
COAL (0.0%)++
Peabody Energy Corp.
7.375%, due 11/1/16 55,000 57,200
7.875%, due 11/1/26 35,000 36,312
------------
93,512
------------
COMMERCIAL SERVICES (0.0%)++
Service Corp. International
7.375%, due 10/1/14 (b) 55,000 56,512
7.625%, due 10/1/18 (b) 55,000 56,512
------------
113,024
------------
COMPUTERS (0.0%)++
SunGard Data Systems, Inc.
3.75%, due 1/15/09 55,000 51,287
------------
DIVERSIFIED FINANCIAL SERVICES (1.3%)
American Real Estate Partners, L.P./ American Real
Estate Finance Corp.
8.125%, due 6/1/12 270,000 276,075
Bear Stearns Cos., Inc. (The)
2.875%, due 7/2/08 1,100,000 1,060,190
Citigroup, Inc.
5.00%, due 9/15/14 1,765,000 1,723,978
Ford Motor Credit Co.
7.375%, due 10/28/09 70,000 68,136
7.875%, due 6/15/10 5,000 4,879
General Motors Acceptance Corp.
5.125%, due 5/9/08 600,000 589,277
6.75%, due 12/1/14 (e) 70,000 69,401
8.00%, due 11/1/31 140,000 150,006
Goldman Sachs Group, L.P.
5.00%, due 10/1/14 790,000 767,692
HSBC Finance Corp.
4.125%, due 11/16/09 1,165,000 1,130,009
4.75%, due 4/15/10 760,000 750,165
</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)
- ------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
LaBranche & Co., Inc.
11.00%, due 5/15/12 $ 30,000 $ 32,400
OMX Timber Finance Investments LLC
Series 1
5.42%, due 1/29/20 (b) 350,000 339,682
Rainbow National Services LLC
8.75%, due 9/1/12 (b) 75,000 78,844
Residential Capital Corp.
6.375%, due 6/30/10 1,280,000 1,299,053
6.50%, due 4/17/13 450,000 457,939
------------
8,797,726
------------
ELECTRIC (0.4%)
AES Corp. (The)
9.00%, due 5/15/15 (b) 255,000 274,444
Calpine Corp.
8.50%, due 7/15/10 (b)(c) 63,000 65,835
Kiowa Power Partners LLC
Series B
5.737%, due 3/30/21 (b) 780,000 755,453
NiSource Finance Corp.
5.25%, due 9/15/17 800,000 753,228
5.45%, due 9/15/20 600,000 560,083
NRG Energy, Inc.
7.25%, due 2/1/14 15,000 15,169
7.375%, due 2/1/16 30,000 30,337
Tenaska Virginia Partners, L.P.
6.119%, due 3/30/24 (b) 485,449 493,211
------------
2,947,760
------------
ELECTRONICS (0.0%)++
Fisher Scientific International, Inc.
6.75%, due 8/15/14 125,000 127,344
------------
ENTERTAINMENT (0.0%)++
Gaylord Entertainment Co.
8.00%, due 11/15/13 105,000 106,837
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 (b) 70,000 69,475
Mohegan Tribal Gaming Authority
6.375%, due 7/15/09 60,000 59,850
------------
236,162
------------
ENVIRONMENTAL CONTROL (0.0%)++
Geo Sub Corp.
11.00%, due 5/15/12 60,000 62,100
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREST PRODUCTS & PAPER (0.0%)++
Georgia-Pacific Corp.
7.75%, due 11/15/29 $ 15,000 $ 14,812
8.00%, due 1/15/24 20,000 20,100
8.875%, due 5/15/31 30,000 31,725
------------
66,637
------------
HEALTH CARE--SERVICES (0.2%)
Alliance Imaging, Inc.
7.25%, due 12/15/12 (e) 40,000 37,400
Ameripath, Inc.
10.50%, due 4/1/13 50,000 53,750
HCA, Inc.
8.75%, due 9/1/10 135,000 136,350
Quest Diagnostics, Inc.
5.45%, due 11/1/15 1,060,000 1,029,946
Triad Hospitals, Inc.
7.00%, due 5/15/12 105,000 104,212
------------
1,361,658
------------
HOLDING COMPANIES--DIVERSIFIED (0.0%)++
Kansas City Southern Railway
9.50%, due 10/1/08 65,000 68,331
------------
INSURANCE (0.2%)
Allstate Corp. (The)
5.95%, due 4/1/36 350,000 357,219
Crum & Forster Holdings Corp.
10.375%, due 6/15/13 70,000 72,625
Fund American Cos., Inc.
5.875%, due 5/15/13 595,000 594,851
------------
1,024,695
------------
IRON & STEEL (0.0%)++
United States Steel Corp.
9.75%, due 5/15/10 100,000 106,375
------------
LEISURE TIME (0.0%)++
Town Sports International, Inc.
9.625%, due 4/15/11 85,000 89,675
------------
LODGING (0.1%)
Boyd Gaming Corp.
7.75%, due 12/15/12 135,000 138,712
MGM Mirage, Inc.
8.50%, due 9/15/10 115,000 121,756
MTR Gaming Group, Inc.
Series B
9.75%, due 4/1/10 65,000 68,250
Park Place Entertainment Corp.
9.375%, due 2/15/07 175,000 176,312
------------
505,030
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
MACHINERY--CONSTRUCTION & MINING (0.2%)
Caterpillar, Inc.
6.05%, due 8/15/36 $ 1,300,000 $ 1,362,774
------------
MEDIA (0.2%)
Houghton Mifflin Co.
7.20%, due 3/15/11 75,000 75,656
Morris Publishing Group LLC
7.00%, due 8/1/13 75,000 71,344
Nielsen Finance LLC/Nielsen Finance Co.
10.00%, due 8/1/14 (b) 45,000 46,913
Paxson Communications Corp.
8.624%, due 1/15/12 (a)(b) 30,000 30,338
11.624%, due 1/15/13 (a)(b) 55,000 55,069
Time Warner Entertainment Co., L.P.
10.15%, due 5/1/12 765,000 913,399
Viacom, Inc.
6.25%, due 4/30/16 400,000 400,620
Ziff Davis Media, Inc.
11.489%, due 5/1/12 (a) 70,000 67,025
------------
1,660,364
------------
MINING (0.1%)
Southern Copper Corp.
7.50%, due 7/27/35 400,000 427,668
------------
MISCELLANEOUS--MANUFACTURING (0.0%)++
RBS Global, Inc./Rexnord Corp.
9.50%, due 8/1/14 (b) 85,000 87,975
------------
OIL & GAS (0.7%)
Chaparral Energy, Inc.
8.50%, due 12/1/15 130,000 129,675
Chesapeake Energy Corp.
6.50%, due 8/15/17 135,000 127,238
6.875%, due 11/15/20 5,000 4,750
Enterprise Products Operating, L.P.
Series B
6.65%, due 10/15/34 520,000 532,683
Gazprom International S.A.
7.201%, due 2/1/20 (b) 725,000 761,613
Hilcorp Energy I, L.P./Hilcorp Finance Co.
9.00%, due 6/1/16 (b) 70,000 72,450
Pemex Project Funding Master Trust
6.625%, due 6/15/35 630,000 635,670
PetroHawk Energy Corp.
9.125%, due 7/15/13 (b) 45,000 45,900
Plains Exploration & Production Co.
7.125%, due 6/15/14 75,000 80,438
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
OIL & GAS (CONTINUED)
Pogo Producing Co.
6.625%, due 3/15/15 $ 65,000 $ 61,913
6.875%, due 10/1/17 190,000 180,975
Pride International, Inc.
7.375%, due 7/15/14 35,000 36,138
Ras Laffan Liquefied Natural
Gas Co., Ltd. III
6.332%, due 9/30/27 (b) 875,000 905,581
Sunoco Logistics Partners Operations, L.P.
6.125%, due 5/15/16 1,365,000 1,386,117
Whiting Petroleum Corp.
7.00%, due 2/1/14 125,000 123,125
------------
5,084,266
------------
OIL & GAS SERVICES (0.0%)++
Allis-Chalmers Energy, Inc.
9.00%, due 1/15/14 (b) 50,000 49,875
------------
PACKAGING & CONTAINERS (0.0%)++
Berry Plastics Holding Corp.
8.875%, due 9/15/14 (b) 70,000 70,700
Owens-Brockway Glass Container, Inc.
7.75%, due 5/15/11 65,000 66,950
8.75%, due 11/15/12 5,000 5,275
Owens-Illinois, Inc.
8.10%, due 5/15/07 60,000 60,450
------------
203,375
------------
PHARMACEUTICALS (0.3%)
Medco Health Solutions, Inc.
7.25%, due 8/15/13 1,180,000 1,282,002
Teva Pharmaceutical Finance LLC
5.55%, due 2/1/16 540,000 531,602
------------
1,813,604
------------
PIPELINES (0.1%)
ANR Pipeline Co.
9.625%, due 11/1/21 55,000 68,450
Copano Energy LLC
8.125%, due 3/1/16 70,000 71,225
El Paso Natural Gas Co.
7.50%, due 11/15/26 95,000 100,389
El Paso Production Holding Co.
7.75%, due 6/1/13 75,000 76,875
MarkWest Energy Partners, L.P./ MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 125,000 117,500
8.50%, due 7/15/16 (b) 15,000 15,113
</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
CORPORATE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
PIPELINES (CONTINUED)
Pacific Energy Partners, L.P./
Pacific Energy Finance Corp.
7.125%, due 6/15/14 $ 70,000 $ 70,788
------------
520,340
------------
REAL ESTATE (0.0%)++
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 134,000 142,710
------------
REAL ESTATE INVESTMENT TRUSTS (0.0%)++
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 75,000 75,094
------------
RETAIL (0.2%)
CVS Corp.
5.789%, due 1/10/26 (b) 321,220 316,492
Rite Aid Corp.
7.50%, due 1/15/15 75,000 71,344
Star Gas Partners, L.P./
Star Gas Finance Co.
Series B
10.25%, due 2/15/13 54,000 56,025
Toys "R" Us, Inc.
7.625%, due 8/1/11 40,000 34,600
8.75%, due 9/1/21 5,000 4,663
Wal-Mart Stores, Inc.
4.50%, due 7/1/15 50,000 47,425
5.25%, due 9/1/35 815,000 766,608
------------
1,297,157
------------
SAVINGS & LOANS (0.2%)
Washington Mutual Bank
5.95%, due 5/20/13 1,375,000 1,405,819
------------
SEMICONDUCTORS (0.0%)++
MagnaChip Semiconductor S.A.
8.64%, due 12/15/11 (a) 225,000 193,500
------------
SOFTWARE (0.1%)
Computer Associates International, Inc.
5.25%, due 12/1/09 (b) 880,000 857,044
------------
TELECOMMUNICATIONS (0.2%)
Ameritech Capital Funding Corp.
6.25%, due 5/18/09 320,000 324,812
Dobson Cellular Systems, Inc.
8.375%, due 11/1/11 35,000 36,356
8.375%, due 11/1/11 (b) 35,000 36,356
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TELECOMMUNICATIONS (CONTINUED)
GCI, Inc.
7.25%, due 2/15/14 $ 90,000 $ 87,300
Lucent Technologies, Inc.
6.45%, due 3/15/29 415,000 371,425
PanAmSat Corp.
9.00%, due 8/15/14 37,000 38,665
9.00%, due 6/15/16 (b) 90,000 94,050
Qwest Communications International, Inc.
7.25%, due 2/15/11 70,000 71,050
Qwest Corp.
7.125%, due 11/15/43 20,000 18,800
7.25%, due 9/15/25 45,000 44,775
7.50%, due 10/1/14 (b) 145,000 151,888
8.875%, due 3/15/12 30,000 33,000
------------
1,308,477
------------
TEXTILES (0.1%)
INVISTA
9.25%, due 5/1/12 (b) 80,000 85,000
Mohawk Industries, Inc.
6.125%, due 1/15/16 525,000 522,575
------------
607,575
------------
TRANSPORTATION (0.0%)++
Gulfmark Offshore, Inc.
7.75%, due 7/15/14 50,000 50,250
------------
Total Corporate Bonds
(Cost $35,920,298) 36,089,937
------------
FOREIGN BONDS (2.6%)
- ------------------------------------------------------------------------------
BEVERAGES (0.2%)
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 430,000 425,773
SABMiller PLC
6.20%, due 7/1/11 (b) 1,080,000 1,109,284
------------
1,535,057
------------
BUILDING MATERIALS (0.2%)
Hanson PLC
6.125%, due 8/15/16 1,000,000 1,018,072
------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.3%)
National RMBS Trust
Series 2006-3, Class A1
5.444%, due 10/20/37 (a)(b) 1,840,000 1,840,000
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS (CONTINUED)
- ------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
Tengizchevroil Finance Co. S.A.R.L.
6.124%, due 11/15/14 (b) $ 350,000 $ 348,250
TNK-BP Finance S.A.
7.50%, due 7/18/16 (b) 920,000 962,557
------------
1,310,807
------------
ELECTRIC (0.1%)
SP PowerAssets, Ltd.
5.00%, due 10/22/13 (b) 625,000 614,966
------------
ELECTRONICS (0.0%)++
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14 (b) 100,000 101,500
9.50%, due 10/15/15 (b)(e) 150,000 151,313
------------
252,813
------------
FOREIGN SOVEREIGN (0.1%)
Republic of Panama
6.70%, due 1/26/36 405,000 408,443
United Mexican States
8.125%, due 12/30/19 495,000 601,425
------------
1,009,868
------------
FOREST PRODUCTS & PAPER (0.0%)++
Bowater Canada Finance
7.95%, due 11/15/11 10,000 9,550
------------
HOLDING COMPANIES--DIVERSIFIED (0.1%)
Hutchison Whampoa International, Ltd.
6.50%, due 2/13/13 (b) 650,000 680,956
------------
HOUSEHOLD PRODUCTS & WARES (0.0%)++
Controladora Mabe S.A. de C.V.
6.50%, due 12/15/15 (b) 205,000 206,972
------------
INSURANCE (0.1%)
Lindsey Morden Group, Inc.
Series B
7.00%, due 6/16/08 C$ 5,000 3,941
Nippon Life Insurance Co.
4.875%, due 8/9/10 (b) $ 340,000 333,758
------------
337,699
------------
LEISURE TIME (0.1%)
Royal Caribbean Cruises, Ltd.
6.875%, due 12/1/13 750,000 755,653
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (0.3%)
BSKYB Finance UK PLC
5.625%, due 10/15/15 (b) $ 755,000 $ 744,401
6.50%, due 10/15/35 (b) 375,000 374,497
CanWest Media, Inc.
8.00%, due 9/15/12 41,000 41,461
Grupo Televisa S.A.
6.625%, due 3/18/25 615,000 639,931
Quebecor Media, Inc.
7.75%, due 3/15/16 15,000 15,150
Videotron Ltee
6.375%, due 12/15/15 75,000 71,625
------------
1,887,065
------------
MINING (0.3%)
Alcan, Inc.
5.00%, due 6/1/15 670,000 639,370
Corporacion Nacional del
Cobre-Codelco, Inc.
5.50%, due 10/15/13 (b) 1,000,000 997,799
FMG Finance Property, Ltd.
10.00%, due 9/1/13 (b)(e) 40,000 38,700
10.625%, due 9/1/16 (b) 40,000 39,400
Vale Overseas, Ltd.
8.25%, due 1/17/34 620,000 716,410
------------
2,431,679
------------
MISCELLANEOUS--MANUFACTURING (0.2%)
Siemens Financieringsmaatschappij N.V.
6.125%, due 8/17/26 (b) 1,505,000 1,565,582
------------
RETAIL (0.0%)++
Jean Coutu Group PJC, Inc. (The)
8.50%, due 8/1/14 (e) 10,000 9,813
------------
TELECOMMUNICATIONS (0.4%)
Millicom International Cellular S.A.
10.00%, due 12/1/13 65,000 69,956
Nortel Networks, Ltd.
10.75%, due 7/15/16 (b) 70,000 74,900
NTL Cable PLC
9.125%, due 8/15/16 55,000 57,819
Telecom Italia Capital S.A.
7.20%, due 7/18/36 1,000,000 1,050,609
Telefonos de Mexico S.A. de C.V.
5.50%, due 1/27/15 1,480,000 1,441,868
Vodafone Group PLC
5.75%, due 3/15/16 350,000 351,028
------------
3,046,180
------------
</Table>
16 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS (CONTINUED)
- ------------------------------------------------------------------------------
TRANSPORTATION (0.0%)++
Stena AB
9.625%, due 12/1/12 $ 45,000 $ 48,094
------------
Total Foreign Bonds
(Cost $18,340,337) 18,560,826
------------
MORTGAGE-BACKED SECURITIES (2.1%)
- ------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.1%)
Banc of America Commercial Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 1,175,000 1,169,097
Bayview Commercial Asset Trust
Series 2006-4A, Class A1
5.55%, due 12/25/36 (a) 515,000 515,000
Citigroup Commercial Mortgage Trust
Series 2004-C2, Class A5
4.733%, due 10/15/41 1,110,000 1,072,414
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-CD1, Class A4
5.40%, due 7/15/44 (a) 890,000 890,668
Commercial Mortgage Pass-Through Certificates
Series 2006-C7, Class A4
5.962%, due 6/10/46 (a) 700,000 726,913
Credit Suisse Mortgage Capital Certificates
Series 2006-C4, Class AJ
5.538%, due 9/15/39 (a) 1,865,000 1,884,281
Greenwich Capital Commercial Funding Corp.
Series 2006-GG7, Class A4
6.11%, due 7/10/38 (a) 425,000 446,331
LB-UBS Commercial Mortgage Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 1,555,000 1,494,376
Series 2004-C7, Class A1
3.625%, due 10/15/29 1,081,280 1,056,654
Series 2005-C7, Class A4
5.197%, due 11/15/30 (a) 925,000 919,821
Series 2006-C4, Class A4
6.098%, due 6/15/38 (a) 645,000 677,426
Merrill Lynch Mortgage Trust
Series 2004-MKB1, Class A1
3.563%, due 2/12/42 931,608 910,416
Series 2004-BPC1, Class A5
4.855%, due 10/12/41 (a) 2,240,000 2,178,067
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36 (b) $ 280,000 $ 285,491
Wachovia Bank Commercial
Mortgage Trust
Series 2004-C14, Class A1
3.477%, due 8/15/41 365,042 356,393
------------
Total Mortgage-Backed Securities
(Cost $14,710,403) 14,583,348
------------
MUNICIPAL BOND (0.1%)
- ------------------------------------------------------------------------------
TEXAS (0.1%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 660,000 661,564
------------
Total Municipal Bond
(Cost $660,000) 661,564
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (23.1%)
- ------------------------------------------------------------------------------
FANNIE MAE
(COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 2006-B1, Class AB
6.00%, due 6/25/16 1,033,903 1,042,284
------------
FANNIE MAE GRANTOR TRUST
(COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 1998-M6, Class A2
6.32%, due 8/15/08 (f) 479,101 485,811
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (3.8%)
3.00%, due 8/1/10 585,882 554,959
4.32%, due 3/1/35 (a) 1,735,577 1,694,207
5.00%, due 8/1/33 1,620,944 1,570,181
V 5.50%, due 1/1/21 8,067,460 8,075,673
5.50%, due 7/1/34 8,135,134 8,068,067
5.50%, due 1/1/36 1,609,426 1,592,691
5.50%, due 9/1/36 2,669,654 2,640,637
6.00%, due 3/1/36 2,606,735 2,625,132
------------
26,821,547
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (4.0%)
V 4.00%, due 9/2/08 (e) 8,230,000 8,082,691
4.625%, due 5/1/13 5,715,000 5,549,499
5.125%, due 1/2/14 810,000 808,112
5.25%, due 8/1/12 2,425,000 2,442,424
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (CONTINUED)
6.25%, due 2/1/11 $ 7,165,000 $ 7,492,283
6.625%, due 9/15/09 3,845,000 4,023,823
------------
28,398,832
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (8.0%)
4.50%, due 4/1/18 1,291,486 1,252,133
4.50%, due 7/1/18 4,649,188 4,507,522
4.50%, due 11/1/18 5,898,960 5,719,212
5.00%, due 12/1/21 TBA (g) 1,670,000 1,643,906
5.00%, due 7/1/35 6,497,372 6,275,152
5.00%, due 6/1/36 128,518 124,076
5.00%, due 12/1/36 TBA (g) 2,770,000 2,673,050
5.50%, due 4/1/21 4,428,631 4,434,937
5.50%, due 6/1/21 3,503,030 3,506,898
V 5.50%, due 6/1/33 10,002,122 9,910,968
5.50%, due 11/1/33 1,778,684 1,762,474
5.50%, due 12/1/33 1,522,200 1,508,327
6.00%, due 1/1/33 1,141,613 1,151,939
6.00%, due 3/1/33 1,479,122 1,491,621
6.00%, due 9/1/34 1,319,263 1,329,197
6.00%, due 9/1/35 4,378,172 4,409,364
6.00%, due 10/1/35 3,034,433 3,053,938
6.50%, due 6/1/31 659,420 675,942
6.50%, due 8/1/31 524,435 537,575
6.50%, due 10/1/31 336,361 344,789
------------
56,313,020
------------
FREDDIE MAC
(COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 2632, Class NH
3.50%, due 6/15/13 980,115 931,828
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (1.1%)
5.00%, due 3/15/36 2,550,408 2,488,105
5.00%, due 6/15/36 1,593,910 1,554,374
6.00%, due 4/15/29 1,399,702 1,422,704
6.00%, due 8/15/32 2,096,607 2,129,124
------------
7,594,307
------------
UNITED STATES TREASURY BONDS (1.8%)
6.00%, due 2/15/26 (e) 3,235,000 3,712,667
6.25%, due 8/15/23 2,740,000 3,188,675
6.25%, due 5/15/30 (e) 4,705,000 5,681,288
8.75%, due 8/15/20 2,000 2,796
------------
12,585,426
------------
UNITED STATES TREASURY NOTES (4.1%)
3.00%, due 2/15/08 5,770,000 5,639,950
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
UNITED STATES TREASURY NOTES (CONTINUED)
3.875%, due 2/15/13 (e) $ 3,505,000 $ 3,371,782
V 4.50%, due 2/15/09 (e) 10,230,000 10,195,238
4.875%, due 7/31/11 7,920,000 8,018,382
4.875%, due 8/15/16 (e) 2,005,000 2,046,666
------------
29,272,018
------------
Total U.S. Government & Federal Agencies
(Cost $163,238,910) 163,445,073
------------
LOAN ASSIGNMENTS & PARTICIPATIONS (0.1%)(h)
- ------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.0%)++
Goodyear Tire & Rubber Co. (The)
2nd Lien Term Loan
7.954%, due 4/30/10 265,000 266,798
------------
MEDIA (0.0%)++
Nielsen Finance LLC
Dollar Term Loan
8.19%, due 8/6/13 100,000 100,344
------------
MINING (0.1%)
Aleris International, Inc.
Term Loan B
7.875%, due 8/1/13 99,750 99,750
Unsecured Bridge Loan
9.625%, due 8/1/07 100,000 100,250
BHM Technologies LLC
1st Lien Term Loan
10.25%, due 7/23/13 180,000 175,500
------------
375,500
------------
REAL ESTATE (0.0%)++
LNR Property Corp.
Initial Tranche B Term Loan
8.22%, due 7/12/11 210,000 210,569
------------
RETAIL (0.0%)++
Michaels Stores, Inc.
Term Loan B
8.375%, due 10/31/13 185,000 185,661
------------
Total Loan Assignments & Participations
(Cost $1,135,123) 1,138,872
------------
YANKEE BONDS (0.1%)(i)
- ------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.0%)++
Smurfit Capital Funding PLC
7.50%, due 11/20/25 115,000 107,525
------------
</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>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
INSURANCE (0.0%)++
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 (e) $ 35,000 $ 29,575
8.30%, due 4/15/26 (e) 25,000 21,625
------------
51,200
------------
LEISURE TIME (0.1%)
Royal Caribbean Cruises, Ltd.
7.00%, due 6/15/13 250,000 253,957
------------
Total Yankee Bonds
(Cost $408,500) 412,682
------------
Total Long-Term Bonds
(Cost $250,676,459) 251,592,419
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.2%)
- ------------------------------------------------------------------------------
iShares Russell 1000 Value Index Fund (j) 12,000 953,400
------------
Total Investment Company
(Cost $901,440) 953,400
------------
COMMON STOCKS (62.0%)
- ------------------------------------------------------------------------------
ADVERTISING (0.5%)
Omnicom Group, Inc. (e) 34,600 3,510,170
------------
AEROSPACE & DEFENSE (1.5%)
L-3 Communications Holdings, Inc. 38,600 3,108,072
Northrop Grumman Corp. 43,800 2,907,882
United Technologies Corp. 72,100 4,738,412
------------
10,754,366
------------
APPAREL (1.1%)
Coach, Inc. (k) 129,600 5,137,344
NIKE, Inc. Class B 29,400 2,701,272
------------
7,838,616
------------
BANKS (4.5%)
V Bank of America Corp. 269,404 14,512,793
Bank of New York Co., Inc. (The) 120,300 4,134,711
PNC Financial Services Group, Inc. 58,000 4,061,740
U.S. Bancorp 109,500 3,705,480
Wachovia Corp. 92,300 5,122,650
------------
31,537,374
------------
BEVERAGES (0.5%)
PepsiCo, Inc. 53,600 3,400,384
------------
</Table>
<Table>
<Caption>
SHARES VALUE
BIOTECHNOLOGY (1.1%)
Amgen, Inc. (e)(k) 54,600 $ 4,144,686
Genentech, Inc. (k) 41,300 3,440,290
------------
7,584,976
------------
BUILDING MATERIALS (0.6%)
American Standard Cos., Inc. 96,500 4,273,985
------------
CHEMICALS (1.6%)
E.I. du Pont de Nemours & Co. 142,200 6,512,760
Praxair, Inc. 77,800 4,687,450
------------
11,200,210
------------
COAL (0.3%)
Peabody Energy Corp. 51,200 2,148,864
------------
COMPUTERS (1.5%)
Apple Computer, Inc. (k) 42,400 3,437,792
Computer Sciences Corp. (k) 50,000 2,642,500
EMC Corp. (k) 269,700 3,303,825
Research In Motion, Ltd. (k) 11,400 1,339,272
------------
10,723,389
------------
DISTRIBUTION & WHOLESALE (0.3%)
W.W. Grainger, Inc. 29,600 2,154,288
------------
DIVERSIFIED FINANCIAL SERVICES (6.0%)
American Express Co. 71,900 4,156,539
Ameriprise Financial, Inc. 23,820 1,226,730
Capital One Financial Corp. (e) 47,200 3,744,376
V Citigroup, Inc. 222,100 11,140,536
Goldman Sachs Group, Inc. (The) 23,700 4,498,023
V JPMorgan Chase & Co. 174,744 8,289,855
Lehman Brothers Holdings, Inc. 13,600 1,058,624
Merrill Lynch & Co., Inc. 61,200 5,350,104
Morgan Stanley 43,700 3,339,991
------------
42,804,778
------------
ELECTRIC (0.4%)
FirstEnergy Corp. 46,600 2,742,410
------------
ELECTRONICS (0.7%)
Fisher Scientific International, Inc. (k) 52,700 4,512,174
Thermo Electron Corp. (k) 13,700 587,319
------------
5,099,493
------------
FOOD (1.6%)
Cadbury Schweppes PLC,
Sponsored ADR (l) 36,500 1,481,535
General Mills, Inc. 103,500 5,880,870
Kroger Co. (The) 164,900 3,708,601
------------
11,071,006
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
HEALTH CARE--PRODUCTS (1.3%)
V Johnson & Johnson 138,100 $ 9,307,940
------------
HEALTH CARE--SERVICES (2.0%)
Coventry Health Care, Inc. (k) 44,350 2,082,233
Quest Diagnostics, Inc. 60,700 3,019,218
UnitedHealth Group, Inc. 82,300 4,014,594
WellPoint, Inc. (k) 63,900 4,876,848
------------
13,992,893
------------
HOME FURNISHINGS (0.3%)
Harman International Industries, Inc. 23,500 2,405,225
------------
INSURANCE (3.5%)
Allstate Corp. (The) 26,100 1,601,496
Genworth Financial, Inc. Class A 139,600 4,668,224
Hartford Financial Services
Group, Inc. (The) 38,500 3,356,045
V PMI Group, Inc. (The) (e) 207,800 8,862,670
Prudential Financial, Inc. 84,500 6,500,585
------------
24,989,020
------------
INTERNET (0.5%)
Akamai Technologies, Inc. (e)(k) 78,800 3,692,568
------------
LEISURE TIME (0.6%)
Harley-Davidson, Inc. (e) 64,900 4,454,087
------------
MACHINERY--CONSTRUCTION & MINING (0.1%)
Caterpillar, Inc. 11,600 704,236
------------
MEDIA (2.1%)
Comcast Corp. Class A (k) 151,400 6,157,438
Gannett Co., Inc. 56,500 3,341,410
News Corp. Class A 108,800 2,268,480
Tribune Co. (e) 102,100 3,402,993
------------
15,170,321
------------
MINING (0.5%)
Alcoa, Inc. 120,000 3,469,200
------------
MISCELLANEOUS--MANUFACTURING (2.6%)
3M Co. 14,200 1,119,528
Danaher Corp. 67,700 4,858,829
General Electric Co. 130,600 4,585,366
Honeywell International, Inc. 107,400 4,523,688
Illinois Tool Works, Inc. 42,200 2,022,646
Pentair, Inc. 32,600 1,073,844
------------
18,183,901
------------
</Table>
<Table>
<Caption>
SHARES VALUE
OIL & GAS (4.6%)
Apache Corp. 14,600 $ 953,672
Chevron Corp. 90,700 6,095,040
ConocoPhillips 76,400 4,602,336
ENSCO International, Inc. 107,100 5,244,687
ExxonMobil Corp. 70,100 5,006,542
Rowan Cos., Inc. 100,700 3,361,366
Transocean, Inc. (k) 98,500 7,145,190
------------
32,408,833
------------
OIL & GAS SERVICES (1.5%)
Baker Hughes, Inc. (e) 56,200 3,880,610
BJ Services Co. (e) 97,200 2,931,552
Weatherford International, Ltd. (k) 96,900 3,980,652
------------
10,792,814
------------
PACKAGING & CONTAINERS (0.3%)
Ball Corp. 49,600 2,062,864
------------
PHARMACEUTICALS (4.9%)
Abbott Laboratories 99,400 4,722,494
Barr Pharmaceuticals, Inc. (k) 55,400 2,901,298
Caremark Rx, Inc. 82,500 4,061,475
Gilead Sciences, Inc. (k) 61,800 4,258,020
KOS Pharmaceuticals, Inc. (e)(k) 72,100 3,586,975
V Pfizer, Inc. 405,100 10,795,915
Wyeth 88,800 4,531,464
------------
34,857,641
------------
RETAIL (5.2%)
Bed Bath & Beyond, Inc. (k) 77,400 3,118,446
Best Buy Co., Inc. 78,050 4,312,263
CVS Corp. 108,600 3,407,868
Gap, Inc. (The) 140,000 2,942,800
Home Depot, Inc. (The) 150,200 5,606,966
Kohl's Corp. (k) 69,500 4,906,700
Lowe's Cos., Inc. 68,900 2,076,646
Star Gas Partners, L.P. (k) 387 975
Target Corp. 66,600 3,941,388
Walgreen Co. 84,500 3,690,960
Wal-Mart Stores, Inc. 50,200 2,473,856
------------
36,478,868
------------
SAVINGS & LOANS (0.4%)
Washington Mutual, Inc. 73,200 3,096,360
------------
SEMICONDUCTORS (3.2%)
Advanced Micro Devices, Inc. (k) 144,600 3,075,642
Intel Corp. 375,200 8,006,768
Linear Technology Corp. (e) 40,900 1,272,808
National Semiconductor Corp. (e) 141,900 3,446,751
Texas Instruments, Inc. (e) 228,500 6,896,130
------------
22,698,099
------------
</Table>
20 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
SOFTWARE (0.6%)
Citrix Systems, Inc. (k) 34,900 $ 1,030,597
Microsoft Corp. 115,300 3,310,263
------------
4,340,860
------------
TELECOMMUNICATIONS (4.6%)
ALLTEL Corp. 22,400 1,194,144
AT&T, Inc. (e) 143,600 4,918,300
Cisco Systems, Inc. (k) 88,000 2,123,440
Corning, Inc. (k) 187,000 3,820,410
Motorola, Inc. 316,300 7,293,878
Nokia Oyj, Sponsored ADR (l) 212,500 4,224,500
Sprint Nextel Corp. 180,700 3,377,283
Verizon Communications, Inc. 143,100 5,294,700
------------
32,246,655
------------
TRANSPORTATION (1.0%)
FedEx Corp. 35,100 4,020,354
Norfolk Southern Corp. 52,800 2,775,696
------------
6,796,050
------------
Total Common Stocks
(Cost $355,420,761) 438,992,744
------------
CONVERTIBLE PREFERRED STOCK (0.0%)++
- ------------------------------------------------------------------------------
SOFTWARE (0.0%)++
QuadraMed Corp.
5.50% (b)(k) 10,700 235,400
------------
Total Convertible Preferred Stock
(Cost $267,500) 235,400
------------
PREFERRED STOCK (0.0%)++
- ------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.0%)++
Sovereign Real Estate Investment Corp.
12.00% (b) 100 140,250
------------
Total Preferred Stock
(Cost $147,000) 140,250
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (13.2%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (5.7%)
AIG Funding, Inc.
5.24%, due 11/7/06 $ 4,000,000 3,996,507
Chevron Funding Corp.
5.22%, due 11/8/06 3,530,000 3,526,417
Fairway Finance Corp.
5.289%, due 11/20/06 (m) 1,156,442 1,156,442
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
Greyhawk Funding
5.286%, due 11/13/06 (m) $ 1,541,923 $ 1,541,923
Jupiter Securitization Corp.
5.303%, due 11/14/06 (m) 1,896,425 1,896,425
Lexington Parker Capital Co.
5.282%, due 11/8/06 (m) 1,541,922 1,541,922
Liberty Street Funding Co.
5.286%, due 11/27/06 (m) 1,908,817 1,908,817
Old Line Funding LLC
5.287%, due 11/15/06 (m) 1,541,923 1,541,923
Prudential Funding Corp.
5.23%, due 11/6/06 4,965,000 4,961,393
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (m) 1,541,923 1,541,923
Societe Generale North America, Inc.
5.29%, due 11/1/06 9,640,000 9,640,000
Toyota Motor Credit Corp.
5.22%, due 11/3/06 5,850,000 5,848,304
Yorktown Capital LLC
5.282%, due 11/16/06 (m) 1,349,182 1,349,182
------------
Total Commercial Paper
(Cost $40,451,178) 40,451,178
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.5%)
- ------------------------------------------------------------------------------
BGI Institutional Money Market Fund (m) 3,328,671 3,328,671
------------
Total Investment Company
(Cost $3,328,671) 3,328,671
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.2%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/01/06
Proceeds at Maturity $1,816,257 (Collateralized
by various Corporate Bonds, with rates between
0%-8.40% and maturity dates between
1/30/07-6/15/34, with a Principal Amount of
$1,836,808 and a Market Value
of $1,888,178) (m) $ 1,815,983 1,815,983
------------
Total Repurchase Agreement
(Cost $1,815,983) 1,815,983
------------
TIME DEPOSITS (6.8%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (m) 3,083,845 3,083,845
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
Bank of America
5.27%, due 11/21/06 (a)(m) $ 4,240,287 4,240,287
Bank of Montreal
5.28%, due 11/27/06 (m) 3,083,845 3,083,845
Bank of Nova Scotia
5.30%, due 11/10/06 (m) 3,083,845 3,083,845
Barclays
5.32%, due 1/18/07 (m) 3,083,845 3,083,845
Deutsche Bank AG
5.27%, due 11/9/06 (m) 3,083,845 3,083,845
Fortis Bank
5.27%, due 11/6/06 (m) 6,707,363 6,707,363
Halifax Bank of Scotland
5.30%, due 1/10/07 (m) 3,083,845 3,083,845
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (m) 3,083,845 3,083,845
Royal Bank of Canada
5.30%, due 12/22/06 (m) 3,083,845 3,083,845
Royal Bank of Scotland
5.29%, due 12/12/06 (m) 3,083,845 3,083,845
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (m) 3,083,845 3,083,845
Societe Generale North America, Inc.
5.28%, due 12/6/06 (m) 3,083,845 3,083,845
UBS AG
5.28%, due 12/5/06 (m) 3,083,845 3,083,845
------------
Total Time Deposits
(Cost $47,953,790) 47,953,790
------------
Total Short-Term Investments
(Cost $93,549,622) 93,549,622
------------
Total Investments
(Cost $700,962,782) (n) 110.9% 785,463,835(o)
Liabilities in Excess of
Cash and Other Assets (10.9) (77,787,411)
----------- ------------
Net Assets 100.0% $707,676,424
=========== ============
</Table>
<Table>
++ Less than one tenth of a percent.
+++ Fifty percent of the Fund's assets are maintained to cover
"senior securities transactions" which may include, but are
not limited to, forwards, TBA's, options and futures. This
percentage is marked-to-market daily against the value of
the Fund's "senior securities" holdings to ensure proper
coverage for these transactions.
(a) Floating rate. Rate shown is the rate in effect at October
31, 2006.
(b) May be sold to institutional investors only under Rule 144
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Issue in default.
(d) Issuer in bankruptcy.
(e) Represents a security, or a portion thereof, which is out on
loan.
(f) ACES--Alternative Credit Enhancement Structure.
(g) TBA: Securities purchased on a forward commitment basis with
an approximate principal amount and maturity date. The
actual principal amount and maturity date will be determined
upon settlement. The market value of these securities at
October 31, 2006 is $4,316,956.
(h) Floating Rate Loan--generally pays interest at rates which
are periodically re-determined at a margin above the London
Inter-Bank Offered Rate ("LIBOR") or other short-term rates.
The rate shown is the rate(s) in effect at October 31, 2006.
Floating Rate Loans are generally considered restrictive in
that the Fund is ordinarily contractually obligated to
receive consent from the Agent Bank and/or borrower prior to
disposition of a Floating Rate Loan. Under procedures
adopted by the Board, the loans are deemed to be liquid.
(i) Yankee Bond--dollar-denominated bond issued in the United
States by a foreign bank or corporation.
(j) Exchange Traded Fund--represents a basket of securities that
are traded on an exchange.
(k) Non-income producing security.
(l) ADR--American Depositary Receipt.
(m) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(n) The cost for federal income tax purposes is $705,826,867.
(o) At October 31, 2006, net unrealized appreciation was
$79,636,968 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 $85,194,267 and aggregate gross
unrealized depreciation for all investments on which there
was an excess of cost over market value of $5,557,299.
The following abbreviations are used in the above portfolio:
C$--Canadian Dollar
</Table>
22 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $700,962,782) including $63,757,696
market value of securities loaned $785,463,835
Cash 909
Cash denominated in foreign currencies
(identified cost $156) 156
Receivables:
Investment securities sold 14,042,245
Dividends and interest 2,546,676
Fund shares sold 34,986
Other assets 24,593
-------------
Total assets 802,113,400
-------------
LIABILITIES:
Securities lending collateral 65,577,001
Unrealized depreciation on unfunded commitments 1,625
Payables:
Investment securities purchased 26,964,985
Fund shares redeemed 735,772
Transfer agent (See Note 3) 417,646
NYLIFE Distributors (See Note 3) 290,719
Manager (See Note 3) 237,189
Shareholder communication 115,885
Professional fees 64,093
Custodian 12,369
Trustees 9,090
Accrued expenses 10,602
-------------
Total liabilities 94,436,976
-------------
Net assets $707,676,424
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 253,438
Class B 101,789
Class C 1,600
Class I 6
Additional paid-in capital 570,575,503
Accumulated undistributed net investment income 902,151
Accumulated net realized gain on investments,
foreign currency transactions and written
option transactions 51,342,506
Net unrealized appreciation on investments 84,501,053
Net unrealized depreciation on unfunded
commitments (1,625)
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies 3
-------------
Net assets $707,676,424
=============
CLASS A
Net assets applicable to outstanding shares $502,340,143
=============
Shares of beneficial interest outstanding 25,343,846
=============
Net asset value per share outstanding $ 19.82
Maximum sales charge (5.50% of offering price) 1.15
-------------
Maximum offering price per share outstanding $ 20.97
=============
CLASS B
Net assets applicable to outstanding shares $202,148,778
=============
Shares of beneficial interest outstanding 10,178,898
=============
Net asset value and offering price per share
outstanding $ 19.86
=============
CLASS C
Net assets applicable to outstanding shares $ 3,174,981
=============
Shares of beneficial interest outstanding 160,041
=============
Net asset value and offering price per share
outstanding $ 19.84
=============
CLASS I
Net assets applicable to outstanding shares $ 12,522
=============
Shares of beneficial interest outstanding 629
=============
Net asset value and offering price per share
outstanding $ 19.90*
=============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 23
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 11,621,663
Dividends (a) 7,346,030
Income from securities loaned--net 102,483
-------------
Total income 19,070,176
-------------
EXPENSES:
Manager (See Note 3) 4,669,869
Transfer agent--Classes A, B and C (See Note
3) 2,573,731
Transfer agent--Class I (See Note 3) 16
Distribution--Class B (See Note 3) 2,257,289
Distribution--Class C (See Note 3) 26,350
Distribution/Service--Class A (See Note 3) 1,101,207
Service--Class B (See Note 3) 752,430
Service--Class C (See Note 3) 8,783
Shareholder communication 347,733
Professional fees 209,151
Recordkeeping 101,165
Registration 74,698
Custodian 48,394
Trustees 44,051
Miscellaneous 51,199
-------------
Total expenses before waiver/reimbursement 12,266,066
Expense waiver from Manager (See Note 3) (1,037,949)
Reimbursement from Manager for professional
fees (See Note 3(B) on page 32.) (79,841)
-------------
Net expenses 11,148,276
-------------
Net investment income 7,921,900
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCY AND WRITTEN OPTIONS:
Net realized gain (loss) on:
Security transactions 55,985,232
Written option transactions 163,023
Foreign currency transactions (22)
-------------
Net realized gain on investments, foreign
currency transactions and written option
transactions 56,148,233
-------------
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 32.) 102,000
-------------
Net change in unrealized appreciation on:
Security transactions and unfunded
commitments 8,699,469
Translation of other assets and liabilities
in foreign currencies 3
-------------
Net change in unrealized appreciation on
investments, and unfunded commitments and
foreign currency transactions 8,699,472
-------------
Net realized and unrealized gain on
investments, unfunded commitments, foreign
currency transactions and written options
transactions 64,949,705
-------------
Net increase in net assets resulting from
operations $ 72,871,605
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $6,056.
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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 7,921,900 $ 3,716,354
Net realized gain on investments,
foreign currency transactions and
written option transactions 56,148,233 30,785,172
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 32.) 102,000 --
Net change in unrealized
appreciation (depreciation) on
investments and foreign currency
transactions 8,699,472 29,581,165
----------------------------
Net increase in net assets
resulting from operations 72,871,605 64,082,691
----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (5,694,551) (1,173,938)
Class B (2,030,485) (2,457,930)
Class C (22,067) (14,284)
Class I (197) (72)
From net realized gain on investments:
Class A (3,889,262) (2,056,474)
Class B (26,533,582) (13,580,523)
Class C (146,215) (77,668)
Class I (267) (60)
----------------------------
Total dividends and distributions
to shareholders (38,316,626) (19,360,949)
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 53,793,461 15,772,768
Class B 14,734,797 22,024,368
Class C 319,520 451,258
Class I 9,130 4,799
</Table>
<Table>
<Caption>
2006 2005
Net asset value of shares issued to shareholders
in reinvestment of
dividends and distributions:
Class A $ 9,352,154 $ 3,046,495
Class B 27,973,873 15,688,823
Class C 160,375 88,351
Class I 464 91
----------------------------
106,343,774 57,076,953
Cost of shares redeemed:
Class A (101,141,539) (42,412,842)
Class B (98,708,842) (160,092,924)
Class C (1,316,300) (1,443,584)
Class I (5,001) (895)
----------------------------
(201,171,682) (203,950,245)
Net asset value of shares
converted (See Note 1):
Class A 417,375,006 --
Class B (417,375,006) --
Decrease in net assets derived
from capital share transactions (94,827,908) (146,873,292)
----------------------------
Net decrease in net assets (60,272,929) (102,151,550)
NET ASSETS:
Beginning of year 767,949,353 870,100,903
----------------------------
End of year $ 707,676,424 $767,949,353
============================
Accumulated undistributed net
investment income at end of year $ 902,151 $ 662,525
============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 25
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 18.92 $ 17.96 $ 17.42 $ 15.29 $ 18.92 $ 22.14
-------- ------- -------- ----------- -------- --------
Net investment income 0.27(a) 0.21(b) 0.17 0.16(a) 0.27 0.34 (c)
Net realized and unrealized
gain (loss) on investments 1.67(f) 1.29 0.54 2.12 (3.62) (2.99)(c)
-------- ------- -------- ----------- -------- --------
Total from investment
operations 1.94 1.50 0.71 2.28 (3.35) (2.65)
-------- ------- -------- ----------- -------- --------
Less dividends and
distributions:
From net investment income (0.27) (0.21) (0.17) (0.15) (0.28) (0.35)
From net realized gain on
investments (0.77) (0.33) -- -- -- (0.22)
-------- ------- -------- ----------- -------- --------
Total dividends and
distributions (1.04) (0.54) (0.17) (0.15) (0.28) (0.57)
-------- ------- -------- ----------- -------- --------
Net asset value at end of
period $ 19.82 $ 18.92 $ 17.96 $ 17.42 $ 15.29 $ 18.92
======== ======= ======== =========== ======== ========
Total investment return (d) 10.53%(e)(f) 8.43% 4.05% 15.02%(g) (17.75%) (11.92%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.42% 1.10%(b) 0.94% 1.21%+ 1.57% 1.74%(c)
Net expenses 1.19% 1.19% 1.30% 1.33%+ 1.30% 1.18%
Expenses (before
waiver/reimbursement) 1.34%(e) 1.31% 1.30% 1.33%+ 1.31% 1.21%
Portfolio turnover rate 70%(h) 77%(h) 103% 67% 96% 120%
Net assets at end of period
(in 000's) $502,340 $98,180 $115,877 $138,787 $140,298 $221,022
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $18.94 $17.98 $17.45 $15.32 $ 18.95 $ 22.17
------ ------ ------ ----------- ------- -------
Net investment income 0.12(a) 0.07(b) 0.04 0.06(a) 0.14 0.20 (c)
Net realized and unrealized
gain (loss) on investments 1.67(f) 1.28 0.53 2.13 (3.61) (3.00)(c)
------ ------ ------ ----------- ------- -------
Total from investment
operations 1.79 1.35 0.57 2.19 (3.47) (2.80)
------ ------ ------ ----------- ------- -------
Less dividends and
distributions:
From net investment income (0.12) (0.06) (0.04) (0.06) (0.16) (0.20)
From net realized gain on
investments (0.77) (0.33) -- -- -- (0.22)
------ ------ ------ ----------- ------- -------
Total dividends and
distributions (0.89) (0.39) (0.04) (0.06) (0.16) (0.42)
------ ------ ------ ----------- ------- -------
Net asset value at end of
period $19.84 $18.94 $17.98 $17.45 $ 15.32 $ 18.95
====== ====== ====== =========== ======= =======
Total investment return (d) 9.69%(e)(f) 7.60% 3.27% 14.33%(g) (18.37%) (12.61%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.62% 0.35%(b) 0.19% 0.46%+ 0.82% 0.99%(c)
Net expenses 1.94% 1.94% 2.05% 2.08%+ 2.05% 1.93%
Expenses (before
waiver/reimbursement) 2.09%(e) 2.06% 2.05% 2.08%+ 2.06% 1.96%
Portfolio turnover rate 70%(h) 77%(h) 103% 67% 96% 120%
Net assets at end of period
(in 000's) $3,175 $3,854 $4,532 $4,845 $ 4,501 $ 7,528
</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) 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.
(c) As required, effective January 1, 2001 the Fund has adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended December 31, 2001 is shown below.
</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>
(d) Total return is calculated exclusive of sales charge. Class I is not subject to sales
charges.
(e) Includes nonrecurring reimbursements for Manager for professional fees. The effect on
total return was less than one-hundredth of a percent. (See note 3(B) on page 32.)
(f) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were less than $0.01 per share
on net realized gains on investments; and the effect on total investment return was 0.02%,
respectively. (See Note 3(B) on page 32.)
(g) Total return is not annualized.
(h) The portfolio turnover rate not including mortgage dollar rolls is 55% and 38% for the
years ended October 31, 2006 and 2005, respectively.
</Table>
26 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 18.95 $ 17.98 $ 17.45 $ 15.32 $ 18.95 $ 22.17
-------- -------- -------- ----------- -------- ----------
0.11(a) 0.07(b) 0.04 0.06(a) 0.14 0.20 (c)
1.69(f) 1.29 0.53 2.13 (3.61) (3.00)(c)
-------- -------- -------- ----------- -------- ----------
1.80 1.36 0.57 2.19 (3.47) (2.80)
-------- -------- -------- ----------- -------- ----------
(0.12) (0.06) (0.04) (0.06) (0.16) (0.20)
(0.77) (0.33) -- -- -- (0.22)
-------- -------- -------- ----------- -------- ----------
(0.89) (0.39) (0.04) (0.06) (0.16) (0.42)
-------- -------- -------- ----------- -------- ----------
$ 19.86 $ 18.95 $ 17.98 $ 17.45 $ 15.32 $ 18.95
======== ======== ======== =========== ======== ==========
9.74%(e)(f) 7.66% 3.27% 14.33%(g) (18.37%) (12.61%)
0.55% 0.35%(b) 0.19% 0.46%+ 0.82% 0.99%(c)
1.94% 1.94% 2.05% 2.08%+ 2.05% 1.93%
2.09%(e) 2.06% 2.05% 2.08%+ 2.06% 1.96%
70%(h) 77%(h) 103% 67% 96% 120%
$202,149 $665,908 $749,689 $829,016 $793,340 $1,143,755
</Table>
<Table>
<Caption>
CLASS I
---------------------------------------------
JANUARY 2,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2006 2005 2004
$18.98 $17.92 $17.98
------ ------ -----------
0.36(a) 0.26(b) 0.15
1.69(f) 1.42 (0.03)
------ ------ -----------
2.05 1.68 0.12
------ ------ -----------
(0.36) (0.29) (0.18)
(0.77) (0.33) --
------ ------ -----------
(1.13) (0.62) (0.18)
------ ------ -----------
$19.90 $18.98 $17.92
====== ====== ===========
11.11%(e)(f) 9.51% 0.68%(g)
1.86% 1.43%(b) 1.40%+
0.74% 0.86% 0.84%+
0.89%(e) 0.98% 0.84%+
70% (h) 77%(h) 103%
$ 13 $ 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 27
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises 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 commenced on
January 3, 1995, Class B shares commenced on December 29, 1987, Class C shares
commenced on September 1, 1998 and Class I 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 a 1% contingent deferred sales charge may be imposed on redemptions made
within one year of purchase of Class C shares. Class I shares are not subject to
a sales charge. As approved by the Board of Trustees in 1997, Class B shares
convert to Class A shares eight years after the date they were purchased. The
first conversion occurred December 28, 2005. The four classes of shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions. 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, as defined in Note 3,
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 trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time).
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund did not hold securities 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.
28 MainStay Total Return Fund
Should the Manager or Subadvisor, as defined in Note 3, conclude that such
events may have affected the accuracy of the last price reported on the local
foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by
the Fund, adjust the value of the local price to reflect the impact on the price
of such securities as a result of such events. Additionally, international
equity securities are also fair valued whenever the movement of a particular
index exceeds certain amounts. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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
on investments and additional paid-in-capital, arising from permanent
differences; net assets at October 31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED ACCUMULATED NET ADDITIONAL
NET INVESTMENT REALIZED GAIN ON PAID-IN
INCOME INVESTMENTS CAPITAL
$65,026 $(167,026) $102,000
----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to the reimbursement
payments (See Note 11 on page 34), premium amortization adjustments and paydown
gain (loss).
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method 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 using the effective interest rate method. Discounts and premiums on
securities purchased, other than short-term securities, for the Fund are
accreted and amortized, respectively, on the effective interest rate method over
the life of the respective securities or, in the case of a callable security,
over the period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) 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
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 price of the underlying
security or foreign currency increase. By writing a covered put option, the
Fund, in exchange for the premium, accepts the risk of decline in the market
value of the underlying security or foreign currency below the exercise price. A
call option may be covered by the call writer's owning the underlying security
throughout the option period. A call option may also be covered by the call
writer's maintaining liquid assets valued at greater than the exercise price of
the call written. When writing a covered call option, the Fund, in return for
the premium on the option, gives up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
the obligation as the writer continues, has retained the risk of loss should the
price of the underlying security decline. 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.
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.
(I) 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 the
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. For example, 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.
(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.
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) 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
30 MainStay Total Return Fund
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, the Fund forgoes
principal and interest on the securities. The 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 liquid assets 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.
(L) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 on page 33.)
(M) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund does not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price.
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total operating
expenses (total annual 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, 1.19% 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 written expense limitation
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. For the year ended October 31, 2006, the
Manager earned fees from the Fund in the amount of $4,669,869 and waived its
fees in the amount of $1,037,949.
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$177,401 $1,037,949 $1,215,350
-----------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 11 on
page 34.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $79,841. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) 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 and 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.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $41,733 for the year ended
October 31, 2006. 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 $5,365, $269,103 and $257, respectively, for the year ended October
31, 2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $2,573,747.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
32 MainStay Total Return Fund
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $155,722 0.0*%
- ---------------------------------------------------------------
Class C 103 0.0*
- ---------------------------------------------------------------
Class I 1,218 9.7
- ---------------------------------------------------------------
</Table>
* Less than one tenth of one percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in professional fees
shown on the Statement of Operations, were $21,150.
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 $101,165 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$3,143,502 $53,965,240 $79,635,346 $136,744,088
------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to straddles and wash sales deferrals.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $ 9,536,626 $ 3,635,097
Long-Term Capital Gains 28,780,000 15,725,852
- -----------------------------------------------------------
$38,316,626 $19,360,949
- -----------------------------------------------------------
</Table>
NOTE 5--COMMITMENTS AND CONTINGENCIES:
At October 31, 2006 the Fund had unfunded loan commitments pursuant to the
following loan agreement:
<Table>
<Caption>
UNFUNDED UNREALIZED
BORROWER COMMITMENT DEPRECIATION
HCA, Inc., due 9/12/07 $325,000 $ (1,625)
- -----------------------------------------------------------------------------------------------
</Table>
The commitment is available until the maturity date of the security.
NOTE 6--FUND SECURITIES LOANED, FOREIGN CURRENCY AND WRITTEN OPTIONS:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $63,757,696. The Fund received $65,577,001 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.
Securities purchased with collateral received are valued at amortized cost.
Foreign Currency held at October 31, 2006:
<Table>
<Caption>
CURRENCY COST VALUE
Canadian Dollar C$175 $156 $ 156
- ----------------------------------------------------------------------------
</Table>
During the year ended October 31, 2006, the Fund had the following transactions
in Written Options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options outstanding at
October 31, 2005 -- $ --
- --------------------------------------------------------------------------
Options--Written 998 165,493
- --------------------------------------------------------------------------
Options--Expired (738) (85,054)
- --------------------------------------------------------------------------
Options--Canceled in
Closing Transactions (260) (80,439)
- --------------------------------------------------------------------------
Options outstanding at
October 31, 2006 -- $ --
- --------------------------------------------------------------------------
</Table>
NOTE 7--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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
www.mainstayfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 made or outstanding on the line of credit during the
year ended October 31, 2006.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of U.S. Government
securities were $278,991 and $255,557, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $231,529 and $384,525, respectively.
NOTE 10--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 2,815 765 17 --(a)
- -------------------------------------------------------------------------------
Shares issued in reinvestment of
dividends and distributions 490 1,471 8 --(a)
- -------------------------------------------------------------------------------
3,305 2,236 25 --(a)
Shares redeemed (5,256) (5,139) (69) --(a)
- -------------------------------------------------------------------------------
Shares converted (See Note 1) 22,107 (22,060) -- --
- -------------------------------------------------------------------------------
Net increase (decrease) 20,156 (24,963) (44) --(a)
- -------------------------------------------------------------------------------
</Table>
<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>
(a) Less than one thousand shares.
NOTE 11--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$102,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
34 MainStay Total Return Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Total Return Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2006, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 35
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance over
the medium- and longer-term, its recent improved investment performance relative
to that of funds having similar investment mandates, and its improved
risk-adjusted returns.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of
36 MainStay Total Return Fund
shareholder accounts, including imposing higher investment minimums for some
share classes. The Trustees discussed additional measures that may increase
average shareholder account size and/or otherwise reduce the Trust's transfer
agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at asset levels above the breakpoints, and the fact
that the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees reviewed information showing that the Fund's asset level
had decreased over the past several years but noted that the Fund's management
fee rate had been reduced by the breakpoint schedule applicable to the Fund. The
Trustees reviewed information about the potential effect of asset growth on Fund
expenses, the difficulty of forecasting its effect on the profitability of the
Manager and its affiliates, and the management fee breakpoints applicable to the
Fund and certain other funds in comparison groups. It was noted that, to the
extent the Fund's gross expenses currently were higher than its net expenses,
the reduction of the Fund's gross expenses through the achievement of economies
of scale might benefit the Manager by reducing the expenses the Manager must
reimburse to the Fund rather than directly benefiting the Fund by reducing its
net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to maintain a limit on the
Fund's net expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
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, 2006) as to the federal tax
status dividends paid by the Fund during such fiscal year. Accordingly, the Fund
paid long-term capital gain distributions of $28,780,000.
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 72.1% to arrive at the amount eligible for qualified
dividend income, 36.6% to arrive at the amount eligible for qualified interest
income and 77.6% for the corporate dividends received deduction.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
38 MainStay Total Return Fund
SPECIAL MEETING OF SHAREHOLDERS
As previously reported to you, pursuant to notice, a special meeting and three
adjournment meetings (pertaining only to certain Funds) of the shareholders of
The MainStay Funds (the "Trust") were held on March 27, April 17, May 8, and
June 8, 2006, respectively, at the Parsippany, New Jersey offices of New York
Life Investment Management LLC. The purpose of the meetings was to present the
following proposals for shareholder consideration:
1. To elect the following individuals to the Board of Trustees of the Trust;
- Charlynn Goins
- Edward J. Hogan
- Alan R. Latshaw
- Terry L. Lierman
- John B. McGuckian
- Donald E. Nickelson
- Richard S. Trutanic
- Gary E. Wendlandt (Interested Trustee)
There are no other Trustees of the Trust.
2. To grant the Trust the approval to enter into and materially amend agreements
with Subadvisors on behalf of one or more of the Funds without obtaining
shareholder approval; and
3. To approve the amendment of certain fundamental investment restrictions.
No other business came before the special meetings.
Each of the proposals listed above was passed by the shareholders of the Fund as
shown below.
<Table>
<Caption>
VOTES VOTES
TOTAL RETURN FUND VOTES FOR AGAINST WITHHELD TOTAL
PROPOSAL #1-ELECTION OF TRUSTEES
- --------------------------------------------------------------------------------
a. Charlynn Goins 18,576,851 0 1,824,210 20,401,061
- --------------------------------------------------------------------------------
b. Edward J. Hogan 18,576,698 0 1,822,362 20,399,060
- --------------------------------------------------------------------------------
c. Alan R. Latshaw 18,569,941 0 1,831,120 20,401,061
- --------------------------------------------------------------------------------
d. Terry L. Lierman 18,576,954 0 1,824,106 20,401,060
- --------------------------------------------------------------------------------
e. John B. McGuckian 18,574,600 0 1,826,461 20,401,061
- --------------------------------------------------------------------------------
f. Donald E. Nickelson 18,570,748 0 1,830,312 20,401,060
- --------------------------------------------------------------------------------
g. Richard S. Trutanic 18,562,669 0 1,838,392 20,401,061
- --------------------------------------------------------------------------------
h. Gary E Wendlandt 18,585,497 0 1,815,563 20,401,060
- --------------------------------------------------------------------------------
PROPOSAL #2-APPROVAL TO ENTER INTO AND MATERIALLY AMEND AGREEMENTS
- --------------------------------------------------------------------------------
16,346,707 513,187 1,628,010 18,487,904
- --------------------------------------------------------------------------------
PROPOSAL #3-AMENDMENT TO CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
a. Borrowing 16,413,528 453,160 1,621,218 18,487,906
- --------------------------------------------------------------------------------
b. Senior Securities 16,481,775 394,474 1,611,657 18,487,906
- --------------------------------------------------------------------------------
c. Underwriting Securities 16,477,198 394,937 1,615,770 18,487,905
- --------------------------------------------------------------------------------
d. Real Estate 16,463,736 413,703 1,610,465 18,487,904
- --------------------------------------------------------------------------------
e. Commodities 16,432,970 444,365 1,610,569 18,487,904
- --------------------------------------------------------------------------------
f. Making Loans 16,434,695 440,760 1,612,449 18,487,904
- --------------------------------------------------------------------------------
g. Concentration of
Investments 16,447,060 420,307 1,620,539 18,487,906
- --------------------------------------------------------------------------------
h. Diversification 16,499,004 375,628 1,613,274 18,487,906
- --------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 39
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 Total Return Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 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>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
42 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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE SYMBOL) MS377-06 MSTR11-12/06
14
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 24
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 25
- --------------------------------------------------------------------------------
Federal Income Tax Information 27
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 27
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 27
- --------------------------------------------------------------------------------
Trustees and Officers 28
</Table>
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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 10.85% 6.05% 6.03%
Excluding sales charges 17.30 7.25 6.64
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/96 9450 10000
11597 13319
11506 15293
12240 17821
13595 18804
12659 16574
10341 14913
12489 18324
13908 21156
15316 23666
10/31/06 17966 28744
</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(1) YEARS YEARS
- ------------------------------------------------
With sales charges 11.44% 6.14% 5.87%
Excluding sales charges 16.44 6.46 5.87
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/96 10000 10000
12218 13319
12031 15293
12695 17821
14000 18804
12932 16574
10485 14913
12571 18324
13898 21156
15186 23666
10/31/06 17682 28744
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
With sales charges 15.44% 6.46% 5.87%
Excluding sales charges 16.44 6.46 5.87
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/96 10000 10000
12218 13319
12031 15293
12695 17821
14000 18804
12932 16574
10485 14913
12571 18324
13898 21156
15186 23666
10/31/06 17682 28744
</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 as 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. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to this agreement if such action does not cause the Fund
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 TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
17.78% 7.56% 6.93%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/96 10000 10000
12335 13319
12267 15293
13071 17821
14552 18804
13569 16574
11108 14913
13451 18324
15031 21156
16588 23666
10/31/06 19537 28744
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
17.67% 7.47% 6.83%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/96 10000 10000
12329 13319
12243 15293
13030 17821
14500 18804
13510 16574
11050 14913
13364 18324
14922 21156
16461 23666
10/31/06 19370 28744
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR(1) YEARS YEARS
- ------------------------------------------------
17.46% 7.22% 6.58%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/96 10000 10000
12297 13319
12184 15293
12942 17821
14361 18804
13348 16574
10894 14913
13141 18324
14634 21156
16100 23666
10/31/06 18910 28744
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Russell 1000(R) Value Index(2) 21.46% 11.64% 11.14%
Average Lipper large-cap value fund(3) 17.73 8.69 8.69
</Table>
to exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense. Prior to 9/1/98
(for Class C shares) and 12/31/03 (for Class I, R1, and R2 shares), performance
for Class 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 C, I, R1, and R2 shares.
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 21
of the Notes to Financial Statements for further explanation.) If these
nonrecurring reimbursements had not been made the total return (excluding
sales charges) would have been 17.25% for Class A, 16.39% for Class B, 16.39%
for Class C, 17.73% for Class I, 17.62% for Class R1, and 17.41% for Class
R2.
2. 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 in 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.
6 MainStay Value Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,044.95 $6.03 $1,019.15 $5.95
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,041.00 $9.88 $1,015.40 $9.75
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,041.00 $9.88 $1,015.40 $9.75
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,047.55 $3.87 $1,021.25 $3.82
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,046.65 $4.38 $1,020.75 $4.33
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,045.40 $5.67 $1,019.50 $5.60
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.17% for Class A, 1.92% for Class B and Class C, 0.75% for Class I, 0.85%
for Class R1 and 1.10% for Class R2) multiplied by the average account value
over the period, divided by 365 and multiplied by 184 (to reflect the
one-half year period). In the absence of waivers and/or reimbursements,
expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM
INVESTMENTS
(COLLATERAL FROM LIABILITIES IN EXCESS
SECURITIES LENDING IS INVESTMENT PURCHASED PUT OF CASH AND OTHER
COMMON STOCKS 2.7%) COMPANY OPTION ASSETS
- ------------- --------------------- ---------- ------------- ---------------------
94.8 5.7* 1.9 0.1 (2.5)
</Table>
* Includes 0.1% of Investment Company Securities.
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Citigroup, Inc.
2. Bank of America Corp.
3. Pfizer, Inc.
4. ExxonMobil Corp.
5. JPMorgan Chase & Co.
6. E.I. du Pont de Nemours & Co.
7. Chevron Corp.
8. Verizon Communications, Inc.
9. Home Depot, Inc. (The)
10. Texas Instruments, Inc.
</Table>
8 MainStay Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Richard A. Rosen, CFA, of MacKay Shields
LLC
HOW DID MAINSTAY VALUE FUND PERFORM RELATIVE TO ITS BENCHMARK AND ITS PEERS
DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Value Fund returned 17.30% for Class A
shares, 16.44% for Class B shares, and 16.44% for Class C shares for the 12
months ended October 31, 2006. Over the same period, the Fund's Class I shares
returned 17.78%, Class R1 shares returned 17.67%, and Class R2 shares returned
17.46%. All share classes underperformed the 21.46% return of the Russell
1000(R) Value Index,(1) the Fund's broad-based securities-market index, for the
12-month period. With the exception of Class I shares, all share classes
underperformed the 17.73% return of the average Lipper(2) large-cap value fund
for the 12 months ended October 31, 2006.(3)
WHICH FUND HOLDINGS WERE PARTICULARLY STRONG DURING THE REPORTING PERIOD?
Despite their volatility, energy prices remained reasonably high, which
benefited several of the Fund's energy holdings, including integrated pro-
ducers ExxonMobil and Chevron. Offshore driller Transocean advanced on
increasing demand for its high-end rigs. We added to the Fund's position in
Chevron when the company's shares weakened, and we reduced the Fund's position
in Transocean as the stock neared our price target.
In the materials sector, rising nickel prices and a series of acquisition bids
moved Inco shares to our price target, and we sold the Fund's position in the
stock. In the industrials sector, defense company Northrop Grumman advanced on
solid order rates and defense spending. We reduced the Fund's posi-tion in the
stock as it reached our price target. In telecommunication services, Comcast
benefited from its "triple-play" offering of video, high-speed Internet service,
and phone service. We sold a portion of the Fund's position as the stock neared
our price target.
Strong equity and bond markets helped several of the Fund's holdings in the
financials sector. Stocks that were sensitive to the capital markets moved
sharply higher, including Goldman Sachs, Morgan Stanley, Merrill Lynch, and
JPMorgan Chase. We trimmed the Fund's positions in Goldman Sachs and Merrill
Lynch as they neared our price targets. Bank of America was also a positive
contributor to performance.
Among pharmaceutical companies, Pfizer saw its stock price rise on positive
product news. Drug retailer CVS also did well, despite a pull-back late in the
reporting period. We reduced the Fund's position in CVS as it neared our price
target.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
Information technology holdings were mixed. Nokia and BMC Software advanced, but
overall the sector was a negative contributor to the Fund's performance. Two
microprocessor manufacturers, Intel and Advanced Micro Devices, both declined on
increasing competition.
Although Verizon and AT&T advanced, telecommunication services generally
detracted from relative results, largely because of weakness at wireless carrier
Sprint Nextel. Although the company's acquisition integration was disappointing,
we retained a reduced position in the stock because we believed that asset value
could serve as a strong catalyst.
Another holding that detracted from results was Home Depot, which declined as
the housing market slowed. We added to the Fund's position in the stock during
the reporting period.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2006, the Fund held overweighted positions relative to the
Russell 1000(R) Value Index in health care, information technology,
telecommunication services, and consumer staples. The Fund was under-weighted in
consumer discretionary, financials, indus-trials, materials, energy, and
utilities.
The principal risk of investing in value stocks is that they may never reach
what the portfolio manager believes is their full value or they may even go down
in value. The Fund may experience a portfolio turnover rate of more than 100%
and may generate taxable short-term gains.
1. See footnote on page 6 for more information on the Russell 1000(R) Value
Index.
2. See footnote on page 6 for more information on Lipper Inc.
3. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 6.
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, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (94.8%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.6%)
Honeywell International, Inc. 298,800 $ 12,585,456
Northrop Grumman Corp. 106,300 7,057,257
------------
19,642,713
------------
BUILDING PRODUCTS (1.4%)
American Standard Cos., Inc. (a) 241,400 10,691,606
------------
CAPITAL MARKETS (6.2%)
Bank of New York Co., Inc. (The) 327,800 11,266,486
Goldman Sachs Group, Inc. (The) 57,500 10,912,925
Merrill Lynch & Co., Inc. (a) 148,300 12,964,386
Morgan Stanley 145,500 11,120,565
------------
46,264,362
------------
CHEMICALS (2.3%)
V E.I. du Pont de Nemours & Co. 376,700 17,252,860
------------
COMMERCIAL BANKS (6.0%)
PNC Financial Services Group, Inc. 138,400 9,692,152
U.S. Bancorp 304,000 10,287,360
Wachovia Corp. 225,200 12,498,600
Wells Fargo & Co. 351,900 12,770,451
------------
45,248,563
------------
COMMUNICATIONS EQUIPMENT (3.1%)
Motorola, Inc. 481,700 11,108,002
Nokia Oyj, Sponsored ADR (b) 621,300 12,351,444
------------
23,459,446
------------
COMPUTERS & PERIPHERALS (1.1%)
International Business Machines Corp. 90,300 8,337,399
------------
CONTAINERS & PACKAGING (0.8%)
Ball Corp. 149,100 6,201,069
------------
DIVERSIFIED FINANCIAL SERVICES (10.9%)
V Bank of America Corp. 565,726 30,475,660
V Citigroup, Inc. 666,766 33,444,982
V JPMorgan Chase & Co. 378,692 17,965,148
------------
81,885,790
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.9%)
AT&T, Inc. 417,100 14,285,675
V Verizon Communications, Inc. 415,100 15,358,700
------------
29,644,375
------------
ELECTRIC UTILITIES (0.9%)
FirstEnergy Corp. 113,100 6,655,935
------------
ENERGY EQUIPMENT & SERVICES (3.7%)
ENSCO International, Inc. 188,600 9,235,742
Rowan Cos., Inc. (a) 288,300 9,623,454
Transocean, Inc. (c) 119,400 8,661,276
------------
27,520,472
------------
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (3.3%)
CVS Corp. 233,100 $ 7,314,678
Kroger Co. (The) 467,500 10,514,075
Wal-Mart Stores, Inc. 146,800 7,234,304
------------
25,063,057
------------
FOOD PRODUCTS (1.8%)
Cadbury Schweppes PLC Sponsored ADR (a)(b) 92,400 3,750,516
General Mills, Inc. 169,800 9,648,036
------------
13,398,552
------------
HEALTH CARE PROVIDERS & SERVICES (0.4%)
Quest Diagnostics, Inc. 53,200 2,646,168
------------
HOUSEHOLD PRODUCTS (1.0%)
Kimberly-Clark Corp. 112,100 7,456,892
------------
INSURANCE (4.8%)
Allstate Corp. (The) 76,200 4,675,632
Genworth Financial, Inc. Class A 339,300 11,346,192
Hartford Financial Services Group, Inc. (The) 112,600 9,815,342
Prudential Financial, Inc. 133,000 10,231,690
------------
36,068,856
------------
IT SERVICES (0.9%)
Computer Sciences Corp. (c) 132,400 6,997,340
------------
MACHINERY (0.4%)
Pentair, Inc. 95,500 3,145,770
------------
MEDIA (4.3%)
Comcast Corp. Class A (c) 247,200 10,053,624
Gannett Co., Inc. 137,100 8,108,094
Time Warner, Inc. 213,400 4,270,134
Tribune Co. (a) 289,700 9,655,701
------------
32,087,553
------------
METALS & MINING (0.7%)
Alcoa, Inc. 190,700 5,513,137
------------
MULTI-UTILITIES (1.1%)
Duke Energy Corp. 154,500 4,888,380
Energy East Corp. 146,800 3,568,708
------------
8,457,088
------------
OIL, GAS & CONSUMABLE FUELS (7.9%)
V Chevron Corp. 243,504 16,363,469
ConocoPhillips 217,300 13,090,152
</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)
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS (CONTINUED)
V ExxonMobil Corp. 343,600 $ 24,539,912
Valero Energy Corp. 100,000 5,233,000
------------
59,226,533
------------
PHARMACEUTICALS (11.1%)
Abbott Laboratories 279,800 13,293,298
Barr Pharmaceuticals, Inc. (c) 153,200 8,023,084
Johnson & Johnson 208,800 14,073,120
KOS Pharmaceuticals, Inc. (a)(c) 179,600 8,935,100
V Pfizer, Inc. 983,000 26,196,950
Wyeth 257,500 13,140,225
------------
83,661,777
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (4.9%)
Advanced Micro Devices, Inc. (c) 465,000 9,890,550
Intel Corp. 562,000 11,993,080
V Texas Instruments, Inc. 493,600 14,896,848
------------
36,780,478
------------
SPECIALTY RETAIL (3.8%)
Gap, Inc. (The) 426,100 8,956,622
V Home Depot, Inc. (The) 402,000 15,006,660
Lowe's Cos., Inc. 148,400 4,472,776
------------
28,436,058
------------
THRIFTS & MORTGAGE FINANCE (2.9%)
PMI Group, Inc. (The) (a) 316,500 13,498,725
Washington Mutual, Inc. 186,750 7,899,525
------------
21,398,250
------------
TRADING COMPANIES & DISTRIBUTERS (0.8%)
W.W. Grainger, Inc. 83,900 6,106,242
------------
WIRELESS TELECOMMUNICATION SERVICES (1.8%)
ALLTEL Corp. 65,400 3,486,474
Sprint Nextel Corp. 524,200 9,797,298
------------
13,283,772
------------
Total Common Stocks
(Cost $586,840,567) 712,532,113
------------
INVESTMENT COMPANY (1.9%)
- --------------------------------------------------------------------------------
iShares Russell 1000 Value Index Fund (a)(d) 177,200 14,078,540
------------
Total Investment Company
(Cost $13,717,314) 14,078,540
------------
<Caption>
NUMBER OF
CONTRACTS (g) VALUE
PURCHASED PUT OPTIONS (0.1%)
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES (0.0%)++
Rowan Cos., Inc.
Strike Price $32.50
Expire 11/18/06 (c) 1,653 $ 206,625
------------
PHARMACEUTICALS (0.1%)
KOS Pharmaceuticals, Inc.
Strike Price $50.00 Expire 5/19/07 (c) 467 308,220
------------
SPECIALTY RETAIL (0.0%)++
Gap, Inc. (The) Strike Price $17.50
Expire 11/18/06 (c) 2,000 15,000
------------
Total Purchased Put Options
(Premium $626,660) 529,845
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (5.7%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (3.5%)
AIG Funding, Inc.
5.23%, due 11/2/06 $ 7,015,000 7,013,981
5.24%, due 11/7/06 6,145,000 6,139,633
Fairway Finance Corp.
5.289%, due 11/20/06 (e) 364,095 364,095
General Electric Capital Corp.
5.23%, due 11/9/06 9,145,000 9,134,372
Greyhawk Funding
5.286%, due 11/13/06 (e) 485,461 485,461
Jupiter Securitization Corp.
5.303%, due 11/14/06 (e) 597,073 597,073
Lexington Parker Capital Co.
5.282%, due 11/8/06 (e) 485,461 485,461
Liberty Street Funding Co.
5.286%, due 11/27/06 (e) 600,974 600,974
Old Line Funding LLC
5.287%, due 11/15/06 (e) 485,461 485,461
Sheffield Receivables Corp.
5.272%, due 11/8/06 (e) 485,461 485,461
Yorktown Capital LLC
5.282%, due 11/16/06 (e) 424,778 424,778
------------
Total Commercial Paper
(Cost $26,216,750) 26,216,750
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
INVESTMENT COMPANY (0.1%)
BGI Institutional Money Market Fund (e) 1,048,003 $ 1,048,003
------------
Total Investment Company
(Cost $1,048,003) 1,048,003
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.1%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $571,833
(Collateralized by various Corporate Bonds, with rates between
0%-8.40% and maturity dates between 1/30/07-6/15/34, with a
Principal Amount of $594,476 and a Market Value
of $578,303) (e) $ 571,747 571,747
------------
Total Repurchase Agreement
(Cost $571,747) 571,747
------------
TIME DEPOSITS (2.0%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (e) 970,922 970,922
Bank of America
5.27%, due 11/21/06 (e)(f) 1,335,017 1,335,017
Bank of Montreal
5.28%, due 11/27/06 (e) 970,922 970,922
Bank of Nova Scotia
5.30%, due 11/10/06 (e) 970,922 970,922
Barclays
5.32%, due 1/18/07 (e) 970,922 970,922
Deutsche Bank AG
5.27%, due 11/9/06 (e) 970,922 970,922
Fortis Bank
5.27%, due 11/6/06 (e) 2,111,755 2,111,755
Halifax Bank of Scotland
5.30%, due 1/10/07 (e) 970,921 970,921
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (e) 970,921 970,921
Royal Bank of Canada
5.30%, due 12/22/06 (e) 970,922 970,922
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Royal Bank of Scotland
5.29%, due 12/12/06 (e) $ 970,922 $ 970,922
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (e) 970,922 970,922
Societe Generale North America, Inc.
5.28%, due 12/6/06 (e) 970,922 970,922
UBS AG
5.28%, due 12/5/06 (e) 970,922 970,922
------------
Total Time Deposits
(Cost $15,097,834) 15,097,834
------------
Total Short-Term Investments
(Cost $42,934,334) 42,934,334
------------
Total Investments
(Cost $644,118,875) (h) 102.5% 770,074,832(i)
Liabilities in Excess of
Cash and Other Assets (2.5) (18,581,677)
------------- ------------
Net Assets 100.0% $751,493,155
============= ============
</Table>
<Table>
++ Less than one tenth of a percent.
(a) Represents a security, or a portion thereof, which is out on
loan.
(b) ADR--American Depositary Receipt.
(c) Non-income producing security.
(d) Exchange Traded Fund--represents a basket of securities that
are traded on an exchange.
(e) Represents a 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, 2006.
(g) One contract relates to 100 shares.
(h) The cost for federal income tax purposes is $646,300,877.
(i) At October 31, 2006 net unrealized appreciation was
$123,773,955. 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 $127,573,702 and aggregate gross
unrealized depreciation for all investments on which there
was an excess of cost over market value of $3,799,747.
</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.
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, 2006
<Table>
ASSETS:
Investment in securities, at value (identified cost
$644,118,875) including $20,137,051 market
value of securities loaned $ 770,074,832
Cash 1,105
Receivables:
Investment securities sold 7,948,910
Dividends and interest 809,809
Fund shares sold 326,459
Other assets 32,856
-------------
Total assets 779,193,971
-------------
LIABILITIES:
Securities lending collateral 20,646,348
Payables:
Investment securities purchased 5,241,642
Fund shares redeemed 694,667
Transfer agent (See Note 3) 372,073
NYLIFE Distributors (See Note 3) 293,975
Manager (See Note 3) 263,779
Shareholder communication 109,719
Professional fees 58,151
Trustees 9,544
Custodian 5,815
Accrued expenses 5,103
-------------
Total liabilities 27,700,816
-------------
Net assets $ 751,493,155
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 220,937
Class B 82,650
Class C 5,788
Class I 8,466
Class R1 1
Class R2 5,751
Additional paid-in capital 545,494,725
Accumulated undistributed net investment
income 613,972
Accumulated undistributed net realized gain on
investments and written option transactions 79,104,908
Net unrealized appreciation on investments 125,955,957
-------------
Net assets $ 751,493,155
=============
CLASS A
Net assets applicable to outstanding shares $ 514,014,541
=============
Shares of beneficial interest outstanding 22,093,683
=============
Net asset value per share outstanding $ 23.27
Maximum sales charge (5.50% of offering price) 1.35
-------------
Maximum offering price per share outstanding $ 24.62
=============
CLASS B
Net assets applicable to outstanding shares $ 191,085,850
=============
Shares of beneficial interest outstanding 8,264,979
=============
Net asset value and offering price per share
outstanding $ 23.12
=============
CLASS C
Net assets applicable to outstanding shares $ 13,380,679
=============
Shares of beneficial interest outstanding 578,778
=============
Net asset value and offering price per share
outstanding $ 23.12
=============
CLASS I
Net assets applicable to outstanding shares $ 19,670,599
=============
Shares of beneficial interest outstanding 846,553
=============
Net asset value and offering price per share
outstanding $ 23.24
=============
CLASS R1
Net assets applicable to outstanding shares $ 1,339
=============
Shares of beneficial interest outstanding 58
=============
Net asset value and offering price per share
outstanding $ 23.23*
=============
CLASS R2
Net assets applicable to outstanding shares $ 13,340,147
=============
Shares of beneficial interest outstanding 575,098
=============
Net asset value and offering price per share
outstanding $ 23.20
=============
* Difference in the NAV recalculation and NAV
stated is caused by rounding differences.
</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, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 15,346,532
Interest 1,071,998
Income from securities loaned--net 98,633
-------------
Total income 16,517,163
-------------
EXPENSES:
Manager (See Note 3) 4,546,639
Transfer agent--Classes A, B and C (See Note
3) 2,244,309
Transfer agent--Classes I, R1 and R2 (See
Note 3) 27,665
Distribution--Class B (See Note 3) 2,018,588
Distribution--Class C (See Note 3) 97,001
Distribution/Service--Class A (See Note 3) 1,075,956
Service--Class B (See Note 3) 672,863
Service--Class C (See Note 3) 32,334
Distribution/Service--Class R2 (See Note 3) 31,921
Shareholder communication 336,216
Professional fees 200,441
Registration 102,083
Recordkeeping 99,800
Trustees 42,718
Custodian 24,540
Shareholder service--Class R1 (See Note 3) 1
Shareholder service--Class R2 (See Note 3) 12,768
Miscellaneous 51,574
-------------
Total expenses before waiver/reimbursement 11,617,417
Expense waiver from Manager (See Note 3) (907,175)
Reimbursement from Manager for professional
fees (See Note 3(B) on page 21.) (73,953)
-------------
Net expenses 10,636,289
-------------
Net investment income 5,880,874
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND WRITTEN
OPTIONS:
Net realized gain on:
Security transactions $ 81,301,955
Written option transactions 393,242
-------------
Net realized gain on investments and written
option transactions 81,695,197
-------------
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 21.) 374,000
-------------
Net change in unrealized appreciation on
investments 27,366,967
-------------
Net realized and unrealized gain on
investments and written options transactions 109,436,164
-------------
Net increase in net assets resulting from
operations $115,317,038
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $9,537.
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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 5,880,874 $ 1,629,999
Net realized gain on
investments and written
option transactions 81,695,197 46,954,014
Net increase from payments
from Manager for losses
attributable to shareholder
trading arrangements (See
Note 3(B) on page 21.) 374,000 --
Net change in unrealized
appreciation on investments
and written option contracts 27,366,967 16,718,167
-----------------------------
Net increase in net assets
resulting from operations 115,317,038 65,302,180
-----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (4,624,242) (1,050,747)
Class B (1,094,995) (414,484)
Class C (51,601) (10,045)
Class I (90,908) (15)
Class R1 (18) (15)
Class R2 (150,386) (68,181)
From net realized gain on investments:
Class A (155,358) --
Class B (680,455) --
Class C (15,559) --
Class I (1) --
Class R1 (1) --
Class R2 (15,002) --
-----------------------------
Total dividends and
distributions to
shareholders (6,878,526) (1,543,487)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 70,663,793 23,332,176
Class B 16,298,100 23,902,999
Class C 2,369,468 1,540,402
Class I 23,089,904 --
Class R2 3,531,952 13,525,728
</Table>
<Table>
<Caption>
2006 2005
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
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions:
Class A 4,605,379 1,006,351
Class B 1,699,371 400,464
Class C 31,346 4,201
Class I 90,909 15
Class R1 19 15
Class R2 165,333 68,208
-----------------------------
122,545,574 125,353,482
Cost of shares redeemed:
Class A (84,694,702) (49,421,869)
Class B (95,504,439) (105,014,067)
Class C (4,503,474) (4,965,790)
Class I (5,138,872) --
Class R2 (3,619,881) (7,672,682)
-----------------------------
(193,461,368) (167,074,408)
Net asset value of shares converted (See
Note 1):
Class A 334,291,220 --
Class B (334,291,220) --
Decrease in net assets
derived from capital share
transactions (70,915,794) (41,720,926)
-----------------------------
Net increase in net assets 37,522,718 22,037,767
NET ASSETS:
Beginning of year 713,970,437 691,932,670
-----------------------------
End of year $ 751,493,155 $ 713,970,437
=============================
Accumulated undistributed net
investment income at end of
year $ 613,972 $ 824,248
=============================
</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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 20.09 $ 18.39 $ 16.56 $ 14.13 $ 18.52 $ 19.12
-------- -------- -------- ----------- -------- --------
Net investment income 0.24 (a) 0.16 (a) 0.14 (a) 0.11 0.12 0.19
Net realized and unrealized gain (loss) on
investments 3.21 (e) 1.70 1.74 2.42 (4.23) (0.52)
-------- -------- -------- ----------- -------- --------
Total from investment operations 3.45 1.86 1.88 2.53 (4.11) (0.33)
-------- -------- -------- ----------- -------- --------
Less dividends and distributions:
From net investment income (0.25) (0.16) (0.05) (0.10) (0.11) (0.19)
From net realized gain on investments (0.02) -- -- -- (0.17) (0.08)
-------- -------- -------- ----------- -------- --------
Total dividends and distributions (0.27) (0.16) (0.05) (0.10) (0.28) (0.27)
-------- -------- -------- ----------- -------- --------
Net asset value at end of period $ 23.27 $ 20.09 $ 18.39 $ 16.56 $ 14.13 $ 18.52
======== ======== ======== =========== ======== ========
Total investment return (c) 17.30%(d)(e) 10.13% 11.36% 18.02%(f) (22.16%) (1.74%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.11% 0.82% 0.77% 0.93%+ 0.82% 0.99%
Net expenses 1.17% 1.21% 1.30% 1.38%+ 1.30% 1.20%
Expenses (before waiver/reimbursement) 1.30%(d) 1.28% 1.30% 1.38%+ 1.30% 1.20%
Portfolio turnover rate 48% 43% 53% 47% 66% 88%
Net assets at end of period (in 000's) $514,015 $128,918 $118,818 $112,745 $101,999 $141,703
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 19.96 $ 18.28 $16.55 $14.13 $ 18.53 $19.12
------- ------- ------ ----------- ------- ------
Net investment income 0.07 (a) 0.02 (a) 0.00 (a)(b) 0.02 0.01 0.04
Net realized and unrealized gain (loss) on
investments 3.20 (e) 1.67 1.75 2.42 (4.23) (0.51)
------- ------- ------ ----------- ------- ------
Total from investment operations 3.27 1.69 1.75 2.44 (4.22) (0.47)
------- ------- ------ ----------- ------- ------
Less dividends and distributions:
From net investment income (0.09) (0.01) (0.02) (0.02) (0.01) (0.04)
From net realized gain on investments (0.02) -- -- -- (0.17) (0.08)
------- ------- ------ ----------- ------- ------
Total dividends and distributions (0.11) (0.01) (0.02) (0.02) (0.18) (0.12)
------- ------- ------ ----------- ------- ------
Net asset value at end of period $ 23.12 $ 19.96 $18.28 $16.55 $ 14.13 $18.53
======= ======= ====== =========== ======= ======
Total investment return (c) 16.44%(d)(e) 9.27% 10.56% 17.26%(f) (22.76%) (2.45%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.34% 0.07% 0.02% 0.18%+ 0.07% 0.24%
Net expenses 1.92% 1.96% 2.05% 2.13%+ 2.05% 1.95%
Expenses (before waiver/reimbursement) 2.05%(d) 2.03% 2.05% 2.13%+ 2.05% 1.95%
Portfolio turnover rate 48% 43% 53% 47% 66% 88%
Net assets at end of period (in 000's) $13,381 $13,555 $4,418 $3,095 $ 2,336 $1,631
</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) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges. Class I, R1 and R2 are not subject
to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundred of a percent. (See Note 3(B) on page 21.)
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were $0.01 per share on net
realized gains on investments; and the effect on total investment return was 0.05%,
respectively. (See Note 3(B) on page 21.)
(f) 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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 19.96 $ 18.28 $ 16.55 $ 14.13 $ 18.53 $ 19.12
-------- -------- -------- ----------- -------- --------
0.06 (a) 0.01 (a) 0.00 (a)(b) 0.02 0.01 0.04
3.21 (e) 1.68 1.75 2.42 (4.23) (0.51)
-------- -------- -------- ----------- -------- --------
3.27 1.69 1.75 2.44 (4.22) (0.47)
-------- -------- -------- ----------- -------- --------
(0.09) (0.01) (0.02) (0.02) (0.01) (0.04)
(0.02) -- -- -- (0.17) (0.08)
-------- -------- -------- ----------- -------- --------
(0.11) (0.01) (0.02) (0.02) (0.18) (0.12)
-------- -------- -------- ----------- -------- --------
$ 23.12 $ 19.96 $ 18.28 $ 16.55 $ 14.13 $ 18.53
======== ======== ======== =========== ======== ========
16.44%(d)(e) 9.27% 10.56% 17.26%(f) (22.76%) (2.45%)
0.30% 0.07% 0.02% 0.18%+ 0.07% 0.24%
1.92% 1.96% 2.05% 2.13%+ 2.05% 1.95%
2.05%(d) 2.03% 2.05% 2.13%+ 2.05% 1.95%
48% 43% 53% 47% 66% 88%
$191,086 $560,139 $563,838 $560,740 $517,050 $753,299
</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,
2006 2005 2004 2006 2005 2004 2006 2005 2004
$ 20.06 $18.43 $17.86 $20.05 $18.42 $17.86 $ 20.01 $ 18.38 $17.86
------- ------ ----------- ------ ------ ----------- ------- ------- -----------
0.32 (a) 0.21 (a) 0.09 (a) 0.31 (a) 0.21 (a) 0.07 (a) 0.25 (a) 0.16 (a) 0.12 (a)
3.21 (e) 1.69 0.48 3.20 (e) 1.69 0.49 3.22 (e) 1.67 0.40
------- ------ ----------- ------ ------ ----------- ------- ------- -----------
3.53 1.90 0.57 3.51 1.90 0.56 3.47 1.83 0.52
------- ------ ----------- ------ ------ ----------- ------- ------- -----------
(0.33) (0.27) -- (0.31) (0.27) -- (0.26) (0.20) --
(0.02) -- -- (0.02) -- -- (0.02) -- --
------- ------ ----------- ------ ------ ----------- ------- ------- -----------
(0.35) (0.27) -- (0.33) (0.27) -- (0.28) (0.20) --
------- ------ ----------- ------ ------ ----------- ------- ------- -----------
$ 23.24 $20.06 $18.43 $23.23 $20.05 $18.42 $ 23.20 $ 20.01 $18.38
======= ====== =========== ====== ====== =========== ======= ======= ===========
17.78%(d)(e) 10.36% 3.19%(f) 17.67%(d)(e) 10.31% 3.14%(f) 17.46%(d)(e) 10.02% 2.91%(f)
1.44% 1.13% 1.11%+ 1.43% 1.03% 1.01%+ 1.16% 0.79% 0.76%+
0.75% 0.90% 0.96%+ 0.85% 1.00% 1.06%+ 1.10% 1.24% 1.31%+
0.88%(d) 0.97% 0.96%+ 0.98%(d) 1.07% 1.06%+ 1.23%(d) 1.31% 1.31%+
48% 43% 53% 48% 43% 53% 48% 43% 53%
$19,671 $ 1 $ 1 $ 1 $ 1 $ 1 $13,340 $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. Distribution of Class A shares
commenced on January 3, 1995, Class B shares commenced on May 1, 1986, Class C
shares commenced on September 1, 1998 and 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 a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I, Class R1 and Class R2 shares are not subject to a sales
charge. As approved by the Board of Trustees in 1997, Class B shares convert to
Class A shares eight years after the date they were purchased. The first
conversion occurred December 28, 2005. 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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 Value Fund
treatment; temporary differences do not require reclassification.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated undistributed net
realized gain on investments and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED UNDISTRIBUTED NET
UNDISTRIBUTED NET REALIZED GAIN ADDITIONAL
INVESTMENT INCOME ON INVESTMENTS PAID-IN-CAPITAL
$ (79,000) $ (374,000) $ 453,000
- --------------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to the reimbursement
payment (See Note 10 on page 23) and the utilization of earnings and profits on
shareholder redemptions.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) 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 price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. 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.
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
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
(I) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 22.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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, 1.17% 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 written expense
limitation 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. For the year ended October 31, 2006,
the Manager earned fees from the Fund in the amount of $4,546,639 and waived its
fees in the amount of $907,175.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008 2009 TOTAL
$235,721 $907,175 $1,142,896
------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
20 MainStay Value Fund
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 10 on
page 23.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $73,953. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) 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
and Class C shares of the Fund. Class I 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
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.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $56,544 for the year ended
October 31, 2006. 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 $4,719, $243,191 and $1,014, respectively, for the year ended October
31, 2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $2,271,974.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $362,249 0.1%
- ---------------------------------------------------------------
Class C 303 0.0*
- ---------------------------------------------------------------
Class I 1,341 0.0*
- ---------------------------------------------------------------
Class R1 1,339 100.0
- ---------------------------------------------------------------
Class R2 1,330 0.0*
- ---------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $19,989.
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
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $99,800 for the year
ended October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$9,760,449 $72,140,433 $123,773,955 $205,674,837
- -----------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals and staddle loss deferrals.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary income $6,012,150 $1,543,487
Long-term capital gains 866,376 --
- -----------------------------------------------------------------------------
$6,878,526 $1,543,487
- -----------------------------------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED AND WRITTEN OPTIONS:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $20,137,051. The Fund received $20,646,348 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.
Securities purchased with collateral received are valued at amortized cost.
Written option activity for the year ended October 31, 2006 was as follows:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options outstanding at
October 31, 2005 -- $ --
- ---------------------------------------------------------------
Options--written 2,414 399,161
- ---------------------------------------------------------------
Options--expired (1,791) (206,417)
- ---------------------------------------------------------------
Options--canceled in closing
transactions (623) (192,744)
- ---------------------------------------------------------------
Options outstanding at
October 31, 2006 -- $ --
- ---------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $340,714 and $395,753, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C
Shares sold 3,252 752 108
- ---------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions 210 80 2
- ---------------------------------------------------------------------
3,462 832 110
Shares redeemed (3,873) (4,447) (210)
- ---------------------------------------------------------------------
Shares converted (See Note 1) 16,087 (16,181) --
- ---------------------------------------------------------------------
Net increase (decrease) 15,676 (19,796) (100)
- ---------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS I CLASS R1 CLASS R2
Shares sold 1,069 -- 167
- -----------------------------------------------------------------------
Shares issued in reinvestment
of dividend and distributions 4 --(a) 8
- -----------------------------------------------------------------------
1,073 --(a) 175
Shares redeemed (226) -- (167)
- -----------------------------------------------------------------------
Net increase 847 --(a) 8
- -----------------------------------------------------------------------
</Table>
22 MainStay Value Fund
<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>
(a) Less than one thousand shares.
(b) On February 4, 2005, and pursuant to shareholder approval, the assets of the
MainStay Research Value Fund were acquired by the Fund.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$374,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
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, 2006, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and financial highlights for
each of the years in the three-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
24 MainStay Value Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's generally mid-range
performance over various time periods relative to groupings of funds having
similar mandates.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
www.mainstayfunds.com 25
discussed additional measures that may increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at asset levels above the breakpoints, and the fact
that the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund's management fee rate had been reduced
by the breakpoint schedule applicable to the Fund. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to maintain a limit on the
Fund's net expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
26 MainStay 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, 2006) 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 $866,376.
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 89.6% to arrive at the amount eligible for qualified
dividend income, 5.8% for the qualified interest income and 95.9% for the
corporate dividends received deduction.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
www.mainstayfunds.com 27
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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 Value Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 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>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE SYMBOL) MS377-06 MSV11-12/06
15
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 26
- --------------------------------------------------------------------------------
Notes to Financial Statements 32
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 41
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 42
- --------------------------------------------------------------------------------
Federal Income Tax Information 44
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 44
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 44
- --------------------------------------------------------------------------------
Trustees and Officers 45
</Table>
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 1.87% 6.74% 5.34%
Excluding sales charges 6.67 7.72 5.84
</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
10209 10676 10747
10451 11375 11750
10845 11498 11813
10834 11361 12675
11400 12192 14520
11332 12850 15375
14002 15123 16129
15183 16674 17021
15503 16806 17214
10/31/06 16537 17972 18108
</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 1.01% 6.62% 5.06%
Excluding sales charges 6.01 6.93 5.06
</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
10635 10676 10747
10802 11375 11750
11143 11498 11813
11031 11361 12675
11535 12192 14520
11370 12850 15375
13953 15123 16129
15025 16674 17021
15210 16806 17214
10/31/06 16123 17972 18108
</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 5.01% 6.93% 5.06%
Excluding sales charges 6.01 6.93 5.06
</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
10635 10676 10747
10802 11375 11750
11143 11498 11813
11031 11361 12675
11535 12192 14520
11370 12850 15375
13953 15123 16129
15025 16674 17021
15210 16806 17214
10/31/06 16123 17972 18108
</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 as 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. These fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of any management fee
waivers or expense reimbursements from the Fund pursuant to this agreement if
such action does not cause the Fund to exceed existing expense limitations and
the recoupment is made within three years after the year in which the Manager
incurred the expense. 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.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
7.09% 8.04% 6.13%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 10000 10000 10000
10708 10676 10747
10989 11375 11750
11433 11498 11813
11451 11361 12675
12080 12192 14520
12038 12850 15375
14910 15123 16129
16225 16674 17021
16602 16806 17214
10/31/06 17778 17972 18108
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- ----------------------------------------------------------------------------------
Three-Index Composite(1) 6.94% 8.07% 6.25%
Lehman Brothers(R) Aggregate Bond Index(2) 5.19 4.51 6.33
Average Lipper multi-sector income fund(3) 6.66 8.16 5.84
</Table>
1. The Funds Three-Index Composite assumes equal investments in the Lehman
Brothers(R) Aggregate Bond Index, the Credit Suisse 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 in an index or this composite.
2. The Lehman Brothers(R) Aggregate Bond Index is an unmanaged index that
consists of 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 in 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.
6 MainStay Diversified Income Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,038.90 $ 6.68 $1,018.50 $ 6.61
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,035.25 $10.52 $1,014.75 $10.41
- ----------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,035.25 $10.52 $1,014.75 $10.41
- ----------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,040.90 $ 4.94 $1,020.20 $ 4.89
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.30% for Class A, 2.05% for Class B and Class C, and 0.96% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period). In the absence of
waivers and/or reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-
TERM
INVESTMENTS
(COLLATERAL
U.S. FROM
GOVERNMENT SECURITIES LOAN
FOREIGN & CORPORATE LENDING MORTGAGE- ASSIGNMENTS ASSET-
CORPORATE GOVERNMENT FEDERAL BONDS-- IS CONVERTIBLE BACKED AND BACKED
BONDS BONDS AGENCIES FOREIGN 4.1%) BONDS SECURITIES PARTICIPATIONS SECURITIES
- --------- ---------- ---------- --------- ----------- ----------- ---------- -------------- ----------
27.4 24.1 20.3 13.5 6.7 4.3 2.4 2.3 1.3
<Caption>
LIABILITIES
IN
EXCESS
OF
CASH
CONVERTIBLE AND
YANKEE PREFERRED PREFERRED COMMON MUNICIPAL OTHER
BONDS STOCKS STOCKS STOCKS BOND WARRANTS ASSETS
- ------ ----------- --------- ------ --------- -------- -----------
0.7 0.7 0.7 0.3 0.1 0.0* (4.8)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal Home Loan Mortgage Corporation (Mortgage
Pass-Through Security), 5.50%, due 1/1/36
2. Federal National Mortgage Association,
5.25%, due 8/1/12
3. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 6/1/21
4. Republic of Germany, 5.00%, due 7/4/11
5. Hellenic Republic, 4.50%, due 5/20/14
6. Federal Republic of Brazil, 8.25%, due 1/20/34
7. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.00%, due 6/1/36
8. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.00%, due 12/1/36 TBA
9. United Mexican States, 6.75%, due 9/27/34
10. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 11/1/33
</Table>
8 MainStay Diversified Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Joseph Portera and J. Matthew Philo,
CFA, of MacKay Shields LLC
HOW DID MAINSTAY DIVERSIFIED INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Diversified Income Fund returned 6.67% for
Class A shares, 6.01% for Class B shares, and 6.01% for Class C shares for the
12 months ended October 31, 2006. Over the same period, the Fund's Class I
shares returned 7.09%. Class I shares outperformed--and Class A, Class B, and
Class C shares underperformed--the 6.94% return of the Fund's Three-Index
Composite,(1) the Fund's broad-based securities-market index, for the 12-month
period. All share classes outperformed the 5.19% return of the Lehman
Brothers(R) Aggregate Bond Index over the same period.(2) Class I and Class A
shares outperformed--and Class B and Class C shares underperformed--the 6.66%
return of the average Lipper(2) multi-sector income fund for the 12 months ended
October 31, 2006.
WHAT KEY FACTORS DROVE THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
We maintained an overweighted position relative to the benchmark in securitized
holdings. We expected solid performance from mortgage-backed and asset-backed
securities and were not disappointed. We expected slower price appreciation in
the housing market to help residential mortgage-backed securities, since
borrowers would have fewer refinancing options and underlying future cash flows
would tend to stabilize. Most of our sector views were correct, but the Fund's
overweighted Ginnie Mae position detracted from performance when the securities
weakened on declining foreign demand. To help manage risk, we decreased the
Fund's Ginnie Mae exposure.
HOW DID YOU POSITION THE FUND'S PORTFOLIO IN THE CORPORATE BOND MARKET?
With corporate-bond spreads caught in various crosscurrents, total returns for
corporate-bonds were dominated by coupon income rather than capital gains.
Because corporate spreads were relatively tight, we began the reporting period
with only modest high-yield exposure and we reduced the Fund's investment-grade
corporate exposure to an underweighted position relative to the benchmark.
During the reporting period, however, we took advantage of attractive entry
points and gradually moved closer to a benchmark-neutral position in high-yield
bonds and expanded the Fund's overweighted overall position in investment-grade
debt.
HOW DID YOU ALLOCATE THE FUND'S HOLDINGS WITHIN THE HIGH-YIELD MARKET?
Given the low risk premiums available in the market, we maintained a relatively
conservative posture in the high-yield portion of the Fund. With tight spreads,
the compensation for taking on additional risk appeared inadequate. As a result,
we reduced exposure to lower-quality high-yield bonds and increased exposure to
higher-quality high-yield securities.
The high-yield portion of the Fund remained underweighted in automotive bonds.
GM and Ford became high-yield issuers in 2005, and because both issuers have
considerable outstanding debt, their bonds have a major influence on the
high-yield market. The Fund maintained its position in GM's finance arm, General
Motors Acceptance Corp.
Although most of the high-yield portion of the Fund was conservatively
positioned, airline holdings were rather volatile, responding directly to
changes in oil prices. The Fund maintained its investments in Delta Airlines and
Northwest Airlines. Both companies sought to lower their cost structures as they
worked through the bankruptcy process. Both positions have benefited from the
recent drop in oil prices.
HOW DID THE FUND'S EMERGING-MARKET DEBT PERFORM DURING THE REPORTING PERIOD?
We continued to add selectively to emerging-market issuers. Since many emerging
markets are commodity exporters, the international portion of the Fund's
portfolio felt the impact of the run-up in commodity prices. Although energy
prices declined toward the end of the reporting period, they remained above
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 more than 100% and may
generate taxable short- term capital gains.
1. See footnote on page 6 for more information on the Fund's Three-Index
Composite.
2. See footnote on page 6 for more information on the Lehman Brothers(R)
Aggregate Bond Index.
3. See footnote on page 6 for more information on Lipper Inc.
www.mainstayfunds.com 9
their historical averages. This allowed emerging-market nations to pursue
prudent fiscal management, and we added to the Fund's exposure in emerging-
market debt.
Emerging-market metals & mining companies traded very cheap relative to their
counterparts in developed nations. We added Southern Peru Copper, one of the
world's largest copper-mine operators, to the Fund. With copper prices rising,
we added to the Fund's exposure in July, and the position is one of the Fund's
largest corporate-bond holdings. CVRD is a Brazilian mining company that
recently won the takeover battle for Canadian nickel miner Inco. We added
exposure to CVRD's 30-year bonds and have been overweighted in the company's
10-year bonds since early in 2006.
HOW WAS THE FUND POSITIONED IN THE INTERNATIONAL GOVERNMENT-BOND AND CURRENCY
MARKETS?
The Fund held an underweighted position in non-dollar investment-grade debt for
the entire reporting period. Low nominal yields in countries such as Japan have,
in our opinion, made these securities relatively unattractive. Fund assets that
would have normally been invested in Japan were reallocated to U.S. convertible
bonds. These securities offer higher yields than Japanese government debt and
allow the Fund to participate in a domestic equity rally.
Outside of Japan, we have been positive on the euro and the British pound and
have maintained exposure in these markets for potential currency appreciation.
During the reporting period, the euro rose 6% and the British pound gained 10%
against the U.S. dollar.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
One new area for the Fund has been local-currency emerging-market debt. Although
the Fund typically invests in hard-currency debt, usually in U.S. dollars, we
felt that the yields on local-currency debt made the bonds attractive, despite
currency volatility. Exposure remained relatively low and was well diversified.
Results were mixed. The Fund's exposure to Egyptian pounds was surprisingly
stable, despite geopolitical tensions in the Middle East. Although Argentina's
local-currency bonds rallied along with the nation's dollar-denominated debt,
the Argentine peso depreciated more than 4% relative to the U.S. dollar, which
eroded some of the Fund's gains on Argentine bonds.
DID YOU MAKE ANY SIGNIFICANT WEIGHTING CHANGES DURING THE REPORTING PERIOD?
Early in the reporting period, the Fund focused on sectors that offered higher
yields or capital-gain potential. During the period, we increased the Fund's
exposure to emerging-market debt, high-yield U.S. debt, and convertible bonds.
Although the Fund's overall allocation to investment-grade securities increased,
we reduced the Fund's exposure in U.S. investment-grade securities, U.S.
Treasurys, non-dollar investment-grade government securities, and corporate
bonds.
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 Diversified Income Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (96.4%)+
Asset-Backed Securities (1.3%)
- ---------------------------------------------------------------------------------
CONSUMER FINANCE (0.3%)
Harley-Davidson Motorcycle Trust
Series 2004-1, Class A2
2.53%, due 11/15/11 $ 377,725 $ 367,844
------------
CONSUMER LOANS (0.1%)
Atlantic City Electric Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 75,000 76,907
------------
DIVERSIFIED FINANCIAL SERVICES (0.3%)
Bank of America Credit Card Trust
Series 2006-C4, Class C4
5.55%, due 11/15/11 (a) 130,000 129,967
Dunkin Securitization
Series 2006-1, Class A2
5.779%, due 6/20/31 (b) 110,000 111,850
Structured Asset Investment Loan Trust
Series 2006-3, Class A4
5.42%, due 6/25/36 (a) 100,000 100,093
------------
341,910
------------
ELECTRIC (0.4%)
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 327,230 358,317
Public Service New Hampshire Funding LLC
Pass-Through Certificates
Series 2002-1, Class A
4.58%, due 2/1/10 79,746 79,372
------------
437,689
------------
ENTERTAINMENT (0.1%)
United Artists Theatre Circuit, Inc.
Series 1995-A
9.30%, due 7/1/15 (c)(d) 102,084 91,876
------------
HOME EQUITY (0.1%)
Citicorp Residential Mortgage Securities, Inc.
Series 2006-1, Class A3
5.706%, due 7/25/36 (a) 120,000 120,669
------------
Total Asset-Backed Securities
(Cost $1,399,921) 1,436,895
------------
CONVERTIBLE BONDS (4.3%)
- ---------------------------------------------------------------------------------
BIOTECHNOLOGY (0.4%)
Amgen, Inc.
0.125%, due 2/1/11 (b) 445,000 466,137
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DISTRIBUTION & WHOLESALE (0.5%)
Costco Wholesale Corp.
(zero coupon), due 8/19/17 (e) $ 410,000 $ 499,175
------------
INSURANCE (0.1%)
Conseco, Inc.
3.50%, due 9/30/35 (b)
(zero coupon), beginning 9/30/10 70,000 71,312
3.50%, due 9/30/35
(zero coupon), beginning 9/30/10 40,000 40,750
------------
112,062
------------
INTERNET (0.0%)++
At Home Corp.
4.75%, due 12/15/06 (d)(f)(g) 504,238 50
------------
LODGING (0.5%)
Hilton Hotels Corp.
3.375%, due 4/15/23 410,000 551,962
------------
MEDIA (0.4%)
Adelphia Communications Corp.
6.00%, due 2/15/07 (f) 80,000 300
Liberty Media Corp.
3.50%, due 1/15/31 450,000 471,375
------------
471,675
------------
OIL & GAS (0.2%)
Pride International, Inc.
3.25%, due 5/1/33 215,000 261,225
------------
OIL & GAS SERVICES (1.2%)
Cooper Cameron Corp.
1.50%, due 5/15/24 285,000 438,187
Halliburton Co.
3.125%, due 7/15/23 235,000 413,894
Schlumberger, Ltd.
1.50%, due 6/1/23 280,000 495,250
------------
1,347,331
------------
PHARMACEUTICALS (0.5%)
Teva Pharmaceutical Finance LLC
Series C
0.25%, due 2/1/26 140,000 135,275
Wyeth
5.109%, due 1/15/24 (a) 430,000 470,936
------------
606,211
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.5%)
Lucent Technologies, Inc.
8.00%, due 8/1/31 $ 95,000 $ 95,831
NII Holdings, Inc.
2.75%, due 8/15/25 (b) 165,000 242,137
Nortel Networks Corp.
4.25%, due 9/1/08 240,000 231,600
------------
569,568
------------
Total Convertible Bonds
(Cost $4,459,460) 4,885,396
------------
CORPORATE BONDS (27.4%)
- ---------------------------------------------------------------------------------
ADVERTISING (0.2%)
Lamar Media Corp.
6.625%, due 8/15/15 120,000 115,500
Vertis, Inc.
9.75%, due 4/1/09 95,000 97,019
------------
212,519
------------
AEROSPACE & DEFENSE (0.2%)
Sequa Corp.
8.875%, due 4/1/08 207,000 214,762
------------
AGRICULTURE (0.4%)
Cargill, Inc.
4.375%, due 6/1/13 (b) 100,000 94,715
Reynolds American, Inc.
7.625%, due 6/1/16 (b) 210,000 222,973
7.75%, due 6/1/18 (b) 150,000 160,188
------------
477,876
------------
AIRLINES (0.5%)
Delta Air Lines, Inc.
8.30%, due 12/15/29 (f) 671,000 244,915
9.75%, due 5/15/21 (f) 5,000 1,800
10.00%, due 8/15/08 (f) 35,000 12,687
10.375%, due 12/15/22 (f) 10,000 3,600
Northwest Airlines, Inc.
7.875%, due 3/15/08 (f) 25,000 15,875
8.70%, due 3/15/07 (f) 5,000 3,187
9.875%, due 3/15/07 (f) 175,000 112,000
10.00%, due 2/1/09 (f) 279,000 174,375
------------
568,439
------------
APPAREL (0.1%)
Unifi, Inc.
11.50%, due 5/15/14 (b) 95,000 89,300
------------
AUTO PARTS & EQUIPMENT (0.8%)
Collins & Aikman Products Co.
12.875%, due 8/15/12 (b)(f)(g) 305,000 381
FleetPride Corp.
11.50%, due 10/1/14 (b) 235,000 235,587
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
AUTO PARTS & EQUIPMENT (CONTINUED)
Goodyear Tire & Rubber Co. (The)
11.25%, due 3/1/11 $ 360,000 $ 396,000
Johnson Controls, Inc.
5.50%, due 1/15/16 250,000 245,384
Tenneco Automotive, Inc.
8.625%, due 11/15/14 (e) 20,000 20,150
------------
897,502
------------
BANKS (0.4%)
Fremont General Corp.
Series B
7.875%, due 3/17/09 255,000 250,537
USB Capital IX
6.189%, due 4/15/11 (a) 135,000 137,837
Wachovia Corp.
5.50%, due 8/1/35 110,000 105,251
------------
493,625
------------
BEVERAGES (0.1%)
Constellation Brands, Inc.
7.25%, due 9/1/16 135,000 137,194
------------
BUILDING MATERIALS (0.4%)
Compression Polymers Corp.
10.50%, due 7/1/13 100,000 102,000
Dayton Superior Corp.
10.75%, due 9/15/08 145,000 150,075
Panolam Industries International, Inc.
10.75%, due 10/1/13 (b) 160,000 163,200
U.S. Concrete, Inc.
8.375%, due 4/1/14 75,000 72,000
------------
487,275
------------
CHEMICALS (1.0%)
Equistar Chemicals, L.P.
10.625%, due 5/1/11 275,000 294,250
IMC Global, Inc.
Series B
10.875%, due 6/1/08 155,000 167,206
10.875%, due 8/1/13 5,000 5,694
Millennium America, Inc.
7.625%, due 11/15/26 149,000 131,492
Reichhold Industries, Inc.
9.00%, due 8/15/14 (b) 30,000 29,850
Terra Capital, Inc.
12.875%, due 10/15/08 372,000 415,710
Tronox Worldwide LLC/Tronox Finance Corp.
9.50%, due 12/1/12 110,000 113,575
------------
1,157,777
------------
COAL (0.1%)
Peabody Energy Corp.
7.375%, due 11/1/16 85,000 88,400
7.875%, due 11/1/26 60,000 62,250
------------
150,650
------------
</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)
- ---------------------------------------------------------------------------------
(x
COMMERCIAL SERVICES (0.6%)
Cardtronics, Inc.
9.25%, due 8/15/13 (e) $ 100,000 $ 103,250
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 60,000 55,800
Language Line, Inc.
11.125%, due 6/15/12 125,000 125,312
Phoenix Color Corp.
11.00%, due 2/1/09 91,000 87,360
Protection One Alarm Monitoring, Inc.
Series B
8.125%, due 1/15/09 65,000 64,025
Service Corp. International
7.375%, due 10/1/14 (b) 90,000 92,475
7.625%, due 10/1/18 (b) 90,000 92,475
------------
620,697
------------
COMPUTERS (0.3%)
SunGard Data Systems, Inc.
3.75%, due 1/15/09 145,000 135,212
4.875%, due 1/15/14 40,000 34,400
9.125%, due 8/15/13 130,000 134,875
------------
304,487
------------
DISTRIBUTION & WHOLESALE (0.1%)
Intcomex, Inc.
11.75%, due 1/15/11 (b) 60,000 59,400
------------
DIVERSIFIED FINANCIAL SERVICES (4.3%)
American Real Estate Partners, L.P./American Real
Estate Finance Corp.
8.125%, due 6/1/12 450,000 460,125
Bear Stearns Cos., Inc. (The)
2.875%, due 7/2/08 230,000 221,676
Chukchansi Economic Development Authority
8.00%, due 11/15/13 (b) 45,000 46,800
Ford Motor Credit Co.
7.375%, due 10/28/09 105,000 102,204
7.875%, due 6/15/10 10,000 9,758
General Motors Acceptance Corp.
5.125%, due 5/9/08 500,000 491,064
6.75%, due 12/1/14 (e) 375,000 371,788
8.00%, due 11/1/31 535,000 573,236
HSBC Finance Corp.
4.75%, due 4/15/10 200,000 197,412
LaBranche & Co., Inc.
9.50%, due 5/15/09 100,000 105,250
11.00%, due 5/15/12 175,000 189,000
OMX Timber Finance Investments LLC
Series 1
5.42%, due 1/29/20 (b) 100,000 97,052
Rainbow National Services LLC
8.75%, due 9/1/12 (b) 90,000 94,612
10.375%, due 9/1/14 (b) 260,000 289,250
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Residential Capital Corp.
6.375%, due 6/30/10 $ 1,170,000 $ 1,187,415
Ucar Finance, Inc.
10.25%, due 2/15/12 185,000 194,481
Vanguard Health Holding Co. II LLC
9.00%, due 10/1/14 165,000 159,637
------------
4,790,760
------------
ELECTRIC (1.1%)
AES Corp. (The)
9.00%, due 5/15/15 (b) 400,000 430,500
Calpine Corp.
8.50%, due 7/15/10 (b)(f) 361,000 377,245
9.875%, due 12/1/11 (b)(f) 29,000 30,450
Kiowa Power Partners LLC
Series B
5.737%, due 3/30/21 (b) 115,000 111,381
NRG Energy, Inc.
7.25%, due 2/1/14 70,000 70,787
7.375%, due 2/1/16 120,000 121,350
PSE&G Energy Holdings LLC
8.625%, due 2/15/08 20,000 20,750
Tenaska Virginia Partners, L.P.
6.119%, due 3/30/24 (b) 104,705 106,379
------------
1,268,842
------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)++
Emerson Electric Co.
6.00%, due 8/15/32 50,000 52,777
------------
ENTERTAINMENT (0.4%)
Gaylord Entertainment Co.
8.00%, due 11/15/13 170,000 172,975
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 (b) 115,000 114,137
Mohegan Tribal Gaming Authority
6.375%, due 7/15/09 25,000 24,937
Warner Music Group
7.375%, due 4/15/14 95,000 92,862
------------
404,911
------------
ENVIRONMENTAL CONTROL (0.2%)
Geo Sub Corp.
11.00%, due 5/15/12 250,000 258,750
------------
FOOD (0.4%)
Chiquita Brands International, Inc.
7.50%, due 11/1/14 135,000 116,775
8.875%, due 12/1/15 (e) 15,000 13,669
Kroger Co. (The)
6.75%, due 4/15/12 70,000 73,563
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
FOOD (CONTINUED)
Pinnacle Foods Holding Corp.
8.25%, due 12/1/13 $ 115,000 $ 115,287
Swift & Co.
10.125%, due 10/1/09 90,000 92,700
12.50%, due 1/1/10 (e) 35,000 35,700
------------
447,694
------------
FOREST PRODUCTS & PAPER (0.4%)
Bowater, Inc.
9.375%, due 12/15/21 180,000 175,500
9.50%, due 10/15/12 5,000 5,050
Georgia-Pacific Corp.
7.75%, due 11/15/29 40,000 39,500
8.00%, due 1/15/24 70,000 70,350
8.875%, due 5/15/31 160,000 169,200
------------
459,600
------------
HAND & MACHINE TOOLS (0.1%)
Thermadyne Holdings Corp.
9.25%, due 2/1/14 80,000 70,600
------------
HEALTH CARE--PRODUCTS (0.2%)
Hanger Orthopedic Group, Inc.
10.25%, due 6/1/14 165,000 168,300
------------
HEALTH CARE--SERVICES (0.9%)
Alliance Imaging, Inc.
7.25%, due 12/15/12 (e) 65,000 60,775
Ameripath, Inc.
10.50%, due 4/1/13 190,000 204,250
HCA, Inc.
6.30%, due 10/1/12 130,000 110,825
8.75%, due 9/1/10 35,000 35,350
Highmark, Inc.
6.80%, due 8/15/13 (b) 245,000 258,705
Quest Diagnostics, Inc.
5.45%, due 11/1/15 75,000 72,874
Skilled Healthcare Group, Inc.
11.00%, due 1/15/14 (b) 50,000 55,000
Triad Hospitals, Inc.
7.00%, due 5/15/12 175,000 173,687
------------
971,466
------------
HOLDING COMPANIES--DIVERSIFIED (0.1%)
Kansas City Southern Railway
9.50%, due 10/1/08 110,000 115,637
------------
HOME BUILDERS (0.1%)
D.R. Horton, Inc.
6.50%, due 4/15/16 80,000 79,718
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HOUSEHOLD PRODUCTS & WARES (0.1%)
ACCO Brands Corp.
7.625%, due 8/15/15 $ 100,000 $ 97,625
------------
INSURANCE (0.4%)
Crum & Forster Holdings Corp.
10.375%, due 6/15/13 240,000 249,000
Fund American Cos., Inc.
5.875%, due 5/15/13 155,000 154,961
Lumbermens Mutual Casualty
8.45%, due 12/1/97 (b)(f) 35,000 262
9.15%, due 7/1/26 (b)(f) 535,000 4,012
------------
408,235
------------
INTERNET (0.1%)
Globix Corp.
11.00%, due 5/1/08 (b)(c)(h) 54,154 54,154
------------
IRON & STEEL (0.3%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 20,000 20,300
Allegheny Technologies, Inc.
8.375%, due 12/15/11 185,000 194,250
United States Steel Corp.
10.75%, due 8/1/08 150,000 161,625
------------
376,175
------------
LEISURE TIME (0.1%)
Town Sports International, Inc.
9.625%, due 4/15/11 140,000 147,700
------------
LODGING (0.6%)
Boyd Gaming Corp.
7.75%, due 12/15/12 225,000 231,187
MTR Gaming Group, Inc.
9.00%, due 6/1/12 (b) 115,000 116,581
Park Place Entertainment Corp.
8.875%, due 9/15/08 35,000 36,444
9.375%, due 2/15/07 285,000 287,137
------------
671,349
------------
MACHINERY--CONSTRUCTION & MINING (0.1%)
Caterpillar, Inc.
6.05%, due 8/15/36 145,000 152,002
------------
MEDIA (2.1%)
Comcast Cable Communications Holdings, Inc.
9.455%, due 11/15/22 200,000 261,170
Houghton Mifflin Co.
7.20%, due 3/15/11 470,000 474,112
MediaNews Group, Inc.
6.875%, due 10/1/13 65,000 60,369
Morris Publishing Group LLC
7.00%, due 8/1/13 220,000 209,275
</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)
- ---------------------------------------------------------------------------------
MEDIA (CONTINUED)
Nielsen Finance LLC/Nielsen Finance Co.
10.00%, due 8/1/14 (b) $ 10,000 $ 10,425
Paxson Communications Corp.
8.624%, due 1/15/12 (a)(b) 115,000 116,294
11.624%, due 1/15/13 (a)(b) 500,000 500,625
Time Warner Entertainment Co., L.P.
10.15%, due 5/1/12 415,000 495,504
Viacom, Inc.
5.75%, due 4/30/11 145,000 145,181
Ziff Davis Media, Inc.
11.489%, due 5/1/12 (a) 135,000 129,262
------------
2,402,217
------------
METAL FABRICATE & HARDWARE (0.3%)
Jarden Corp.
9.75%, due 5/1/12 (e) 140,000 148,050
Metals USA, Inc.
11.125%, due 12/1/15 75,000 82,125
Mueller Group, Inc.
10.00%, due 5/1/12 91,000 99,190
------------
329,365
------------
MINING (0.3%)
Southern Copper Corp.
7.50%, due 7/27/35 300,000 320,751
------------
MISCELLANEOUS--MANUFACTURING (0.1%)
RBS Global, Inc./Rexnord Corp.
9.50%, due 8/1/14 (b) 145,000 150,075
------------
OFFICE & BUSINESS EQUIPMENT (0.1%)
Xerox Corp.
6.40%, due 3/15/16 150,000 150,375
------------
OIL & GAS (2.6%)
Chaparral Energy, Inc.
8.50%, due 12/1/15 225,000 224,437
Chesapeake Energy Corp.
6.50%, due 8/15/17 215,000 202,637
6.875%, due 11/15/20 25,000 23,750
Enterprise Products Operating, L.P.
Series B
6.65%, due 10/15/34 130,000 133,171
Forest Oil Corp.
8.00%, due 12/15/11 210,000 217,350
Hilcorp Energy I, L.P./Hilcorp Finance Co.
9.00%, due 6/1/16 (b) 110,000 113,850
10.50%, due 9/1/10 (b) 7,000 7,508
Mariner Energy, Inc.
7.50%, due 4/15/13 (b) 215,000 206,400
Newfield Exploration Co.
6.625%, due 4/15/16 15,000 14,738
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
OIL & GAS (CONTINUED)
Parker Drilling Co.
9.625%, due 10/1/13 $ 80,000 $ 87,000
Pemex Project Funding Master Trust
7.875%, due 2/1/09 500,000 525,250
PetroHawk Energy Corp.
9.125%, due 7/15/13 (b) 65,000 66,300
Plains Exploration & Production Co.
7.125%, due 6/15/14 50,000 53,625
8.75%, due 7/1/12 100,000 106,250
Pogo Producing Co.
6.625%, due 3/15/15 105,000 100,013
6.875%, due 10/1/17 310,000 295,275
Venoco, Inc.
8.75%, due 12/15/11 80,000 77,800
Vintage Petroleum, Inc.
8.25%, due 5/1/12 220,000 231,810
Whiting Petroleum Corp.
7.00%, due 2/1/14 220,000 216,700
------------
2,903,864
------------
OIL & GAS SERVICES (0.1%)
Allis-Chalmers Energy, Inc.
9.00%, due 1/15/14 (b) 85,000 84,788
------------
PACKAGING & CONTAINERS (0.5%)
Berry Plastics Holding Corp.
8.875%, due 9/15/14 (b) 115,000 116,150
Graphic Packaging International Corp.
8.50%, due 8/15/11 35,000 35,963
Owens-Brockway Glass Container, Inc.
8.75%, due 11/15/12 10,000 10,550
8.875%, due 2/15/09 127,000 130,175
Owens-Illinois, Inc.
8.10%, due 5/15/07 260,000 261,950
------------
554,788
------------
PHARMACEUTICALS (0.5%)
Medco Health Solutions, Inc.
7.25%, due 8/15/13 240,000 260,746
Teva Pharmaceutical Finance LLC
5.55%, due 2/1/16 125,000 123,056
6.15%, due 2/1/36 100,000 97,865
Wyeth
6.00%, due 2/15/36 80,000 82,233
------------
563,900
------------
PIPELINES (1.4%)
ANR Pipeline Co.
8.875%, due 3/15/10 55,000 57,777
9.625%, due 11/1/21 155,000 192,906
Copano Energy LLC
8.125%, due 3/1/16 115,000 117,013
El Paso Natural Gas Co.
7.50%, due 11/15/26 25,000 26,418
7.625%, due 8/1/10 205,000 211,663
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
PIPELINES (CONTINUED)
)xEl Paso Production Holding Co.
7.75%, due 6/1/13 $ 400,000 $ 410,000
Kern River Funding Corp.
4.893%, due 4/30/18 (b) 233,200 226,915
MarkWest Energy Partners, L.P./ MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 145,000 136,300
8.50%, due 7/15/16 (b) 40,000 40,300
Pacific Energy Partners, L.P./ Pacific Energy
Finance Corp.
7.125%, due 6/15/14 115,000 116,294
------------
1,535,586
------------
REAL ESTATE (0.1%)
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 73,000 77,745
------------
REAL ESTATE INVESTMENT TRUSTS (0.8%)
Crescent Real Estate Equities, L.P.
7.50%, due 9/15/07 310,000 311,163
Host Hotels & Resorts, L.P.
6.875%, due 11/1/14 (b) 115,000 115,431
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 255,000 255,319
Trustreet Properties, Inc.
7.50%, due 4/1/15 230,000 250,700
------------
932,613
------------
RETAIL (0.8%)
CVS Corp.
5.789%, due 1/10/26 (b) 102,418 100,910
Harry & David Holdings, Inc.
9.00%, due 3/1/13 65,000 61,750
Michaels Stores, Inc.
10.00%, due 11/1/14 (b) 125,000 125,156
Rite Aid Corp.
7.50%, due 1/15/15 120,000 114,150
Star Gas Partners, L.P./ Star Gas Finance Co.
Series B
10.25%, due 2/15/13 204,000 211,650
Toys "R" Us, Inc.
7.625%, due 8/1/11 180,000 155,700
8.75%, due 9/1/21 195,000 181,838
------------
951,154
------------
SEMICONDUCTORS (0.1%)
MagnaChip Semiconductor S.A.
8.64%, due 12/15/11 (a) 95,000 81,700
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SOFTWARE (0.2%)
Computer Associates International, Inc.
5.25%, due 12/1/09 (b) $ 120,000 $ 116,870
SS&C Technologies, Inc.
11.75%, due 12/1/13 110,000 118,250
------------
235,120
------------
TELECOMMUNICATIONS (2.1%)
AT&T Corp.
Series Reg S
6.00%, due 11/21/06 E 120,000 153,340
Dobson Cellular Systems, Inc.
8.375%, due 11/1/11 $ 40,000 41,550
8.375%, due 11/1/11 (b) 70,000 72,713
9.875%, due 11/1/12 75,000 81,000
GCI, Inc.
7.25%, due 2/15/14 145,000 140,650
Lucent Technologies, Inc.
6.45%, due 3/15/29 360,000 322,200
New Cingular Wireless Services, Inc.
8.75%, due 3/1/31 150,000 196,552
PanAmSat Corp.
9.00%, due 8/15/14 92,000 96,140
9.00%, due 6/15/16 (b) 145,000 151,525
Qwest Communications International, Inc.
7.25%, due 2/15/11 215,000 218,225
Series B
7.50%, due 2/15/14 190,000 193,800
Qwest Corp.
5.625%, due 11/15/08 15,000 14,944
7.50%, due 10/1/14 (b) 180,000 188,550
7.50%, due 6/15/23 195,000 196,950
8.875%, due 3/15/12 100,000 110,000
8.875%, due 6/1/31 180,000 187,650
------------
2,365,789
------------
TEXTILES (0.2%)
Mohawk Industries, Inc.
6.125%, due 1/15/16 250,000 248,845
------------
Total Corporate Bonds
(Cost $30,607,649) 30,756,473
------------
CORPORATE BONDS--FOREIGN (13.5%)
- ---------------------------------------------------------------------------------
ARGENTINA (0.4%)
Argentine Beverages Financial Trust
7.375%, due 3/22/12 (b) 250,000 255,250
Loma Negra Compania Industrial Argentina S.A.
7.25%, due 3/15/13 (b) 100,000 98,350
Telecom Personal S.A.
9.25%, due 12/22/10 (b) 100,000 103,750
------------
457,350
------------
</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)
- ---------------------------------------------------------------------------------
AUSTRALIA (0.3%)
FMG Finance Property, Ltd.
10.00%, due 9/1/13 (b)(e) $ 65,000 $ 62,888
10.625%, due 9/1/16 (b) 65,000 64,025
National RMBS Trust
Series 2006-3, Class A1
5.444%, due 10/20/37 (a)(b) 270,000 270,000
------------
396,913
------------
BAHAMAS (0.1%)
Ultrapetrol, Ltd.
9.00%, due 11/24/14 100,000 94,125
------------
BERMUDA (0.7%)
AES China Generating Co., Ltd.
8.25%, due 6/26/10 230,000 227,825
Hopson Development Holdings, Ltd.
8.125%, due 11/9/12 (b) 150,000 148,688
Intelsat Subsidiary Holding Co., Ltd.
8.25%, due 1/15/13 230,000 234,313
10.484%, due 1/15/12 (a) 65,000 65,894
Shanghai Real Estate, Ltd.
8.625%, due 4/24/13 100,000 93,913
------------
770,633
------------
BRAZIL (1.1%)
Braskem S.A.
Series Reg S
9.375%, due 6/1/15 150,000 165,945
Caue Finance, Ltd.
8.875%, due 8/1/15 (b) 200,000 218,500
CIA Brasileira de Bebidas
10.50%, due 12/15/11 365,000 439,825
Cosan S.A. Industria e Comercio
8.25%, due 5/15/49 (b) 100,000 94,950
Gol Finance
8.75%, due 4/29/49 100,000 97,250
Series Reg S
8.75%, due 4/29/49 (b) 100,000 97,250
JBS S.A.
10.50%, due 8/4/16 (b) 100,000 104,200
------------
1,217,920
------------
CANADA (1.8%)
Ainsworth Lumber Co., Ltd.
9.367%, due 4/1/13 (a) 65,000 49,400
Bowater Canada Finance
7.95%, due 11/15/11 55,000 52,525
Canada Housing Trust No. 1
3.70%, due 9/15/08 (b) C$ 575,000 508,654
CanWest Media, Inc.
8.00%, due 9/15/12 $ 170,000 171,913
Jean Coutu Group PJC, Inc. (The)
8.50%, due 8/1/14 (e) 15,000 14,719
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CANADA (CONTINUED)
Lindsey Morden Group, Inc.
Series B
7.00%, due 6/16/08 C$ 20,000 $ 15,762
Nortel Networks, Ltd.
10.75%, due 7/15/16 (b) $ 115,000 123,050
Nova Chemicals Corp.
8.405%, due 11/15/13 (a) 65,000 66,138
Quebecor Media, Inc.
7.75%, due 3/15/16 180,000 181,800
Rogers Cable, Inc.
7.875%, due 5/1/12 245,000 261,538
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 225,000 216,971
Sun Media Corp.
7.625%, due 2/15/13 $ 210,000 212,100
Videotron Ltee
6.375%, due 12/15/15 120,000 114,600
------------
1,989,170
------------
CAYMAN ISLANDS (0.7%)
Agile Property Holdings, Ltd.
9.00%, due 9/22/13 (b) 100,000 99,625
CSN Islands VIII Corp.
9.75%, due 12/16/13 (b) 200,000 227,500
Vale Overseas, Ltd.
6.25%, due 1/11/16 200,000 201,300
8.25%, due 1/17/34 100,000 115,550
Votorantim Overseas III
7.875%, due 1/23/14 (b) 100,000 109,000
------------
752,975
------------
CHILE (0.3%)
AES Gener S.A.
7.50%, due 3/25/14 (e) 250,000 262,855
Corporacion Nacional del Cobre-Codelco, Inc.
5.50%, due 10/15/13 (b) 55,000 54,879
------------
317,734
------------
GERMANY (0.3%)
Kyivstar GSM
10.375%, due 8/17/09 (b) 275,000 299,406
------------
JAPAN (0.2%)
Nippon Life Insurance Co.
4.875%, due 8/9/10 (b) 250,000 245,410
------------
LIBERIA (0.1%)
Royal Caribbean Cruises, Ltd.
6.875%, due 12/1/13 90,000 90,678
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS--FOREIGN (CONTINUED)
- ---------------------------------------------------------------------------------
LUXEMBOURG (2.0%)
Evraz Group S.A.
8.25%, due 11/10/15 (b) $ 100,000 $ 102,750
Gazprom International S.A.
7.201%, due 2/1/20 (b) 200,000 210,100
7.201%, due 2/1/20 303,000 318,150
Millicom International Cellular S.A.
10.00%, due 12/1/13 300,000 322,875
Mobile Telesystems Finance S.A.
9.75%, due 1/30/08 (b) 150,000 155,813
Norilsk Nickel Finance Luxembourg S.A.
7.125%, due 9/30/09 200,000 205,058
OJSC Russian Agricultural Bank
7.175%, due 5/16/13 (b) 100,000 105,375
OJSC Vimpel Communications
8.25%, due 5/23/16 (b)(e) 300,000 310,875
Tengizchevroil Finance Co. S.A.R.L.
6.124%, due 11/15/14 (b) 100,000 99,500
TNK-BP Finance S.A.
7.50%, due 7/18/16 (b) 395,000 413,272
------------
2,243,768
------------
MEXICO (1.2%)
America Movil S.A. de C.V.
5.50%, due 3/1/14 100,000 98,057
Controladora Mabe S.A. de C.V.
6.50%, due 12/15/15 (b) 50,000 50,481
Grupo Gigante S.A. de C.V.
8.75%, due 4/13/16 (b) 200,000 202,000
Grupo Televisa S.A.
6.625%, due 3/18/25 500,000 520,270
Grupo Transportacion Ferroviaria Mexicana S.A. de
C.V.
12.50%, due 6/15/12 50,000 54,750
Monterrey Power S.A. de C.V.
9.625%, due 11/15/09 (b) 100,157 110,173
Telefonos de Mexico S.A. de C.V.
5.50%, due 1/27/15 290,000 282,528
------------
1,318,259
------------
NETHERLANDS (0.9%)
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 50,000 49,508
Electricidad de Caracas Finance B.V.
10.25%, due 10/15/14 (b) 95,000 100,700
Excelcomindo Finance Co. B.V.
7.125%, due 1/18/13 (b) 100,000 99,750
Kazkommerts International B.V.
8.50%, due 4/16/13 (b) 400,000 426,000
Majapahit Holdings B.V.
7.75%, due 10/17/16 (b) 100,000 102,500
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NETHERLANDS (CONTINUED)
Siemens Financieringsmaatschappij N.V.
6.125%, due 8/17/26 (b) $ 145,000 $ 150,837
TuranAlem Finance B.V.
7.75%, due 4/25/13 (b) 100,000 100,250
------------
1,029,545
------------
PANAMA (0.2%)
AES El Salvador Trust
6.75%, due 2/1/16 (b) 200,000 198,511
------------
PHILIPPINES (0.2%)
National Power Corp.
6.875%, due 11/2/16 (b) 200,000 200,750
------------
QATAR (0.2%)
Ras Laffan Liquefied Natural Gas Co., Ltd. III
6.332%, due 9/30/27 (b) 250,000 258,738
------------
RUSSIA (0.5%)
OAO Gazprom
9.625%, due 3/1/13 (b) 160,000 190,000
Siberian Oil Co.
Series Reg S
10.75%, due 1/15/09 100,000 109,980
Tyumen Oil Co.
11.00%, due 11/6/07 (b) 250,000 261,875
------------
561,855
------------
SINGAPORE (0.1%)
SP PowerAssets, Ltd.
5.00%, due 10/22/13 (b) 175,000 172,190
------------
SUPRANATIONAL (0.8%)
INVISTA
9.25%, due 5/1/12 (b) 355,000 377,188
Jafra Cosmetics International, Inc./ Distribuidora
Comerical Jafra S.A. de C.V.
10.75%, due 5/15/11 118,000 126,703
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14 (b) 165,000 167,475
9.50%, due 10/15/15 (b)(e) 245,000 247,144
------------
918,510
------------
SWEDEN (0.2%)
Stena AB
9.625%, due 12/1/12 200,000 213,750
------------
UNITED KINGDOM (1.2%)
BSKYB Finance UK PLC
5.625%, due 10/15/15 (b) 190,000 187,333
6.50%, due 10/15/35 (b) 95,000 94,873
Galaxy Entertainment Finance Co., Ltd.
9.875%, due 12/15/12 (b) 65,000 68,738
</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
CORPORATE BONDS--FOREIGN (CONTINUED)
- ---------------------------------------------------------------------------------
UNITED KINGDOM (CONTINUED)
Independent News & Media Finance, Ltd.
5.75%, due 5/17/09 E $300,000 $ 389,303
Inmarsat Finance PLC
(zero coupon), due 11/15/12
10.375%, beginning 11/15/08 $ 250,000 223,750
NTL Cable PLC
9.125%, due 8/15/16 90,000 94,613
SABMiller PLC
6.20%, due 7/1/11 (b) 110,000 112,983
6.50%, due 7/1/16 (b) 200,000 208,872
------------
1,380,465
------------
Total Corporate Bonds--Foreign
(Cost $14,619,411) 15,128,655
------------
FOREIGN GOVERNMENT BONDS (24.1%)
- ---------------------------------------------------------------------------------
ARGENTINA (0.5%)
Republic of Argentina
(zero coupon), due 12/15/35 (a) ARS 1,424,332 45,426
5.83%, due 12/31/33 517,606 214,316
8.28%, due 12/31/33 $ 278,124 280,071
------------
539,813
------------
AUSTRALIA (0.4%)
Commonwealth of Australia
7.50%, due 9/15/09 A$ 570,000 458,107
------------
AUSTRIA (0.8%)
Republic of Austria
4.65%, due 1/15/18 E 643,000 884,730
------------
BELGIUM (0.5%)
Kingdom of Belgium
5.00%, due 9/28/11 400,000 540,014
------------
BRAZIL (2.7%)
Federal Republic of Brazil
4.75%, due 4/10/07 Y 25,000,000 216,814
V 8.25%, due 1/20/34 $ 1,321,000 1,544,249
14.50%, due 10/15/09 (e) 1,000,000 1,252,500
------------
3,013,563
------------
CANADA (0.7%)
Canada Government
5.25%, due 6/1/12 C$ 344,000 326,079
5.75%, due 6/1/33 400,000 451,667
------------
777,746
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COLOMBIA (0.4%)
Republic of Colombia
8.125%, due 5/21/24 (e) $ 300,000 $ 337,650
12.00%, due 10/22/15 CP 325,000,000 165,567
------------
503,217
------------
DOMINICAN REPUBLIC (0.1%)
Dominican Republic
Series Reg S
9.04%, due 1/23/18 $ 109,298 124,873
------------
ECUADOR (0.4%)
Republic of Ecuador
Series Reg S
10.00%, due 8/15/30 445,000 444,333
------------
EGYPT (0.1%)
Republic of Egypt
(zero coupon), due 3/6/07 EGP 650,000 109,711
------------
EL SALVADOR (0.2%)
Republic of El Salvador
7.75%, due 1/24/23 (b) $ 250,000 284,375
------------
GERMANY (3.4%)
Republic of Germany
3.75%, due 1/4/09 E 510,000 652,312
4.00%, due 1/4/37 510,000 669,347
V 5.00%, due 7/4/11 1,405,000 1,893,298
6.25%, due 1/4/30 350,000 606,692
------------
3,821,649
------------
GREECE (2.0%)
Hellenic Republic
V 4.50%, due 5/20/14 1,200,000 1,589,866
5.90%, due 10/22/22 406,000 625,233
------------
2,215,099
------------
INDONESIA (0.3%)
Republic of Indonesia
6.875%, due 3/9/17 (b) $ 200,000 206,500
7.25%, due 4/20/15 (b) 180,000 190,350
------------
396,850
------------
ITALY (2.2%)
Republic of Italy
5.50%, due 11/1/10 E 600,000 815,349
6.00%, due 5/1/31 625,000 1,019,828
6.50%, due 11/1/27 372,000 629,468
------------
2,464,645
------------
LEBANON (0.2%)
Republic of Lebanon
Series Reg S
11.625%, due 5/11/16 $ 150,000 179,250
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN GOVERNMENT BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
MEXICO (1.3%)
United Mexican States
V 6.75%, due 9/27/34 (e) $ 1,300,000 $ 1,400,750
8.125%, due 12/30/19 90,000 109,350
------------
1,510,100
------------
NETHERLANDS (0.7%)
Kingdom of the Netherlands
3.75%, due 7/15/09 E 634,000 811,475
------------
PANAMA (0.6%)
Republic of Panama
6.70%, due 1/26/36 $ 243,000 245,066
8.875%, due 9/30/27 325,000 404,625
------------
649,691
------------
PERU (0.2%)
Republic of Peru
8.75%, due 11/21/33 152,000 192,660
------------
PHILIPPINES (0.7%)
Republic of Philippines
7.75%, due 1/14/31 (e) 200,000 218,500
9.50%, due 2/2/30 250,000 322,813
9.875%, due 1/15/19 200,000 254,500
------------
795,813
------------
RUSSIA (0.9%)
Russian Federation
Series Reg S
5.00%, due 3/31/30
7.50%, beginning 3/31/07 892,000 999,129
------------
SOUTH AFRICA (0.1%)
Republic of South Africa
7.00%, due 4/10/08 E 100,000 132,493
------------
TURKEY (0.5%)
Republic of Turkey
7.375%, due 2/5/25 $ 470,000 473,525
14.00%, due 1/19/11 TRY 170,000 103,826
------------
577,351
------------
UKRAINE (0.2%)
Ukraine Government
6.875%, due 3/4/11 (b) $ 175,000 179,156
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
UNITED KINGDOM (3.4%)
United Kingdom Treasury Bonds
4.00%, due 3/7/09 L 97,000 $ 181,215
4.25%, due 6/7/32 300,000 588,918
4.25%, due 3/7/36 205,000 408,176
5.00%, due 3/7/12 315,000 608,449
6.00%, due 12/7/28 285,000 684,336
6.25%, due 11/25/10 465,000 933,456
8.00%, due 6/7/21 140,000 368,296
------------
3,772,846
------------
URUGUAY (0.2%)
Republic of Uruguay
7.50%, due 3/15/15 $ 175,000 186,813
------------
VENEZUELA (0.4%)
Republic of Venezuela
Series Reg S
6.376%, due 4/20/11 (a) 200,000 199,000
13.625%, due 8/15/18 181,000 271,500
------------
470,500
------------
Total Foreign Government Bonds
(Cost $24,429,610) 27,036,002
------------
LOAN ASSIGNMENTS & PARTICIPATIONS (2.3%) (I)
- ---------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.2%)
Goodyear Tire & Rubber Co. (The)
2nd Lien Term Loan
8.14%, due 4/30/10 250,000 251,697
------------
MEDIA (0.7%)
Fidelity National Information Solutions, Inc.
Term Loan B
7.07%, due 3/9/13 432,500 433,371
Nielsen Finance LLC
Dollar Term Loan
8.19%, due 8/6/13 350,000 351,203
------------
784,574
------------
MINING (0.5%)
Aleris International, Inc.
Term Loan B
7.875%, due 8/1/13 149,625 149,625
Unsecured Bridge Loan
9.625%, due 8/1/07 120,000 120,300
BHM Technologies LLC
1st Lien Term Loan
8.435%, due 7/23/13 300,000 292,500
------------
562,425
------------
REAL ESTATE (0.3%)
LNR Property Corp.
Initial Tranche B Term Loan
8.22%, due 7/12/11 350,000 350,948
------------
</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
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
- ---------------------------------------------------------------------------------
RETAIL (0.4%)
Michaels Stores, Inc.
Term Loan B
8.375%, due 10/31/13 $ 305,000 $ 306,089
Neiman Marcus Group, Inc. (The)
Term Loan B
7.641%, due 4/6/13 142,405 143,461
------------
449,550
------------
SOFTWARE (0.2%)
SunGard Data Systems, Inc.
Term Loan
7.999%, due 2/11/13 167,875 169,330
------------
Total Loan Assignments & Participations
(Cost $2,558,770) 2,568,524
------------
MORTGAGE-BACKED SECURITIES (2.4%)
- ---------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.4%)
Banc of America Commercial Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 295,000 293,518
Bayview Commercial Asset Trust
Series 2006-4A, Class A1
5.55%, due 12/25/36 (a) 110,000 110,000
Citigroup Commercial Mortgage Trust
Series 2004-C2, Class A5
4.733%, due 10/15/41 220,000 212,550
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-CD1, Class A4
5.40%, due 7/15/44 (a) 440,000 440,330
LB-UBS Commercial Mortgage Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 425,000 408,431
Series 2004-C7, Class A1
3.625%, due 10/15/29 200,237 195,677
Series 2005-C7, Class A4
5.197%, due 11/15/30 (a) 235,000 233,684
Merrill Lynch Mortgage Trust
Series 2004-MKB1, Class A1
3.563%, due 2/12/42 172,178 168,262
Series 2004-BPC1, Class A5
4.855%, due 10/12/41 (a) 555,000 539,655
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36 (b) 40,000 40,784
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
Wachovia Bank Commercial Mortgage Trust
Series 2004-C14, Class A1
3.477%, due 8/15/41 $ 66,371 $ 64,799
------------
Total Mortgage-Backed Securities
(Cost $2,753,285) 2,707,690
------------
MUNICIPAL BOND (0.1%)
- ---------------------------------------------------------------------------------
TEXAS (0.1%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 120,000 120,284
------------
Total Municipal Bond
(Cost $120,278) 120,284
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (20.3%)
- ---------------------------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATION) (0.2%)
Series 2006-B1, Class AB
6.00%, due 6/25/16 175,394 176,816
------------
FANNIE MAE GRANTOR TRUST
(COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 1998-M6, Class A2
6.32%, due 8/15/08 (j) 90,755 92,026
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.6%)
4.75%, due 11/17/15 740,000 728,742
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (4.6%)
3.00%, due 8/1/10 87,546 82,925
4.32%, due 3/1/35 (a) 133,506 130,324
5.00%, due 6/1/33 347,784 336,957
5.00%, due 8/1/33 684,322 662,891
5.50%, due 1/1/21 499,436 499,944
5.50%, due 2/1/33 195,708 194,135
5.50%, due 11/1/35 514,345 508,997
V 5.50%, due 1/1/36 2,812,913 2,783,664
------------
5,199,837
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (3.2%)
4.00%, due 9/2/08 (e) 500,000 491,051
4.625%, due 5/1/13 135,000 131,091
5.125%, due 1/2/14 150,000 149,650
V 5.25%, due 8/1/12 2,300,000 2,316,526
6.00%, due 11/1/36 305,000 306,888
6.25%, due 2/1/11 185,000 193,450
------------
3,588,656
------------
</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, 2006 (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 $ 110,051 $ 106,698
4.50%, due 7/1/18 383,714 372,022
4.50%, due 11/1/18 415,888 403,216
5.00%, due 9/1/17 370,314 365,635
5.00%, due 1/1/36 234,284 226,271
V 5.00%, due 6/1/36 1,566,932 1,512,778
V 5.00%, due 12/1/36 TBA (k) 1,540,000 1,486,100
V 5.50%, due 6/1/21 2,165,159 2,167,548
5.50%, due 6/1/33 252,390 250,090
V 5.50%, due 11/1/33 1,278,681 1,267,028
5.50%, due 12/1/33 533,956 529,090
5.50%, due 12/1/34 270,896 268,181
6.00%, due 1/1/33 124,598 125,725
6.00%, due 3/1/33 160,583 161,940
6.00%, due 9/1/34 103,762 104,544
6.00%, due 9/1/35 415,439 418,344
6.00%, due 10/1/35 235,183 236,695
6.00%, due 6/1/36 325,163 327,177
6.50%, due 6/1/31 28,190 28,896
6.50%, due 8/1/31 22,413 22,974
6.50%, due 10/1/31 15,113 15,492
6.50%, due 6/1/32 93,660 95,947
------------
10,492,391
------------
FREDDIE MAC (COLLATERALIZED MORTGAGE OBLIGATION) (0.2%)
Series 2632, Class NH
3.50%, due 6/15/13 196,787 187,092
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.1%)
6.00%, due 4/15/29 61,662 62,676
6.00%, due 8/15/32 102,802 104,397
------------
167,073
------------
OVERSEAS PRIVATE INVESTMENT CORP. (1.1%)
5.142%, due 12/15/23 (l) 1,200,000 1,192,416
------------
UNITED STATES TREASURY NOTES (0.9%)
3.875%, due 2/15/13 645,000 620,485
4.875%, due 8/15/16 390,000 398,105
------------
1,018,590
------------
Total U.S. Government & Federal Agencies
(Cost $22,867,330) 22,843,639
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (0.7%) (m)
- ---------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.2%)
Abitibi-Consolidated, Inc.
8.85%, due 8/1/30 $ 60,000 $ 49,725
Smurfit Capital Funding PLC
7.50%, due 11/20/25 245,000 229,075
------------
278,800
------------
INSURANCE (0.1%)
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 (e) 35,000 29,575
7.75%, due 7/15/37 (e) 35,000 28,700
8.25%, due 10/1/15 (e) 5,000 4,650
8.30%, due 4/15/26 (e) 15,000 12,975
------------
75,900
------------
LEISURE TIME (0.1%)
Royal Caribbean Cruises, Ltd.
7.00%, due 6/15/13 150,000 152,374
------------
OIL & GAS (0.1%)
YPF Sociedad Anonima
9.125%, due 2/24/09 60,000 63,570
------------
REGIONAL GOVERNMENT (0.2%)
Financement-Quebec
5.00%, due 10/25/12 190,000 188,759
------------
Total Yankee Bonds
(Cost $758,531) 759,403
------------
Total Long-Term Bonds
(Cost $104,574,245) 108,242,961
------------
<Caption>
SHARES
COMMON STOCKS (0.3%)
- ---------------------------------------------------------------------------------
AGRICULTURE (0.0%)++
North Atlantic Trading Co., Inc. (c)(d)(n)(o) 522 5
------------
BUILDING MATERIALS (0.0%)++
Ainsworth Lumber Co., Ltd. (e) 1,000 9,730
------------
INTERNET (0.1%)
Globix Corp. (d)(n)(o) 40,134 125,017
------------
RETAIL (0.0%)++
Star Gas Partners, L.P. (n) 12,981 32,712
------------
SOFTWARE (0.1%)
QuadraMed Corp. (c)(n) 29,592 71,908
------------
</Table>
22 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.1%)
Loral Space & Communications, Ltd. (n) 4,487 $ 130,303
------------
Total Common Stocks
(Cost $226,830) 369,675
------------
CONVERTIBLE PREFERRED STOCKS (0.7%)
- ---------------------------------------------------------------------------------
INSURANCE (0.5%)
MetLife, Inc.
6.375% (n) 17,200 509,464
------------
INTERNET (0.0%)++
Globix Corp.
6.00% (c)(d)(n) 5,076 16,941
------------
SOFTWARE (0.2%)
QuadraMed Corp.
5.50% (b)(c)(n) 10,400 228,800
------------
Total Convertible Preferred Stocks
(Cost $738,023) 755,205
------------
PREFERRED STOCKS (0.7%)
- ---------------------------------------------------------------------------------
MEDIA (0.2%)
Haights Cross Communications, Inc.
16.00% (c)(o) 3,900 169,650
Ziff Davis Holdings, Inc.
10.00% (c)(n) 48 6,312
------------
175,962
------------
REAL ESTATE INVESTMENT TRUSTS (0.4%)
Sovereign Real Estate Investment Corp.
12.00% (b) 358 502,095
------------
TELECOMMUNICATIONS (0.1%)
Loral Skynet Corp.
12.00% Series A (b)(e)(f)(h) 350 71,400
------------
Total Preferred Stocks
(Cost $583,146) 749,457
------------
<Caption>
NUMBER OF
WARRANTS VALUE
WARRANTS (0.0%)++
- ---------------------------------------------------------------------------------
MEDIA (0.0%)++
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 12/10/11 (c)(d)(n)(o) 7 $ 0(s)
Strike Price $0.001
Expire 12/10/11 (c)(d)(n)(o) 3,598 36
Ziff Davis Holdings, Inc.
Strike Price $0.001
Expire 8/12/12 (b)(d)(n) 8,954 90
------------
126
------------
SEMICONDUCTORS (0.0%)++
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (b)(c)(d)(n) 175 2
------------
TELECOMMUNICATIONS (0.0%)++
UbiquiTel, Inc.
Strike Price $22.74
Expire 4/15/10 (b)(c)(n) 225 2
------------
Total Warrants
(Cost $34,777) 130
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (6.7%)
- ---------------------------------------------------------------------------------
COMMERCIAL PAPER (3.4%)
Fairway Finance Corp.
5.289%, due 11/20/06 (p) $ 80,461 80,461
Greyhawk Funding
5.286%, due 11/13/06 (p) 107,282 107,282
Jupiter Securitization Corp.
5.303%, due 11/14/06 (p) 131,947 131,947
Lexington Parker Capital Co.
5.282%, due 11/8/06 (p) 107,282 107,282
Liberty Street Funding Co.
5.286%, due 11/27/06 (p) 132,809 132,809
Old Line Funding LLC
5.287%, due 11/15/06 (p) 107,282 107,282
Sheffield Receivables Corp.
5.272%, due 11/8/06 (p) 107,282 107,282
UBS Finance LLC
5.28%, due 11/1/06 2,975,000 2,975,000
Yorktown Capital LLC
5.282%, due 11/16/06 (p) 93,872 93,872
------------
Total Commercial Paper
(Cost $3,843,217) 3,843,217
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ---------------------------------------------------------------------------------
INVESTMENT COMPANY (0.2%)
BGI Institutional Money Market Fund (p) 231,598 $ 231,598
------------
Total Investment Company
(Cost $231,598) 231,598
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.1%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $126,369
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$127,799 and a Market Value
of $131,373) (p) $ 126,350 126,350
------------
Total Repurchase Agreement
(Cost $126,350) 126,350
------------
TIME DEPOSITS (3.0%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (p) 214,563 214,563
Bank of America
5.27%, due 11/21/06 (a)(p) 295,025 295,025
Bank of Montreal
5.28%, due 11/27/06 (p) 214,563 214,563
Bank of Nova Scotia
5.30%, due 11/10/06 (p) 214,563 214,563
Barclays
5.32%, due 1/18/07 (p) 214,563 214,563
Deutsche Bank AG
5.27%, due 11/9/06 (p) 214,563 214,563
Fortis Bank
5.27%, due 11/6/06 (p) 466,675 466,675
Halifax Bank of Scotland
5.30%, due 1/10/07 (p) 214,564 214,564
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (p) 214,563 214,563
Royal Bank of Canada
5.30%, due 12/22/06 (p) 214,564 214,564
Royal Bank of Scotland
5.29%, due 12/12/06 (p) 214,563 214,563
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (p) 214,563 214,563
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Societe Generale North America, Inc.
5.28%, due 12/6/06 (p) $ 214,563 $ 214,563
UBS AG
5.28%, due 12/5/06 (p) 214,563 214,563
------------
Total Time Deposits
(Cost $3,336,458) 3,336,458
------------
Total Short-Term Investments
(Cost $7,537,623) 7,537,623
------------
Total Investments
(Cost $113,694,644) (q) 104.8% 117,655,051(r)
Liabilities in Excess of
Cash and Other Assets (4.8) (5,386,342)
-------------- ------------
Net Assets 100.0% $112,268,709
============== ============
</Table>
<Table>
++ Less than one tenth of a percent.
+++ Fifty percent of the Fund's liquid assets are maintained to cover "senior
securities transactions" which may include, but are not limited to,
forwards, TBA's, options and futures. This percentage is marked-to-market
daily against the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(b) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(c) Illiquid security. The total market value of these securities at October
31, 2006 is $639,686, which represents 0.6% of the Fund's net assets.
(d) Fair valued security. The total market value of these securities at October
31, 2006 is $234,017, which reflects 0.2% of the Fund's net assets.
(e) Represents a security, or a portion thereof, which is out on loan.
(f) Issue in default.
(g) Issuer in bankruptcy.
(h) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(i) Floating Rate Loan--generally pays interest at rates which are periodically
re-determined at a margin above the London Inter-Bank Offered Rate
("LIBOR") or other short-term rates. The rate shown is the rate(s) in
effect at October 31, 2006. Floating Rate Loans are generally considered
restrictive in that the Fund is ordinarily contractually obligated to
receive consent from the Agent Bank and/or borrower prior to disposition of
a Floating Rate Loan. Under procedures adopted by the Board, the loans are
deemed to be liquid except those identified with a footnote (c). (See
footnote (c) above.)
(j) ACES--Alternative Credit Enhancement Structure.
(k) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and
maturity date will be determined upon settlement. The market value of these
securities at October 31, 2006 is $1,486,100.
(l) United States Government Guaranteed Security.
(m) Yankee Bond--dollar-denominated bond issued in the United States by a
foreign bank or corporation.
(n) Non-income producing security.
</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.
<Table>
(o) Restricted security. (See Note 2 (N) and Note 6)
(p) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(q) The cost for federal income tax purposes is $115,446,313.
(r) At October 31, 2006, net unrealized appreciation was $2,208,738 based on
cost for federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $3,559,487 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,350,749.
(s) Less than one dollar.
The following abbreviations are used in the above portfolio:
ARS--Argentinian Peso
A$--Australian Dollar
C$--Canadian Dollar
CP--Colombian Peso
EGP--Egyptian Pound
E--Euro
L--British Pound Sterling
Y--Japanese Yen
TRY--New Turkish Lira
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $113,694,644) including $4,459,635
market value of securities loaned $117,655,051
Cash denominated in foreign currencies
(identified cost $1,062,376) 1,079,274
Cash 11,302
Receivables:
Dividends and interest 1,661,045
Investment securities sold 1,305,485
Fund shares sold 21,414
Other assets 14,439
Unrealized appreciation on foreign currency
forward contracts 16,099
-------------
Total assets 121,764,109
-------------
LIABILITIES:
Securities lending collateral 4,562,623
Unrealized depreciation of unfunded
commitments 2,675
Payables:
Investment securities purchased 4,296,159
Fund shares redeemed 139,368
Manager (See Note 3) 95,519
Transfer agent (See Note 3) 56,767
NYLIFE Distributors (See Note 3) 54,831
Shareholder communication 43,996
Professional fees 36,927
Custodian 19,902
Trustees 1,428
Accrued expenses 13,260
Dividend payable 114,780
Unrealized depreciation on foreign currency
forward contracts 57,165
-------------
Total liabilities 9,495,400
-------------
Net assets $112,268,709
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 73,551
Class B 38,426
Class C 13,904
Class I 224
Additional paid-in capital 114,580,457
Accumulated distributions in excess of net
investment income (1,013,401)
Accumulated net realized loss on investments
and foreign currency transactions (5,383,382)
Net unrealized appreciation on investments 3,960,407
Net unrealized depreciation of unfunded
commitments (2,675)
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts 1,198
-------------
Net assets $112,268,709
=============
CLASS A
Net assets applicable to outstanding shares $ 65,565,907
=============
Shares of beneficial interest outstanding 7,355,137
=============
Net asset value per share outstanding $ 8.91
Maximum sales charge (4.50% of offering price) 0.42
-------------
Maximum offering price per share outstanding $ 9.33
=============
CLASS B
Net assets applicable to outstanding shares $ 34,148,050
=============
Shares of beneficial interest outstanding 3,842,649
=============
Net asset value and offering price per share
outstanding $ 8.89
=============
CLASS C
Net assets applicable to outstanding shares $ 12,355,349
=============
Shares of beneficial interest outstanding 1,390,419
=============
Net asset value and offering price per share
outstanding $ 8.89
=============
CLASS I
Net assets applicable to outstanding shares $ 199,403
=============
Shares of beneficial interest outstanding 22,367
=============
Net asset value and offering price per share
outstanding $ 8.91*
=============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $6,768,539
Dividends (a) 84,299
Income from securities loaned--net 24,423
-----------
Total income 6,877,261
-----------
EXPENSES:
Manager (See Note 3) 701,004
Distribution--Class B (See Note 3) 327,224
Distribution--Class C (See Note 3) 95,980
Transfer agent--Classes A, B and C (See Note
3) 353,763
Transfer agent--Class I (See Note 3) 485
Distribution/Service--Class A (See Note 3) 150,447
Service--Class B (See Note 3) 109,075
Service--Class C (See Note 3) 31,993
Custodian 93,576
Shareholder communication 90,350
Professional fees 62,645
Registration 55,249
Recordkeeping 38,351
Trustees 7,938
Miscellaneous 14,922
-----------
Total expenses before waiver 2,133,002
Expense waiver from Manager (See Note 3) (190,789)
-----------
Net expenses 1,942,213
-----------
Net investment income 4,935,048
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions (b) 701,703
Foreign currency transactions (160,052)
-----------
Net realized gain on investments and foreign
currency transactions 541,651
-----------
Net change in unrealized appreciation on:
Security transactions and unfunded commitments 1,681,191
Translation of other assets and liabilities in
foreign currencies and foreign currency
forward contracts (33,610)
-----------
Net change in unrealized appreciation on
investments, unfunded commitments and foreign
currency transactions 1,647,581
-----------
Net realized and unrealized gain on investments,
unfunded commitments and foreign currency
transactions 2,189,232
-----------
Net increase in net assets resulting from
operations $7,124,280
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $148.
(b) Realized gain on security transactions net of foreign withholding taxes in
the amount of $473.
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
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 4,935,048 $ 5,008,246
Net realized gain on investments
and foreign currency transactions 541,651 1,292,645
Net change in unrealized
appreciation on investments and
foreign currency transactions 1,647,581 (4,298,208)
---------------------------
Net increase in net assets
resulting from operations 7,124,280 2,002,683
---------------------------
Dividends to shareholders:
From net investment income:
Class A (3,043,145) (1,708,513)
Class B (2,170,137) (2,720,609)
Class C (592,217) (575,607)
Class I (13,052) (8,134)
---------------------------
Total dividends to shareholders (5,818,551) (5,012,863)
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 12,780,102 12,794,668
Class B 4,301,883 8,764,440
Class C 2,860,864 7,104,784
Class I 30,433 160,449
Net asset value of shares issued to shareholders
in reinvestment of dividends:
Class A 2,327,143 1,245,678
Class B 1,426,209 2,045,194
Class C 340,343 265,298
Class I 12,372 7,148
---------------------------
24,079,349 32,387,659
Cost of shares redeemed:
Class A (15,515,186) (10,184,745)
Class B (18,357,923) (15,560,074)
Class C (4,992,613) (7,437,723)
Class I (77,206) (2,207)
---------------------------
(38,942,928) (33,184,749)
Net asset value of shares converted (See Note
1):
Class A 25,063,683 --
Class B (25,063,683) --
Decrease in net assets derived
from capital share transactions (14,863,579) (797,090)
---------------------------
Net decrease in net assets (13,557,850) (3,807,270)
</Table>
<Table>
<Caption>
2006 2005
NET ASSETS:
Beginning of year $125,826,559 $129,633,829
---------------------------
End of year $112,268,709 $125,826,559
===========================
Accumulated distributions in excess
of net investment income at end of
year $ (1,013,401) $ (1,368,616)
===========================
</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.
This page intentionally left blank
www.mainstayfunds.com 29
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 8.81 $ 9.01 $ 8.77 $ 7.97 $ 8.22 $ 8.37
------- ------- ------- ----------- ------- -------
Net investment income (a) 0.40 0.39 0.40 0.39 0.55 0.67 (b)
Net realized and unrealized gain (loss) on
investments 0.18 (0.24) 0.37 0.86 (0.03) (0.14)(b)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.01) 0.04 (0.05) 0.01 (0.15) 0.01
------- ------- ------- ----------- ------- -------
Total from investment operations 0.57 0.19 0.72 1.26 0.37 0.54
------- ------- ------- ----------- ------- -------
Less dividends and distributions:
From net investment income (0.47) (0.39) (0.48) (0.38) (0.46) (0.62)
Return of capital -- -- -- (0.08) (0.16) (0.07)
------- ------- ------- ----------- ------- -------
Total dividends and distributions (0.47) (0.39) (0.48) (0.46) (0.62) (0.69)
------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 8.91 $ 8.81 $ 9.01 $ 8.77 $ 7.97 $ 8.22
======= ======= ======= =========== ======= =======
Total investment return (c) 6.67% 2.11% 8.44% 16.22%(d) 4.78% 6.62%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.60% 4.32% 4.48% 5.59%+ 6.95% 7.95%(b)
Net expenses 1.30% 1.34% 1.41% 1.46%+ 1.49% 1.44%
Expenses (before waiver) 1.46% 1.40% 1.41% 1.46%+ 1.49% 1.44%
Portfolio turnover rate 87%(e) 105% 84% 80% 84% 141%
Net assets at end of period (in 000's) $65,566 $40,076 $37,179 $31,042 $18,297 $15,066
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36
------- ------- ------- ----------- ------ ------
Net investment income (a) 0.34 0.32 0.33 0.34 0.49 0.61(b)
Net realized and unrealized gain (loss) on
investments 0.18 (0.25) 0.39 0.86 (0.03) (0.15)(b)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.01) 0.04 (0.06) 0.01 (0.15) 0.01
------- ------- ------- ----------- ------ ------
Total from investment operations 0.51 0.11 0.66 1.21 0.31 0.47
------- ------- ------- ----------- ------ ------
Less dividends and distributions:
From net investment income (0.40) (0.32) (0.42) (0.34) (0.42) (0.56)
Return of capital -- -- -- (0.07) (0.14) (0.07)
------- ------- ------- ----------- ------ ------
Total dividends and distributions (0.40) (0.32) (0.42) (0.41) (0.56) (0.63)
------- ------- ------- ----------- ------ ------
Net asset value at end of period $ 8.89 $ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20
======= ======= ======= =========== ====== ======
Total investment return (c) 6.01% 1.23% 7.68% 15.55%(d) 3.99% 5.78%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.85% 3.57% 3.73% 4.84%+ 6.20% 7.20%(b)
Net expenses 2.05% 2.09% 2.16% 2.21%+ 2.24% 2.19%
Expenses (before waiver) 2.21% 2.15% 2.16% 2.21%+ 2.24% 2.19%
Portfolio turnover rate 87%(e) 105% 84% 80% 84% 141%
Net assets at end of period (in 000's) $12,355 $14,004 $14,449 $10,573 $5,967 $2,965
</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) As required, effective January 1, 2001 the Fund has adopted the provisions of 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 $(0.00)(f) $(0.00)(f) $(0.00)(f)
Increase net realized and unrealized gains and losses 0.00(f) 0.00(f) 0.00(f)
Decrease ratio of net investment income (0.13%) (0.13%) (0.13%)
</Table>
<Table>
(c) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(d) Total return is not annualized.
(e) The portfolio turnover rate not including mortgage dollar rolls for the year ended October
31, 2006 is 66%.
(f) Less than one cent per share.
</Table>
30 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*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36
------- ------- ------- ----------- ------- -------
0.34 0.32 0.33 0.34 0.49 0.61(b)
0.18 (0.25) 0.39 0.86 (0.03) (0.15)(b)
(0.01) 0.04 (0.06) 0.01 (0.15) 0.01
------- ------- ------- ----------- ------- -------
0.51 0.11 0.66 1.21 0.31 0.47
------- ------- ------- ----------- ------- -------
(0.40) (0.32) (0.42) (0.34) (0.42) (0.56)
-- -- -- (0.07) (0.14) (0.07)
------- ------- ------- ----------- ------- -------
(0.40) (0.32) (0.42) (0.41) (0.56) (0.63)
------- ------- ------- ----------- ------- -------
$ 8.89 $ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20
======= ======= ======= =========== ======= =======
6.01% 1.23% 7.68% 15.55%(d) 3.99% 5.78%
3.85% 3.57% 3.73% 4.84%+ 6.20% 7.20%(b)
2.05% 2.09% 2.16% 2.21%+ 2.24% 2.19%
2.21% 2.15% 2.16% 2.21%+ 2.24% 2.19%
87%(e) 105% 84% 80% 84% 141%
$34,148 $71,515 $77,933 $73,799 $55,842 $51,694
</Table>
<Table>
<Caption>
CLASS I
---------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2006 2005 2004
$ 8.81 $ 9.02 $ 8.96
-------- -------- -----------
0.43 0.42 0.33
0.18 (0.25) 0.16
(0.01) 0.04 (0.02)
-------- -------- -----------
0.60 0.21 0.47
-------- -------- -----------
(0.50) (0.42) (0.41)
-- -- --
-------- -------- -----------
(0.50) (0.42) (0.41)
-------- -------- -----------
$ 8.91 $ 8.81 $ 9.02
======== ======== ===========
7.09% 2.32% 5.44%(d)
4.94% 4.69% 4.77%+
0.96% 0.97% 1.12%+
1.12% 1.03% 1.12%+
87%(e) 105% 84%
$ 199 $ 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 31
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 commenced on
September 1, 1998 and Class I shares commenced 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 a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are not subject to sales
charge. As approved by the Board of Trustees in 1997, Class B shares convert to
Class A shares eight years after the date they were purchased. The first
conversion occurred December 28, 2005. The four classes of shares bear the same
voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions. 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 also invests in high yield securities (sometimes called "junk bonds"),
which are generally considered speculative because they present a greater risk
of loss, including default, than higher quality debt securities. These
securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to 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, as defined in Note 3,
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 trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time).
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("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 ask prices based on dealer or exchange
quotations.
Temporary cash investments acquired over 60 days prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on the security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund held securities with a value of $234,017
that were valued in such manner.
32 MainStay Diversified Income Fund
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, as defined in Note 3, conclude that such events may have
affected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain amounts. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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, 2006, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
DISTRIBUTIONS IN NET REALIZED
EXCESS OF NET LOSS ON
INVESTMENT INCOME INVESTMENTS
$1,238,718 $(1,238,718)
- -------------------------------------
</Table>
The reclassifications for the Fund are primarily due to
premium amortization adjustments, paydown, foreign currency gain (loss) and
prior year straddle deferrals.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities,
other than short-term securities, purchased for the Fund are accreted and
amortized, respectively, on the effective interest rate 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.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement,
www.mainstayfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
realization and/or retention of the collateral may be subject to legal
proceedings.
(H) 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 price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. 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.
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.
(I) 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 the
London InterBank Offered Rate ("LIBOR").(See Note 5 on page 37.)
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, 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.
(J) 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
valuation date to credit loss in the event of a counterparty's failure to
perform its obligations. (See Note 6 on page 37.)
34 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) 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, the Fund forgoes principal and interest on the securities. The 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 liquid assets 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.
(M) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 on page 37.)
(N) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund does not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 6 on page
37.)
(O) 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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
is responsible for the day-to-day portfolio management of the Fund.
www.mainstayfunds.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Trust, on behalf of the Fund, pays the Manager a monthly fee for the
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.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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, 1.30% 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 written expense
limitation 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. For the year ended October 31, 2006,
the Manager earned fees from the Fund in the amount of $701,004 and waived its
fees in the amount of $190,789.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$19,479 $190,789 $210,268
- -----------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupment
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, the Manager pays 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 voluntarily agreed to do so
proportionately.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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 and 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 $17,206 for the year ended
October 31, 2006. 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 $173, $67,490, and $408, respectively, for the year ended October 31,
2006.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $354,248.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
36 MainStay Diversified Income Fund
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $8,076,583 12.3%
Class B 102 0.0*
Class C 106 0.0*
Class I 1,106 0.6
- -----------------------------------------------------------------
</Table>
* Less than one tenth of one percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $3,399.
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 $38,351 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, 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 LOSS
$707,984 $(5,279,384) $(114,780) $2,248,327 $(2,437,853)
- ----------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale loss deferrals, premium amortization adjustments,
straddles, interest on defaulted securities and mark-to-market of foreign
currency forward contracts.
The other temporary differences is primarily attributable to distribution
payable.
At October 31, 2006, for federal income tax purposes, capital loss carryforwards
of $5,279,384 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)
2008 $1,322
2009 864
2010 1,161
2011 523
2014 1,409
-------------------------------------------
$5,279
-------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $5,818,551 $5,012,863
- ---------------------------------------------------------
</Table>
NOTE 5--COMMITMENTS AND CONTINGENCIES:
At October 31, 2006 the Fund had unfunded loan commitments pursuant to the
following loan agreement:
<Table>
<Caption>
UNFUNDED UNREALIZED
BORROWER COMMITMENT DEPRECIATION
HCA, Inc., due 9/12/07 $ 535,000 $ (2,675)
- ------------------------------------------------------
</Table>
The commitment is available until the maturity date of the security.
NOTE 6--FUND SECURITIES LOANED, FOREIGN CURRENCY FORWARD CONTRACTS AND
RESTRICTED SECURITIES:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $4,459,635. The Fund received $4,562,623 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.
Securities purchased with collateral received are valued at amortized cost.
www.mainstayfunds.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Foreign currency forward contracts open at October 31, 2006:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts
- -----------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/9/06 E 14,583 $ 18,564 $ 55
- -----------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 12/1/06 E 672,033 $ 856,372 2,690
- -----------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 12/1/06 L 103,729 $ 197,296 621
- -----------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Currency Sale Contracts
- -----------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. U.S. Dollar, expiring 11/16/06 C$ 567,765 $ 499,793 (6,029)
- -----------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/16/06 L 827,470 $ 1,537,199 (41,429)
- -----------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Cross Currency Contracts
- -----------------------------------------------------------------------------------------------------------------
Euro vs. Norwegian Krone, expiring 11/16/06 E 640,151 NK5,424,000 12,733
- -----------------------------------------------------------------------------------------------------------------
Norwegian Krone vs. Euro, expiring 11/16/06 NK5,424,000 E 642,521 (9,707)
- -----------------------------------------------------------------------------------------------------------------
Unrealized depreciation on foreign currency forward
contracts $ (41,066)
- -----------------------------------------------------------------------------------------------------------------
</Table>
Foreign currency held at October 31, 2006:
<Table>
<Caption>
CURRENCY COST VALUE
Euro E 686,617 $ 864,854 $ 876,329
- ------------------------------------------------------------------------------------------------------------------
Pound Sterling L 103,729 192,563 197,868
- ------------------------------------------------------------------------------------------------------------------
Japanese Yen Y 593,750 4,959 5,077
- ------------------------------------------------------------------------------------------------------------------
$ 1,062,376 $ 1,079,274
- ------------------------------------------------------------------------------------------------------------------
</Table>
Restricted securities held at October 31, 2006:
<Table>
<Caption>
SHARES/
DATE(S) OF NUMBER OF 10/31/06 PERCENTAGE OF
SECURITY ACQUISITION WARRANTS COST VALUE NET ASSETS
Globix Corp.
Common Stock 6/21/01-12/3/02 40,134 $ 28,781 $ 125,017 0.1%
- -----------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Preferred Stock 16.00% 1/22/04-2/3/06 3,900 181,730 169,650 0.2
Warrants 1/22/04-2/3/06 3,598 36 36 0.0(b)
Warrants 1/22/04-2/3/06 7 0(a) 0(a) 0.0(b)
- -----------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common Stock 4/21/04 522 5 5 0.0(b)
- -----------------------------------------------------------------------------------------------------------------------------
$210,552 $ 294,708 0.3%
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one dollar.
(b) Less than one tenth of a percent.
NOTE 7--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual
38 MainStay Diversified Income Fund
rate of .070%, up to September 6, 2006 at which time the rate changed to .060%
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 made or outstanding on the line of credit during the year ended
October 31, 2006.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of U.S. Government
securities were $46,221 and $55,991, respectively. Purchase and sales of
securities, other than U.S. Government securities and short-term securities,
were $50,842 and $53,148, respectively.
NOTE 10--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 1,456 490 325 4
- ------------------------------------------------------------
Shares issued in
reinvestment of
dividend and
distributions 265 163 39 1
- ------------------------------------------------------------
1,721 653 364 5
Shares redeemed (1,764) (2,096) (569) (9)
- ------------------------------------------------------------
Shares converted (see
Note 1) 2,848 (2,855) -- --
- ------------------------------------------------------------
Net increase
(decrease) 2,805 (4,298) (205) (4)
- ------------------------------------------------------------
</Table>
<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>
(a) Less than one thousand shares.
NOTE 11--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5,882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and
www.mainstayfunds.com 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
requires additional disclosures about fair value measurements. SFAS No. 157
applies to fair value measurements already required or permitted by existing
standards. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
40 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,
2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the three-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, 2006, 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, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 41
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's generally mid-range
investment performance over several time periods, its underperformance relative
to peers for the trailing one-year period, and its more favorable risk-adjusted
returns.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
discussed additional measures that may increase average
42 MainStay Diversified Income Fund
shareholder account size and/or otherwise reduce the Trust's transfer agency
expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint, and the fact that
the breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund had not reached the asset level at which the
breakpoint would reduce the Fund's management fee rate. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered that comparative data with respect to other
clients of the Manager or Subadvisor was not available as such clients did not
have similar investment mandates as the Fund. The Trustees considered the
current and proposed contractual and net management fees, its anticipated
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust. The
Trustees noted the Manager's agreement to maintain a limit on the Fund's net
expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
www.mainstayfunds.com 43
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2006,
should be multiplied by 1.3% to arrive at the amount eligible for qualified
dividend income, 44.7% to arrive at the amount eligible for qualified interest
income and 0.5% for the corporate dividends received deduction.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
44 MainStay Diversified Income Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 45
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
46 MainStay Diversified Income Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 47
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO9806 (RECYCLE SYMBOL) MS377-06 MSDI11-12/06
16
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 10
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 27
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 28
- --------------------------------------------------------------------------------
Federal Income Tax Information 30
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 30
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 30
- --------------------------------------------------------------------------------
Trustees and Officers 31
</Table>
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 YEAR YEARS
- ---------------------------------------------
With sales charges 3.99% 5.42% 5.29%
Excluding sales charges 10.04 6.62 5.89
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/96 9450 10000 10000
10804 13047 13211
12344 16263 16117
14777 21832 20253
17857 23869 21487
12151 14335 16136
10031 11523 13698
12409 14036 16548
13326 14511 18107
15218 15790 19686
10/31/06 16745 17501 22903
</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 YEAR YEARS
- --------------------------------------------
With sales charges 4.13% 5.50% 5.09%
Excluding sales charges 9.13 5.82 5.09
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/96 10000 10000 10000
11348 13047 13211
12868 16263 16117
15289 21832 20253
18337 23869 21487
12385 14335 16136
10147 11523 13698
12460 14036 16548
13280 14511 18107
15061 15790 19686
10/31/06 16436 17501 22903
</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 8.13% 5.82% 5.09%
Excluding sales charges 9.13 5.82 5.09
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/96 10000 10000 10000
11348 13047 13211
12868 16263 16117
15289 21832 20253
18337 23869 21487
12385 14335 16136
10147 11523 13698
12460 14036 16548
13280 14511 18107
15061 15790 19686
10/31/06 16436 17501 22903
</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 as 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.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
10.56% 6.99% 6.20%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/96 10000 10000 10000
11462 13047 13211
13128 16263 16117
15754 21832 20253
19086 23869 21487
13020 14335 16136
10775 11523 13698
13363 14036 16548
14387 14511 18107
16508 15790 19686
10/31/06 18252 17501 22903
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
10.60% 6.84% 6.08%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/96 10000 10000 10000
11450 13047 13211
13101 16263 16117
15707 21832 20253
19010 23869 21487
12955 14335 16136
10710 11523 13698
13270 14036 16548
14272 14511 18107
16308 15790 19686
10/31/06 18037 17501 22903
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------------------------------
10.25% 6.55% 5.80%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/96 10000 10000 10000
11422 13047 13211
13036 16263 16117
15590 21832 20253
18820 23869 21487
12794 14335 16136
10551 11523 13698
13040 14036 16548
13989 14511 18107
15938 15790 19686
10/31/06 17571 17501 22903
</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. Class R3 shares are sold with no initial sales charge or CDSC,
have an annual 12b-1 fee of .50%, and are available in certain individual
retirement accounts or in certain retirement plans. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns may
have been lower. These fee waivers and/or expense limitations are contractual
and may be modified or terminated only with the approval of the Board of
Trustees. The Manager may recoup the amount of any management fee waivers or
expense reimbursements from the Fund pursuant to this agreement if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. On 4/1/05, FMI Winslow Growth Fund was reorganized as
MainStay Large Cap Growth Fund Class A shares. Prior to 4/1/05, performance for
MainStay Large Cap Growth Fund Class A shares includes the historical
performance of FMI Winslow Growth Fund adjusted to reflect the applicable sales
charge and fees and expenses for Class A shares. Prior to 4/1/05, performance
for Class B, C, and I shares 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 FOLLOWING PAGE ARE AN
INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN
CONJUNCTION WITH THEM.
6 MainStay Large Cap Growth Fund
CLASS R3 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------------------------------
9.66% 6.25% 5.52%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/96 10000 10000 10000
11393 13047 13211
12971 16263 16117
15473 21832 20253
18633 23869 21487
12635 14335 16136
10394 11523 13698
12813 14036 16548
13712 14511 18107
15604 15790 19686
10/31/06 17111 17501 22903
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ----------------------------------------------------------------
Russell 1000(R) Growth Index(1) 10.84% 4.07% 5.76%
S&P 500(R) Index(2) 16.34 7.26 8.64
Average Lipper large-cap growth fund(3) 7.42 3.53 5.60
</Table>
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 share
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. Prior to 4/28/06,
performance for Class R3 shares includes the historical performance of Class A
shares adjusted to reflect the applicable sales charge (or CDSC) and fees and
expenses for Class R3 shares.
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 in 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 in 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 PRECEDING TWO PAGES ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 7
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,017.60 $ 7.12 $1,018.00 $ 7.12
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,012.55 $10.91 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,014.35 $10.92 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,019.05 $ 3.82 $1,021.25 $ 3.82
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,019.15 $ 4.33 $1,020.75 $ 4.33
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,017.50 $ 5.59 $1,019.50 $ 5.60
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,016.15 $ 6.96 $1,018.15 $ 6.97
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Class A, 2.15% for Class B and Class C, 0.75% for Class I, 0.85%
for Class R1, 1.10% for Class R2, and 1.37% for R3) multiplied by the average
account value over the period, divided by 365 and multiplied by 184 (to
reflect the one-half year period). In the absence of waivers and/or
reimbursements, expenses would have been higher.
8 MainStay Large Cap Growth Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(COMPOSITION PIE CHART)
<Table>
Common Stocks 97.7
Short-Term Investments (collateral from securities lending 5.5
is 5.5%)
Liabilities in Excess of Cash and Other Assets (3.2)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Cisco Systems, Inc.
2. Goldman Sachs Group, Inc. (The)
3. Schlumberger, Ltd.
4. General Electric Co.
5. Procter & Gamble Co. (The)
6. United Technologies Corp.
7. Franklin Resources, Inc.
8. Danaher Corp.
9. America Movil S.A. de C.V. Class L, ADR
10. QUALCOMM, Inc.
</Table>
www.mainstayfunds.com 9
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.
HOW DID MAINSTAY LARGE CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Large Cap Growth Fund returned 10.04% for
Class A shares, 9.13% for Class B shares, and 9.13% for Class C shares for the
12 months ended October 31, 2006. Over the same period, the Fund returned 10.56%
for Class I shares, 10.60% for Class R1 shares, 10.25% for Class R2 shares, and
9.66% for Class R3 shares.(1) All share classes underperformed the 10.84% return
of the Russell 1000(R) Growth Index,(2) the Fund's broad-based securities-market
index, for the 12-month period. On the other hand, all share classes
outperformed the 7.42% return of the average Lipper(3) large-cap growth fund for
the 12 months ended October 31, 2006.
WHICH SECTORS AND INDIVIDUAL STOCKS WERE AMONG THE FUND'S STRONGEST PERFORMERS
FOR THE 12 MONTHS ENDED OCTOBER 31, 2006?
Telecommunication services, financials, and energy were the three
strongest-performing sectors in the Fund during the reporting period. Stock
selection and overweighted positions in these sectors relative to the Russell
1000(R) Growth Index helped absolute and relative performance.
Telecommunication services results were driven primarily by growth in cell phone
service in Latin America. America Movil was a prime beneficiary. Financials
advanced on strength among capital markets companies and asset managers. The
Fund's position in Goldman Sachs rose significantly. The energy sector's major
catalysts were elevated oil prices and robust demand for energy services.
Schlumberger was an outstanding Fund holding during the reporting period.
Multiline retailer Kohl's advanced on successful management initiatives and
comparable-store gains that were above market expectations.
WHICH SECTORS AND STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
During the reporting period, the health care sector produced modestly negative
returns on an absolute basis, largely because of issues affecting managed care
companies and slowing performance among medical-device producers. The Fund's
consumer discretionary holdings trailed comparable stocks in the Russell 1000(R)
Growth Index, while the Fund's holdings in the information technology sector
produced returns essentially in line with related stocks in the benchmark.
The Fund's three worst-performing stocks in absolute terms were Yahoo! and eBay
in the information technology sector and UnitedHealth Group in the health care
sector. Both Yahoo! and eBay struggled with a general slowdown in online
business. After years of outstanding performance, UnitedHealth Group saw its
share price decline because of questions about its stock-option granting
process.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
We purchased communications semiconductor producer Broadcom for the Fund, but
sold the position within a relatively short period after a double-digit gain led
us to conclude that the shares were overpriced. We established a position in
Nextel International (NII Holdings) to take advantage of strong cell-phone
growth in Latin America, and the share price rose significantly. We sold the
Fund's position in Golden West Financial at a double-digit gain after Wachovia
announced an offer to acquire the company. We eliminated the Fund's position in
Harrah's Entertainment after the company an-
nounced disappointing earnings. We also sold the Fund's positions in Yahoo! and
eBay because of slowing growth.
WERE THERE ANY CHANGES IN THE FUND'S POSITION-ING DURING THE REPORTING PERIOD?
During the reporting period, we increased the Fund's weighting relative to the
Russell 1000(R) Growth Index in the industrials sector to take advantage of
strong corporate cash flows and higher capital spending. We reduced the Fund's
weighting in the consumer discretionary sector on concerns that higher gasoline
prices and higher interest rates might reduce discretionary income.
As of October 31, 2006, the Fund had overweighted positions relative to the
Russell 1000(R) Growth Index in Goldman Sachs and America Movil. On that same
date, the Fund had no underweighted individual stocks relative to the Index.
Typically, the subadvisor invests 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. The Fund may experience a portfolio turnover rate of
more than 100% and may generate taxable short-term capital gains.
1. Class R3 shares were first offered on April 28, 2006.
2. See footnote on page 7 for more information on the Russell 1000(R) Growth
Index.
3. See footnote on page 7 for more information on Lipper Inc.
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 forecast
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 Large Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (97.7%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (4.2%)
Rockwell Collins, Inc. 117,800 $ 6,841,824
V United Technologies Corp. 283,900 18,657,908
------------
25,499,732
------------
BIOTECHNOLOGY (4.9%)
Amgen, Inc. (a) 111,500 8,463,965
Genentech, Inc. (a) 132,100 11,003,930
Gilead Sciences, Inc. (a)(b) 153,400 10,569,260
------------
30,037,155
------------
CAPITAL MARKETS (8.5%)
V Franklin Resources, Inc. 162,500 18,518,500
V Goldman Sachs Group, Inc. (The) 109,600 20,800,984
Merrill Lynch & Co., Inc. 82,800 7,238,376
T. Rowe Price Group, Inc. 121,100 5,729,241
------------
52,287,101
------------
CHEMICALS (1.9%)
Ecolab, Inc. (b) 120,000 5,442,000
Monsanto Co. 146,600 6,482,652
------------
11,924,652
------------
COMMUNICATIONS EQUIPMENT (9.9%)
V Cisco Systems, Inc. (a) 865,100 20,874,863
Comverse Technology, Inc. (a) 369,600 8,046,192
Corning, Inc. (a) 278,500 5,689,755
Motorola, Inc. 385,300 8,885,018
V QUALCOMM, Inc. 468,400 17,045,076
------------
60,540,904
------------
COMPUTERS & PERIPHERALS (4.5%)
Apple Computer, Inc. (a) 124,300 10,078,244
Hewlett-Packard Co. 234,800 9,096,152
Network Appliance, Inc. (a) 233,000 8,504,500
------------
27,678,896
------------
CONSUMER FINANCE (4.5%)
American Express Co. 230,000 13,296,300
SLM Corp. 294,400 14,331,392
------------
27,627,692
------------
DIVERSIFIED FINANCIAL SERVICES (1.8%)
Chicago Mercantile Exchange Holdings, Inc. 22,300 11,172,300
------------
ELECTRICAL EQUIPMENT (0.8%)
Emerson Electric Co. 57,400 4,844,560
------------
ENERGY EQUIPMENT & SERVICES (7.5%)
Baker Hughes, Inc. 137,300 9,480,565
National-Oilwell Varco, Inc. (a) 168,900 10,201,560
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (CONTINUED)
V Schlumberger, Ltd. 324,800 $ 20,488,384
Weatherford International, Ltd. (a) 139,300 5,722,444
------------
45,892,953
------------
FOOD & STAPLES RETAILING (4.1%)
CVS Corp. 414,600 13,010,148
Walgreen Co. 284,400 12,422,592
------------
25,432,740
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.0%)
Alcon, Inc. (b) 60,500 6,417,840
------------
HEALTH CARE PROVIDERS & SERVICES (4.2%)
Caremark Rx, Inc. 267,600 13,173,948
Quest Diagnostics, Inc. 130,600 6,496,044
WellPoint, Inc. (a) 77,900 5,945,328
------------
25,615,320
------------
HOUSEHOLD PRODUCTS (3.2%)
V Procter & Gamble Co. (The) 310,100 19,657,239
------------
INDUSTRIAL CONGLOMERATES (3.3%)
V General Electric Co. 583,200 20,476,152
------------
INTERNET SOFTWARE & SERVICES (2.2%)
Google, Inc. Class A (a) 28,700 13,672,393
------------
IT SERVICES (2.1%)
Paychex, Inc. 328,200 12,957,336
------------
LIFE SCIENCES TOOLS & SERVICES (1.1%)
Fisher Scientific International, Inc. (a) 76,500 6,549,930
------------
MACHINERY (2.8%)
V Danaher Corp. 243,700 17,490,349
------------
MEDIA (1.9%)
Comcast Corp. Class A (a) 293,100 11,864,688
------------
MULTILINE RETAIL (2.7%)
Kohl's Corp. (a) 98,800 6,975,280
Target Corp. 165,700 9,806,126
------------
16,781,406
------------
OIL, GAS & CONSUMABLE FUELS (2.4%)
XTO Energy, Inc. 309,100 14,422,606
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
PHARMACEUTICALS (3.0%)
Allergan, Inc. 84,100 $ 9,713,550
Wyeth 172,100 8,782,263
------------
18,495,813
------------
ROAD & RAIL (1.0%)
CSX Corp. 168,900 6,024,663
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.6%)
Marvell Technology Group, Ltd. (a)(b) 183,900 3,361,692
------------
SOFTWARE (4.3%)
BEA Systems, Inc. (a) 493,900 8,035,753
Microsoft Corp. 213,100 6,118,101
Oracle Corp. (a) 262,200 4,842,834
Salesforce.com, Inc. (a)(b) 184,800 7,210,896
------------
26,207,584
------------
SPECIALTY RETAIL (1.0%)
Lowe's Cos., Inc. 203,100 6,121,434
------------
TEXTILES, APPAREL & LUXURY GOODS (1.2%)
Coach, Inc. (a) 188,000 7,452,320
------------
TRADING COMPANIES & DISTRIBUTORS (2.4%)
Fastenal Co. (b) 203,900 8,204,936
WESCO International, Inc. (a) 102,000 6,657,540
------------
14,862,476
------------
WIRELESS TELECOMMUNICATION SERVICES (4.7%)
V America Movil S.A. de C.V.
Class L, ADR (c) 401,500 17,212,305
NII Holdings, Inc. (a)(b) 180,600 11,744,418
------------
28,956,723
------------
Total Common Stocks
(Cost $530,822,812) 600,326,649
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (5.5%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (1.0%)
Fairway Finance Corp.
5.289%, due 11/20/06 (d) $ 598,930 598,930
Greyhawk Funding
5.286%, due 11/13/06 (d) 798,573 798,573
Jupiter Securitization Corp.
5.303%, due 11/14/06 (d) 982,173 982,173
Lexington Parker Capital Co.
5.282%, due 11/8/06 (d) 798,573 798,573
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
Liberty Street Funding Co.
5.286%, due 11/27/06 (d) $ 988,590 $ 988,590
Old Line Funding LLC
5.287%, due 11/15/06 (d) 798,573 798,573
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (d) 798,573 798,573
Yorktown Capital LLC
5.282%, due 11/16/06 (d) 698,751 698,751
------------
Total Commercial Paper
(Cost $6,462,736) 6,462,736
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.3%)
BGI Institutional Money Market Fund (d) 1,723,943 1,723,943
------------
Total Investment Company
(Cost $1,723,943) 1,723,943
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.2%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/01/06
Proceeds at Maturity $940,652
(Collateralized by various Corporate Bonds, with
rates between 0%-8.40% and maturity dates between
1/30/07-6/15/34, with a Principal Amount of
$951,296 and a Market Value of $977,901) (d) $ 940,511 940,511
------------
Total Repurchase Agreement
(Cost $940,511) 940,511
------------
TIME DEPOSITS (4.0%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (d) 1,597,145 1,597,145
Bank of America
5.27%, due 11/21/06 (d)(e) 2,196,075 2,196,075
Bank of Montreal
5.28%, due 11/27/06 (d) 1,597,145 1,597,145
Bank of Nova Scotia
5.30%, due 11/10/06 (d) 1,597,145 1,597,145
Barclays
5.32%, due 1/18/07 (d) 1,597,145 1,597,145
Deutsche Bank AG
5.27%, due 11/9/06 (d) 1,597,145 1,597,145
Fortis Bank
5.27%, due 11/6/06 (d) 3,473,792 3,473,792
</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.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
Halifax Bank of Scotland
5.30%, due 1/10/07 (d) $1,597,146 $ 1,597,146
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (d) 1,597,146 1,597,146
Royal Bank of Canada
5.30%, due 12/22/06 (d) 1,597,146 1,597,146
Royal Bank of Scotland
5.29%, due 12/12/06 (d) 1,597,146 1,597,146
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (d) 1,597,146 1,597,146
Societe Generale North America, Inc.
5.28%, due 12/6/06 (d) 1,597,146 1,597,146
UBS AG
5.28%, due 12/5/06 (d) 1,597,146 1,597,146
------------
Total Time Deposits
(Cost $24,835,614) 24,835,614
------------
Total Short-Term Investments
(Cost $33,962,804) 33,962,804
------------
Total Investments
(Cost $564,785,616) (f) 103.2% 634,289,453(g)
Liabilities in Excess of
Cash and Other Assets (3.2) (19,519,030)
---------- ------------
Net Assets 100.0% $614,770,423
========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan.
(c) ADR--American Depositary Receipt.
(d) Represents a 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, 2006.
(f) The cost for federal income tax purposes is $566,560,019.
(g) At October 31, 2006 net unrealized appreciation was $67,729,434, based on
cost for federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $72,603,157 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $4,873,723.
</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, 2006
<Table>
ASSETS:
Investment in securities, at value
(identified cost
$564,785,616) including $32,710,736 market
value of securities loaned $ 634,289,453
Cash 12,279,023
Receivables:
Fund shares sold 2,927,729
Dividends and interest 320,175
Other assets 34,683
-------------
Total assets 649,851,063
-------------
LIABILITIES:
Securities lending collateral 33,962,804
Payables:
Fund shares redeemed 338,302
Transfer agent (See Note 3) 267,719
Manager (See Note 3) 195,171
NYLIFE Distributors (See Note 3) 173,730
Shareholder communication 81,297
Professional fees 45,794
Trustees 6,689
Custodian 4,395
Accrued expenses 4,739
-------------
Total liabilities 35,080,640
-------------
Net assets $ 614,770,423
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number
of shares authorized:
Class A $ 343,586
Class B 231,012
Class C 31,506
Class I 440,444
Class R1 5,391
Class R2 15
Class R3 17
Additional paid-in capital 711,683,983
Accumulated net realized loss on investments (167,469,368)
Net unrealized appreciation on investments 69,503,837
-------------
Net assets $ 614,770,423
=============
CLASS A
Net assets applicable to outstanding shares $ 200,500,103
=============
Shares of beneficial interest outstanding 34,358,612
=============
Net asset value per share outstanding $ 5.84
Maximum sales charge (5.50% of offering
price) 0.34
-------------
Maximum offering price per share outstanding $ 6.18
=============
CLASS B
Net assets applicable to outstanding shares $ 133,329,652
=============
Shares of beneficial interest outstanding 23,101,206
=============
Net asset value and offering price per share
outstanding $ 5.77
=============
CLASS C
Net assets applicable to outstanding shares $ 18,170,795
=============
Shares of beneficial interest outstanding 3,150,571
=============
Net asset value and offering price per share
outstanding $ 5.77
=============
CLASS I
Net assets applicable to outstanding shares $ 259,587,836
=============
Shares of beneficial interest outstanding 44,044,418
=============
Net asset value and offering price per share
outstanding $ 5.89
=============
CLASS R1
Net assets applicable to outstanding shares $ 3,163,133
=============
Shares of beneficial interest outstanding 539,107
=============
Net asset value and offering price per share
outstanding $ 5.87
=============
CLASS R2
Net assets applicable to outstanding shares $ 8,740
=============
Shares of beneficial interest outstanding 1,496
=============
Net asset value and offering price per share
outstanding $ 5.84
=============
CLASS R3
Net assets applicable to outstanding shares $ 10,164
=============
Shares of beneficial interest outstanding 1,742
=============
Net asset value and offering price per share
outstanding $ 5.83
=============
</Table>
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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 3,335,259
Interest 543,957
Income from securities loaned--net 36,950
------------
Total income 3,916,166
------------
EXPENSES:
Manager (See Note 3) 3,532,333
Transfer agent--Classes A, B and C (See Note
3) 1,421,896
Transfer agent--Classes I, R1, R2 and R3 (See
Note 3) 105,505
Distribution--Class B (See Note 3) 1,089,680
Distribution--Class C (See Note 3) 86,875
Distribution--Class R3 (See Note 3) 12
Distribution/Service--Class A (See Note 3) 358,238
Service--Class B (See Note 3) 363,227
Service--Class C (See Note 3) 28,958
Distribution/Service--Class R2 (See Note 3) 11
Distribution/Service--Class R3 (See Note 3) 12
Shareholder communication 258,676
Professional fees 103,266
Registration 99,623
Recordkeeping 72,129
Trustees 30,760
Custodian 17,411
Shareholder service--Class R1 (See Note 3) 592
Shareholder service--Class R2 (See Note 3) 5
Shareholder service--Class R3 (See Note 3) 5
Miscellaneous 17,142
------------
Total expenses before waiver 7,586,356
Expense waiver from Manager (See Note 3) (1,053,988)
------------
Net expenses 6,532,368
------------
Net investment loss (2,616,202)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 2,619,250
Net change in unrealized appreciation on
investments 40,546,094
------------
Net realized and unrealized gain on investments 43,165,344
------------
Net increase in net assets resulting from
operations $40,549,142
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$19,445.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 2006 AND THE PERIOD ENDED OCTOBER 31, 2005* AND
THE YEAR ENDED JUNE 30, 2005
<Table>
<Caption>
2006 2005 2005
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (2,616,202) $ (1,086,262) $ (36,486)
Net realized gain
(loss) on investments 2,619,250 (1,170,546) 456,600
Net change in
unrealized
appreciation
(depreciation) on
investments 40,546,094 15,490,193 (1,598,830)
-------------------------------------------
Net increase
(decrease) in net
assets resulting from
operations 40,549,142 13,233,385 (1,178,716)
-------------------------------------------
Distributions to shareholders:
From net realized gain on
investments:
Class A (41,083) -- --
Class B (92,585) -- --
Class C (4,617) -- --
Class I (59,626) -- --
Class R1 (1) -- --
Class R2 (1) -- --
-------------------------------------------
Total distributions to
shareholders (197,913) -- --
-------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 114,559,639 7,051,226 3,512,262
Class B 17,783,940 5,476,548 2,153,623
Class C 12,454,427 1,133,443 544,063
Class I 176,512,397 79,668,226 14,337,964
Class R1 2,987,358 -- 2,075
Class R2 6,096 -- 2,075
Class R3 10,000 -- --
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
</Table>
<Table>
<Caption>
2006 2005 2005
Net asset value of shares issued to
shareholders in reinvestment of
distributions:
Class A $ 39,308 $ -- $ --
Class B 78,600 -- --
Class C 3,751 -- --
Class I 59,455 -- --
Class R1 1 -- --
Class R2 1 -- --
-------------------------------------------
324,494,973 93,329,443 254,560,200
Cost of shares redeemed:
Class A (29,965,731) (5,441,061) (1,379,081)
Class B (34,478,538) (11,565,371) (217,268)
Class C (3,283,483) (635,320) (44,709)
Class I (25,575,965) (2,242,075) (60,723)
Class R1 (56,753) -- (72)
Class R2 -- -- (72)
-------------------------------------------
(93,360,470) (19,883,827) (1,701,925)
Net asset value of shares converted
(See Note 1):
Class A 33,247,592 -- --
Class B (33,247,592) -- --
Increase in net
assets derived
from capital share
transactions 231,134,503 73,445,616 252,858,275
-------------------------------------------
Net increase in net
assets 271,485,732 86,679,001 251,679,559
NET ASSETS:
Beginning of period 343,284,691 256,605,690 4,926,131
-------------------------------------------
End of period $ 614,770,423 $343,284,691 $256,605,690
===========================================
</Table>
* The Fund changed its fiscal year end from June 30 to October 31.
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.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------
JULY 1,
2005*
YEAR ENDED THROUGH
JUNE 30, OCTOBER 31, YEAR ENDED OCTOBER 31,
2006 2005 2005 2004 2003 2002
Net asset value at beginning
of period $ 5.31 $ 5.06 $ 4.69 $ 3.96 $ 3.92 $ 5.07
----------- ----------- ------- ------ ------ ------
Net investment loss (a) (0.03) (0.01) (0.03) (0.03) (0.03) (0.03)
Net realized and unrealized
gain (loss) on investments 0.56 0.26 0.40 0.76 0.07 (1.12)
----------- ----------- ------- ------ ------ ------
Total from investment
operations 0.53 0.25 0.37 0.73 0.04 (1.15)
----------- ----------- ------- ------ ------ ------
Less distributions:
From net realized gain on
investments (0.00)(b) -- -- -- -- --
----------- ----------- ------- ------ ------ ------
Net asset value at end of
period $ 5.84 $ 5.31 $ 5.06 $ 4.69 $ 3.96 $ 3.92
=========== =========== ======= ====== ====== ======
Total investment return (c) 10.04% 4.94%(d) 7.89% 18.43% 1.02% (22.53%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.53%) (0.77%)+ (0.29%) (0.77%) (0.74%) (0.73%)
Net expenses 1.40% 1.40% + 1.35% 1.30% 1.30% 1.30%
Expenses (before waiver) 1.63% 1.77% + 3.01% 2.78% 3.17% 2.71%
Portfolio turnover rate 92% 29% 27% 94% 108% 71%
Net assets at end of period
(in 000's) $200,500 $71,859 $67,000 $4,926 $3,972 $4,144
</Table>
<Table>
<Caption>
CLASS I CLASS R1
------------------------------------------ ------------------------------------------
JULY 1, APRIL 1, JULY 1, APRIL 1,
2005* 2005** 2005* 2005**
YEAR ENDED THROUGH THROUGH YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, JUNE 30, OCTOBER 31, OCTOBER 31, JUNE 30,
2006 2005 2005 2006 2005 2005
Net asset value at beginning
of period $ 5.33 $ 5.07 $ 4.83 $ 5.31 $ 5.06 $ 4.83
----------- ----------- -------- ----------- ----------- --------
Net investment income (loss)
(a) 0.01 0.00(b) (0.01) 0.00 (b) 0.00(b) (0.03)
Net realized and unrealized
gain on investments 0.55 0.26 0.25 0.56 0.25 0.26
----------- ----------- -------- ----------- ----------- --------
Total from investment
operations 0.56 0.26 0.24 0.56 0.25 0.23
----------- ----------- -------- ----------- ----------- --------
Less distributions:
From net realized gain on
investments (0.00)(b) -- -- (0.00)(b) -- --
----------- ----------- -------- ----------- ----------- --------
Net asset value at end of
period $ 5.89 $ 5.33 $ 5.07 $ 5.87 $ 5.31 $ 5.06
=========== =========== ======== =========== =========== ========
Total investment return (c) 10.56% 5.13%(d) 4.97%(d) 10.60% 4.94%(d) 4.76 %(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.11% 0.06%+ (0.28%)+ 0.03% 0.10%+ (0.38%)+
Net expenses 0.75% 0.60%+ 1.02% + 0.85% 0.70%+ 1.12% +
Expenses (before waiver) 0.98% 0.97%+ 3.11% + 1.08% 1.07%+ 3.21% +
Portfolio turnover rate 92% 29% 27% 92% 29% 27%
Net assets at end of period
(in 000's) $259,588 $93,694 $14,349 $3,163 $ 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, R2 and R3 are not
subject to sales charges.
(d) Total return is not annualized.
</Table>
18 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
------------------------------------------ ------------------------------------------
JULY 1, APRIL 1, JULY 1, APRIL 1,
2005* 2005** 2005* 2005**
YEAR ENDED THROUGH THROUGH YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, JUNE 30, OCTOBER 31, OCTOBER 31, JUNE 30,
2006 2005 2005 2006 2005 2005
$ 5.29 $ 5.06 $ 4.83 $ 5.29 $ 5.05 $ 4.83
----------- ----------- -------- ----------- ----------- --------
(0.07) (0.03) (0.00)(b) (0.07) (0.03) (0.01)
0.55 0.26 0.23 0.55 0.27 0.23
----------- ----------- -------- ----------- ----------- --------
0.48 0.23 0.23 0.48 0.24 0.22
----------- ----------- -------- ----------- ----------- --------
(0.00)(b) -- -- (0.00)(b) -- --
----------- ----------- -------- ----------- ----------- --------
$ 5.77 $ 5.29 $ 5.06 $ 5.77 $ 5.29 $ 5.05
=========== =========== ======== =========== =========== ========
9.13% 4.55%(d) 4.76%(d) 9.13% 4.75 %(d) 4.55 %(d)
(1.29%) (1.52%)+ (1.41%)+ (1.29%) (1.52%)+ (1.41%)+
2.15% 2.15% + 2.15% + 2.15% 2.15% + 2.15% +
2.38% 2.52% + 4.24% + 2.38% 2.52% + 4.24% +
92% 29% 27% 92% 29% 27%
$133,330 $169,703 $168,063 $18,171 $8,024 $7,190
</Table>
<Table>
<Caption>
CLASS R2 CLASS R3
------------------------------- -----------
JULY 1, APRIL 28,
2005* 2006**
YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2006 2005 2006
$ 5.30 $ 5.05 $ 5.74
----------- ----------- -----------
(0.01) (0.01) (0.01)
0.55 0.26 0.10
----------- ----------- -----------
0.54 0.25 0.09
----------- ----------- -----------
(0.00)(b) -- --
----------- ----------- -----------
$ 5.84 $ 5.30 $ 5.83
=========== =========== ===========
10.25% 4.95%(d) 1.57%(d)
(0.24%) (0.51%)+ (0.47%)+
1.10% 0.95% + 1.37% +
1.33% 1.32% + 1.63% +
92% 29% 92%
$ 9 $ 2 $ 10
</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 Large Cap
Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Distribution of Class A
shares, Class B shares, Class C shares, Class I shares, Class R1 shares and
Class R2 shares commenced on March 31, 2005. Distribution of Class R3 shares
commenced on April 28, 2006. 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 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 a 1% contingent deferred sales charge may be
imposed on redemptions made within one year of purchase of Class C shares. Class
I, Class R1, Class R2 and Class R3 shares are not subject to sales charge. As
approved by the Board of Trustees in 1997, Class B shares convert to Class A
shares eight years after the date they were purchased. The first conversion
occurred December 28, 2005. The seven 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 and Class C shares are subject
to higher distribution fee rates than Class A, Class R2 and Class R3 shares
under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and
Class R1 shares are not subject to a distribution or service fee. Class R1,
Class R2 and Class R3 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, Class R2 or
Class R3 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default for which there
is not current market quotation; a security of an issuer that has entered into a
restructuring; a security that has been de-listed from a national exchange; a
security the market price of which is not available from an independent pricing
source or, if so provided, does not, in the opinion of the Fund's investment
adviser or sub-adviser (if applicable), reflect the security's market value; and
a security where the trading on that security's principal market is temporarily
closed at a time when, under normal conditions, it would be open. At October 31,
2006, the Fund did not hold securities that were valued in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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
20 MainStay Large Cap Growth Fund
realized loss on investments and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2006, are not affected.
<Table>
<Caption>
NET ACCUMULATED NET ADDITIONAL
INVESTMENT REALIZED LOSS PAID-IN
LOSS ON INVESTMENTS CAPITAL
$2,616,202 $ (4,099) $ (2,612,103)
-------------------------------------------
</Table>
The reclassification for the Fund is due to the reclassification of net
operating losses that cannot be utilized for tax purposes and use of
redemptions.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities,
other than short-term securities, purchased for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 24.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund and all the operational expenses that are not the responsibility of the
Fund. Winslow Capital Management, Inc. (the "Subadvisor"), a registered
investment adviser, is responsible for the day-to-day portfolio management of
the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for the
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 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.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total operating
expenses (total annual 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, 1.40% 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 written expense limitation
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. For the year ended October 31, 2006, the
Manager earned fees from the Fund in the amount of $3,532,333 and waived its
fees in the amount of $1,053,988.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$278,094 $928,988 $1,207,082
- ------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, the Manager pays 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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, Class R2 and Class R3 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
and Class C shares of the Fund. Pursuant to the Class R3 Plan, the Distributor
receives a monthly fee from the Fund at the annual rate of 0.50% of the average
daily net assets of the Fund's Class R3 shares, which is an expense of the Class
R3 shares of the Fund for distribution or service activities as designated by
the Distributor. Class I 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, Class
R2 and Class R3 shares. Under the terms of this plan, Class R1, Class R2 and
Class R3 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
22 MainStay Large Cap Growth Fund
0.10% of the average daily net assets of the Fund's Class R1, Class R2 and Class
R3 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 $89,994 for the year ended
October 31, 2006. 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 $3,602, $191,752 and $4,759, respectively, for the year ended October
31, 2006.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $1,527,401.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 223 0.0*%
- -----------------------------------------------------------------
Class B 2,391 0.0*
- -----------------------------------------------------------------
Class C 2,510 0.0*
- -----------------------------------------------------------------
Class I 2,440 0.0*
- -----------------------------------------------------------------
Class R1 2,432 0.1
- -----------------------------------------------------------------
Class R2 2,419 27.7
- -----------------------------------------------------------------
Class R3 10,157 99.9
- -----------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, $10,371.
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 $72,129 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
CAPITAL UNREALIZED ACCUMULATED
LOSSES APPRECIATION LOSS
$ (165,694,965) $67,729,434 $ (97,965,531)
- ---------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2006 for federal income tax purposes, capital loss carryforwards
of $165,694,965 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 $ 6,418
2008 99,425
2009 53,277
2010 5,418
2013 1,157
-------------------------------------------
$165,695
-------------------------------------------
</Table>
The Fund utilized $3,206,983 of capital loss carryforwards during the year ended
October 31, 2006.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005 and the
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
period ended October 31, 2004, shown in the Statement of Changes in Net Assets,
was as follows:
<Table>
<Caption>
2006 2004 2003
Distributions paid from:
Ordinary income $ 37,927 $-- $--
Long-term capital gains 159,986 -- --
- ------------------------------------------------------------
$197,913 $-- $--
- ------------------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $32,710,736. The Fund received $33,962,804 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $629,271 and $403,629, respectively.
24 MainStay Large Cap Growth Fund
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS R1 CLASS R2 CLASS R3*
Shares sold 20,213 3,170 2,221 30,987 549 1 2
- --------------------------------------------------------------------------------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 7 14 1 11 --(a) --(a) --
- --------------------------------------------------------------------------------------------------------------------------------
20,220 3,184 2,222 30,998 549 1 2
Shares redeemed (5,343) (6,188) (589) (4,535) (10) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Shares converted (See Note
1) 5,937 (5,958) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) 20,814 (8,962) 1,633 26,463 539 1 2
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
PERIOD ENDED OCTOBER 31, 2005+
CLASS A CLASS B CLASS C CLASS I CLASS R1 CLASS R2
Shares sold 1,344 1,043 215 15,177 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Shares redeemed (1,037) (2,206) (121) (428) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) 307 (1,163) 94 14,749 -- --
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30, 2005
CLASS A CLASS B** CLASS C** CLASS I** CLASS R1** CLASS R2**
Shares sold 714 439 110 2,845 429 429
- ------------------------------------------------------------------------------------------------------------------------------
Shares acquired in connection
with the acquisition of
MainStay Blue Chip Growth
Fund (b) 11,748 32,830 1,322 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
12,462 33,269 1,432 2,845 429 429
Shares redeemed (274) (43) (9) (13) (15) (15)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase 12,188 33,226 1,423 2,832 414 414
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
* Commenced operations on April 28, 2006.
** Commenced operations on April 1, 2005.
+ The fund changed its fiscal year from June 30 to October 31.
(a) Less than one thousand shares.
(b) 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:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
being sustained by the applicable tax authority. Tax positions not deemed to
meet the more-likely-than-not threshold would be recorded as a tax benefit or
expense in the current year. Adoption of FIN 48 is required for fiscal years
beginning after December 15, 2006 and is to be applied to all open tax years as
of the effective date. Management of the Fund is currently evaluating the impact
that FIN 48 will have on the Fund's financial statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
26 MainStay Large Cap Growth 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 Large Cap Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2006, and the related statements of operations for the year then ended, the
statements of changes in net assets and financial highlights for the year then
ended, 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 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, 2006, 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, 2006, and
the results of its operations for the year ended October 31, 2006, the changes
in its net assets and financial highlights for the year ended October 31, 2006,
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 21, 2006
www.mainstayfunds.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (the "Subadvisor") (each an "Agreement") at a meeting held on
June 12 and 13, 2006. In connection with the approval of each Agreement, the
Trustees reviewed a wide variety of information that they had requested and
received from the Manager and the Subadvisor, and data and analysis from an
outside data provider and a third party consultant. The Trustees also considered
additional information that they had reviewed during the past year in approving
the Subadvisory Agreement in connection with a change of control of the
Subadvisor and the solicitation of the Fund's shareholders to approve that
Agreement. The Trustees acknowledged the favorable shareholder vote. The
Trustees reviewed various industry trends and regulatory developments in their
deliberations. In considering the approval of each Agreement, and in evaluating
the fairness of the compensation to be paid by the Fund under each Agreement,
the Trustees met a number of times as a full Board, and in executive session
with no Interested Trustee present, to discuss the Board's consideration of the
approval of the Agreement. The Trustees considered the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees considered the
details of the change of control of the Subadvisor and the likely impact that
that transaction may have on the long-term management of the Fund. The Trustees
noted the generally favorable results of a third party review of the services
and communications that NYLIM Service Company LLC, an affiliate of the Manager
and the Subadvisor, has provided to Trust shareholders. The Trustees, including
the Non-Interested Trustees, unanimously concluded that, overall, the nature,
extent and quality of the services expected to be provided by the Manager and
the Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the reorganization of the Fund
with FMI Winslow Growth Fund and another series of the Trust in 2004 and the
Fund's continued strong performance under the Subadvisor and its generally
favorably risk-adjusted returns since completion of that reorganization.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates and the subadvisory fee payments
made by the Manager to the Subadvisor. The Trustees were provided information
indicating that the profitability to the Manager and its affiliates from the
Agreements, and from the overall relationship with the Trust, was low. The
Trustees considered other benefits that the Manager and its affiliates receive
from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Subadvisor, including that the program was designed to
reward providing favorable long-term results for clients. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted
28 MainStay Large Cap Growth Fund
favorably those portfolio managers of the Trust who invest in portfolios they
manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
discussed additional measures that may increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at asset levels above the breakpoints, and the fact
that the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund's management fee rate had been reduced
by the breakpoint schedule applicable to the Fund. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager or Subadvisor, including other registered funds and
separate institutional accounts having investment strategies similar to that of
the Fund, and took account of explanations and other information relating to the
fees and expenses of those other funds and accounts. The Trustees considered the
current and proposed contractual and net management fees, its anticipated gross
and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees reviewed
information relating to the amount of the management fee retained by the Manager
and the amount paid by the Manager to the Subadvisor. The Trustees generally
acknowledged the historical relationships among the Manager and the Trust and
the likely difficulties in implementing an alternative to the investment
management arrangement between the Manager and the Trust. The Trustees noted the
Manager's agreement to waive a certain portion of its management fee, and to
maintain a limit on the Fund's net expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
www.mainstayfunds.com 29
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, 2006) 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 $159,986.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
30 MainStay Large Cap Growth Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 31
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
32 MainStay Large Cap Growth Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSLG11-12/06
31
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 25
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 26
- --------------------------------------------------------------------------------
Federal Income Tax Information 28
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 28
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 28
- --------------------------------------------------------------------------------
Trustees and Officers 29
</Table>
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 9.34% 9.33% 10.85%
Excluding sales charges 15.70 10.57 11.59
</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
20578 18917
10/31/06 23810 22797
</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 9.82% 9.47% 10.76%
Excluding sales charges 14.82 9.74 10.76
</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
20606 18917
10/31/06 23659 22797
</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 13.82% 9.74% 10.76%
Excluding sales charges 14.82 9.74 10.76
</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
20606 18917
10/31/06 23659 22797
</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 as 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. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to this agreement if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense. 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
- --------------------------------------------------
16.08% 10.92% 11.92%
</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
22246 18917
10/31/06 25824 22797
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
16.11% 10.85% 11.83%
</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
22087 18917
10/31/06 25645 22797
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
15.77% 10.53% 11.52%
</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
21646 18917
10/31/06 25059 22797
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -------------------------------------------------------------
Russell Midcap(R) Value Index(1) 20.51% 17.43% 13.82%
Average Lipper mid cap value
fund(2) 16.81 14.71 11.87
</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 in 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.
6 MainStay Mid Cap Value Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,019.60 $ 6.82 $1,018.30 $ 6.82
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,015.75 $10.62 $1,014.55 $10.61
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,015.75 $10.62 $1,014.55 $10.61
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,019.45 $ 5.04 $1,020.05 $ 5.04
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,020.65 $ 4.84 $1,020.25 $ 4.84
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,019.05 $ 6.26 $1,018.85 $ 6.26
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.34% for Class A, 2.09% for Class B and Class C, 0.99% for Class I, 0.95%
for Class R1 and 1.23% for Class R2) multiplied by the average account value
over the period, divided by 365 and multiplied by 184 (to reflect the
one-half year period). In the absence of waivers and/or reimbursements,
expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(COMPOSITION PIE CHART)
<Table>
Common Stocks 94.2
Short-Term Investments (collateral from securities lending 14.2
is 10.4%)
Investment Company 2.2
Purchased Put Options 0.1
Liabilities in Excess of Cash and Other Assets (10.7)
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. PMI Group, Inc. (The)
2. Kroger Co. (The)
3. Sovereign Bancorp, Inc.
4. Genworth Financial, Inc., Class A
5. PPL Corp.
6. American Standard Cos., Inc.
7. Tribune Co.
8. TRW Automotive Holdings Corp.
9. Marshall & Ilsley Corp.
10. General Mills, Inc.
</Table>
8 MainStay Mid Cap Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Richard A. Rosen, CFA, and Mark T.
Spellman of MacKay Shields LLC
HOW DID MAINSTAY MID CAP VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Mid Cap Value Fund returned 15.70% for
Class A shares, 14.82% for Class B shares, and 14.82% for Class C shares for the
12 months ended October 31, 2006. Over the same period, the Fund's Class I
shares returned 16.08%. Class R1 shares returned 16.11% and Class R2 shares
returned 15.77%. All share classes underperformed the 20.51% return of the
Russell Midcap(R) Value Index,(1) the Fund's broad-based securities-market
index, for the 12-month period. All share classes also underperformed the 16.81%
return of the average Lipper(2) mid-cap value fund for the 12 months ended
October 31, 2006.
DURING THE REPORTING PERIOD, WHICH SECTORS WERE STRONG PERFORMERS AND WHICH ONES
WERE WEAK?
With economies throughout the world posting strong growth, the Fund's industrial
holdings experienced solid earnings. These holdings posted the highest absolute
returns for the Fund during the 12-month reporting period and made a positive
contribution to the Fund's relative performance. The utilities sector also
posted strong absolute and relative results for the reporting period, as
valuation levels continued to produce record highs for utility stocks in a
fairly benign interest-rate environment. The Fund's overweighted position in the
energy sector also contributed positively to relative results. Energy stocks
benefited from higher crude oil and natural gas prices for much of the reporting
period.
Although the Fund posted positive absolute returns in the financials, consumer
staples, and materials sectors, these sectors were the most significant
detractors from the Fund's performance relative to the Russell Midcap(R) Value
Index.
WHAT WERE SOME OF THE FUND'S BEST-PERFORMING INDIVIDUAL STOCKS DURING THE
REPORTING PERIOD?
Two offshore drilling companies, Transocean and Global Santa Fe, were the
strongest contributors to the Fund's performance. Since crude oil and natural
gas prices remained elevated for most of the reporting period, both stocks
benefited from the higher rates their drilling fleets were able to command. We
sold the Fund's position in Transocean when its shares reached the price target
we had previously set. Canadian nickel producer Inco was another strong
performer. Inco's shares advanced after the company received multiple takeover
bids from other mining companies. We sold the Fund's position in Inco after the
stock appreciated to a level above our private market-value estimate.
WHICH STOCKS DETRACTED FROM THE FUND'S RESULTS?
Shares of specialty chemical company Chemtura hurt the Fund's performance.
Chemtura suffered from higher manufacturing input costs and limited ability to
pass the expenses along to customers. Lucent Technologies suffered from
lackluster business trends, and the company's stock detracted from the Fund's
results. After Lucent agreed to merge with French communications company
Alcatel, we sold the Fund's position in Lucent Technologies on concerns that the
deal would not be a positive development for future share-price performance. The
Fund's position in H&R Block also hurt performance, largely because the
company's subprime mortgage business posted worse-than-expected results.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
Our sale of Transocean and our decision to trim several other energy-related
positions as they approached our price targets led to a substantial decrease in
the Fund's energy sector overweighting during the reporting period. As of
October 31, 2006, the Fund held overweighted positions relative to the Russell
Midcap(R) Value Index in industrials, health care, and energy. On the same date,
the Fund was underweighted relative to the Index in the utilities, financials,
and consumer discretionary sectors.
The principal risk of investing in value stocks is that they may never reach
what the portfolio manager believes is their full value or they may even go down
in value. 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 more than 100%
and may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on the Russell Midcap(R) Value
Index.
2. See footnote on page 6 for more information about Lipper Inc.
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 forecast
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, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (94.2%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.9%)
Raytheon Co. 139,842 $ 6,985,108
------------
AUTO COMPONENTS (2.2%)
V TRW Automotive Holdings Corp. (a) 320,800 8,228,520
------------
BUILDING PRODUCTS (2.3%)
V American Standard Cos., Inc. 187,400 8,299,946
------------
CHEMICALS (4.0%)
Arch Chemicals, Inc. 193,182 6,463,870
Chemtura Corp. 531,200 4,557,696
Olin Corp. 211,325 3,655,922
------------
14,677,488
------------
COMMERCIAL BANKS (7.7%)
Compass Bancshares, Inc. 95,414 5,367,992
KeyCorp (b) 216,700 8,048,238
V Marshall & Ilsley Corp. 169,243 8,113,509
North Fork Bancorp., Inc. 236,800 6,767,744
------------
28,297,483
------------
COMMERCIAL SERVICES & SUPPLIES (2.1%)
Pitney Bowes, Inc. 166,911 7,796,413
------------
COMPUTERS & PERIPHERALS (1.8%)
Emulex Corp. (a) 359,400 6,756,720
------------
CONTAINERS & PACKAGING (2.9%)
Ball Corp. 150,900 6,275,931
Temple-Inland, Inc. (b) 110,900 4,373,896
------------
10,649,827
------------
DIVERSIFIED CONSUMER SERVICES (1.9%)
H&R Block, Inc. 324,000 7,082,640
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%)
Windstream Corp. 59,360 814,419
------------
ELECTRIC UTILITIES (6.4%)
Edison International 173,600 7,714,784
Entergy Corp. 76,287 6,547,713
V PPL Corp. (b) 270,800 9,348,016
------------
23,610,513
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.5%)
Molex, Inc. Class A 192,400 5,685,420
------------
ENERGY EQUIPMENT & SERVICES (6.3%)
Diamond Offshore Drilling, Inc. (b) 64,800 4,486,104
ENSCO International, Inc. 138,922 6,803,010
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (CONTINUED)
GlobalSantaFe Corp. 87,856 $ 4,559,726
Pride International, Inc. (a) 61,100 1,686,971
Rowan Cos., Inc. (b) 167,700 5,597,826
------------
23,133,637
------------
FOOD & STAPLES RETAILING (3.0%)
V Kroger Co. (The) 493,100 11,089,819
------------
FOOD PRODUCTS (4.4%)
Cadbury Schweppes PLC,
Sponsored ADR (c) 179,500 7,285,905
V General Mills, Inc. 142,000 8,068,440
J.M. Smucker Co. (The) 14,000 686,000
------------
16,040,345
------------
HEALTH CARE PROVIDERS & SERVICES (1.5%)
Quest Diagnostics, Inc. 38,800 1,929,912
Universal Health Services, Inc. Class B 69,200 3,664,140
------------
5,594,052
------------
INSURANCE (9.1%)
Aspen Insurance Holdings, Ltd. 281,100 6,976,902
V Genworth Financial, Inc. Class A 301,500 10,082,160
Hartford Financial Services Group, Inc. (The) 44,047 3,839,577
PartnerRe, Ltd. (b) 97,400 6,810,208
SAFECO Corp. 101,400 5,900,466
------------
33,609,313
------------
IT SERVICES (1.0%)
Computer Sciences Corp. (a) 71,152 3,760,383
------------
LEISURE EQUIPMENT & PRODUCTS (0.6%)
Mattel, Inc. 89,100 2,016,333
------------
MACHINERY (1.6%)
Pentair, Inc. 76,300 2,513,322
Timken Co. (The) 115,400 3,467,770
------------
5,981,092
------------
MEDIA (4.3%)
Gannett Co., Inc. (b) 128,400 7,593,576
V Tribune Co. (b) 247,100 8,235,843
------------
15,829,419
------------
MULTI-UTILITIES (1.5%)
PG&E Corp. 129,625 5,592,023
------------
OIL, GAS & CONSUMABLE FUELS (1.3%)
Hess Corp. (b) 116,900 4,956,560
------------
</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)
- --------------------------------------------------------------------------------
PHARMACEUTICALS (5.5%)
Barr Pharmaceuticals, Inc. (a) 134,100 $ 7,022,817
Forest Laboratories, Inc. (a) 125,100 6,122,394
KOS Pharmaceuticals, Inc. (a) 145,800 7,253,550
------------
20,398,761
------------
REAL ESTATE INVESTMENT TRUSTS (2.9%)
Douglas Emmett, Inc. (a)(b) 58,000 1,383,300
General Growth Properties, Inc. 81,648 4,237,531
Highwoods Properties, Inc. 130,763 4,995,147
------------
10,615,978
------------
ROAD & RAIL (2.1%)
CSX Corp. 212,622 7,584,227
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.1%)
Advanced Micro Devices, Inc. (a) 370,700 7,884,789
------------
SPECIALTY RETAIL (2.7%)
Gap, Inc. (The) (b) 211,600 4,447,832
Williams-Sonoma, Inc. (b) 159,300 5,417,793
------------
9,865,625
------------
THRIFTS & MORTGAGE FINANCE (7.2%)
V PMI Group, Inc. (The) (b) 362,900 15,477,685
V Sovereign Bancorp, Inc. 461,602 11,013,824
------------
26,491,509
------------
TRADING COMPANIES & DISTRIBUTORS (1.4%)
W.W. Grainger, Inc. 69,400 5,050,932
------------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
ALLTEL Corp. 57,413 3,060,687
------------
Total Common Stocks
(Cost $289,902,052) 347,439,981
------------
INVESTMENT COMPANY (2.2%)
- --------------------------------------------------------------------------------
iShares Russell Midcap Value Index Fund (b)(d) 56,700 8,025,885
------------
Total Investment Company
(Cost $6,808,292) 8,025,885
------------
<Caption>
NUMBER OF
CONTRACTS (i) VALUE
PURCHASED PUT OPTIONS (0.1%)
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES (0.0%)++
Rowan Cos., Inc.
Strike Price $32.50
Expire 11/18/06 (a) 962 $ 120,250
------------
PHARMACEUTICALS (0.1%)
KOS Pharmaceuticals, Inc.
Strike Price $50.00
Expire 5/19/07 (a) 406 267,960
------------
SPECIALTY RETAIL (0.0%)++
Gap, Inc. (The)
Strike Price $17.50
Expire 11/18/06 (a) 2,100 15,750
------------
Total Purchased Put Options
(Premium $473,982) 403,960
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (14.2%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (5.8%)
Abbey National NA LLC
5.25%, due 11/6/06 $ 3,670,000 3,666,789
AIG Funding, Inc.
5.23%, due 11/2/06 2,235,000 2,234,350
AIG Funding, Inc.
5.235%, due 11/7/06 3,060,000 3,056,885
Fairway Finance Corp.
5.289%, due 11/20/06 (e) 675,193 675,193
Greyhawk Funding
5.286%, due 11/13/06 (e) 900,257 900,257
Jupiter Securitization Corp.
5.303%, due 11/14/06 (e) 1,107,235 1,107,235
Lexington Parker Capital Co.
5.282%, due 11/8/06 (e) 900,257 900,257
Liberty Street Funding Co.
5.286%, due 11/27/06 (e) 1,114,470 1,114,470
Old Line Funding LLC
5.287%, due 11/15/06 (e) 900,257 900,257
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (e) 900,257 900,257
Toyota Motor Credit Corp.
5.22%, due 11/3/06 3,000,000 2,998,695
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
+xUBS Finance LLC
5.28%, due 11/1/06 $ 1,945,000 $ 1,944,715
Yorktown Capital LLC
5.282%, due 11/16/06 (e) 787,725 787,725
------------
Total Commercial Paper
(Cost $21,187,085) 21,187,085
------------
SHARES
+x
INVESTMENT COMPANY (0.5%)
BGI Institutional Money Market Fund (e) 1,943,458 1,943,458
------------
Total Investment Company
(Cost $1,943,458) 1,943,458
------------
PRINCIPAL
AMOUNT
+x
REPURCHASE AGREEMENT (0.3%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $1,060,428
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$1,072,427 and a Market Value
of $1,102,420) (e) $ 1,060,269 1,060,269
------------
Total Repurchase Agreement
(Cost $1,060,269) 1,060,269
------------
TIME DEPOSITS (7.6%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (e) 1,800,515 1,800,515
Bank of America
5.27%, due 11/21/06 (e)(f) 2,475,708 2,475,708
Bank of Montreal
5.28%, due 11/27/06 (e) 1,800,515 1,800,515
Bank of Nova Scotia
5.30%, due 11/10/06 (e) 1,800,515 1,800,515
Barclays
5.32%, due 1/18/07 (e) 1,800,515 1,800,515
Deutsche Bank AG
5.27%, due 11/9/06 (e) 1,800,515 1,800,515
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Fortis Bank
5.27%, due 11/6/06 (e) $ 3,916,120 $ 3,916,120
Halifax Bank of Scotland
5.30%, due 1/10/07 (e) 1,800,515 1,800,515
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (e) 1,800,515 1,800,515
Royal Bank of Canada
5.30%, due 12/22/06 (e) 1,800,515 1,800,515
Royal Bank of Scotland
5.29%, due 12/12/06 (e) 1,800,515 1,800,515
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (e) 1,800,515 1,800,515
Societe Generale North America, Inc.
5.28%, due 12/6/06 (e) 1,800,515 1,800,515
UBS AG
5.28%, due 12/5/06 (e) 1,800,515 1,800,515
------------
Total Time Deposits
(Cost $27,998,008) 27,998,008
------------
Total Short-Term Investments
(Cost $52,188,820) 52,188,820
------------
Total Investments
(Cost $349,373,146) (g) 110.7% 408,058,646(h)
Liabilities in Excess of
Cash and Other Assets (10.7) (39,512,455)
------------- ------------
Net Assets 100.0% $368,546,191
============= ============
</Table>
<Table>
++ Less than one tenth of a percent.
(a) Non-income producing security.
(b) Represents a 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 a 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, 2006.
(g) The cost for federal income tax purposes is $350,021,326.
(h) At October 31, 2006 net unrealized appreciation was
$58,037,320, 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 $62,236,761 and aggregate gross
unrealized depreciation for all investments on which there
was an excess of cost over market value of $4,199,441.
(i) One contract relates to 100 shares.
</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, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $349,373,146) including $36,969,408
market value of securities loaned $408,058,646
Cash 1,500
Receivables:
Dividends and interest 213,162
Fund shares sold 129,280
Other assets 25,385
-------------
Total assets 408,427,973
-------------
LIABILITIES:
Securities lending collateral 38,287,386
Payables:
Investment securities purchased 499,231
Fund shares redeemed 421,414
NYLIFE Distributors (See Note 3) 209,091
Transfer agent (See Note 3) 204,869
Manager (See Note 3) 121,918
Shareholder communication 76,348
Professional fees 41,968
Trustees 4,665
Custodian 3,880
Accrued expenses 11,012
-------------
Total liabilities 39,881,782
-------------
Net assets $368,546,191
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 93,288
Class B 87,808
Class C 22,455
Class I 366
Class R1 1
Class R2 7
Additional paid-in capital 258,429,528
Accumulated undistributed net investment
income 513,813
Accumulated undistributed net realized gain on
investments, foreign currency transactions
and written option transactions 50,713,425
Net unrealized appreciation on investments 58,685,500
-------------
Net assets $368,546,191
=============
CLASS A
Net assets applicable to outstanding shares $171,907,575
=============
Shares of beneficial interest outstanding 9,328,819
=============
Net asset value per share outstanding $ 18.43
Maximum sales charge (5.50% of offering price) 1.07
-------------
Maximum offering price per share outstanding $ 19.50
=============
CLASS B
Net assets applicable to outstanding shares $156,043,276
=============
Shares of beneficial interest outstanding 8,780,772
=============
Net asset value and offering price per share
outstanding $ 17.77
=============
CLASS C
Net assets applicable to outstanding shares $ 39,899,212
=============
Shares of beneficial interest outstanding 2,245,526
=============
Net asset value and offering price per share
outstanding $ 17.77
=============
CLASS I
Net assets applicable to outstanding shares $ 681,943
=============
Shares of beneficial interest outstanding 36,601
=============
Net asset value and offering price per share
outstanding $ 18.63
=============
CLASS R1
Net assets applicable to outstanding shares $ 1,363
=============
Shares of beneficial interest outstanding 73
=============
Net asset value and offering price per share
outstanding $ 18.61*
=============
CLASS R2
Net assets applicable to outstanding shares $ 12,822
=============
Shares of beneficial interest outstanding 695
=============
Net asset value and offering price per share
outstanding $ 18.44*
=============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
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, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 6,279,694
Interest 812,398
Income from securities loaned--net 150,929
------------
Total income 7,243,021
------------
EXPENSES:
Manager (See Note 3) 2,672,927
Distribution--Class B (See Note 3) 1,278,230
Distribution--Class C (See Note 3) 312,447
Transfer agent--Classes A, B and C (See Note
3) 1,265,654
Transfer agent--Classes I, R1 and R2 (See
Note 3) 4,216
Distribution/Service--Class A (See Note 3) 416,521
Service--Class B (See Note 3) 426,077
Service--Class C (See Note 3) 104,149
Distribution/Service--Class R2 (See Note 3) 5,388
Shareholder communication 247,646
Registration 91,735
Professional fees 82,908
Recordkeeping 64,852
Trustees 22,434
Custodian 15,955
Shareholder service--Class R1 (See Note 3) 347
Shareholder service--Class R2 (See Note 3) 2,155
Miscellaneous 29,581
------------
Total expenses before waiver 7,043,222
Expense waiver from Manager (See Note 3) (347,680)
------------
Net expenses 6,695,542
------------
Net investment income 547,479
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS, FOREIGN CURRENCY
AND WRITTEN OPTIONS:
Net realized gain on:
Security transactions 50,641,346
Written option transactions 230,207
Foreign currency transactions 435
------------
Net realized gain on investments, foreign
currency transactions and written option
transactions 50,871,988
------------
Net change in unrealized appreciation on
investments 3,347,059
------------
Net realized and unrealized gain on
investments, foreign currency and written
options 54,219,047
------------
Net increase in net assets resulting from
operations $54,766,526
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$40,280.
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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) $ 547,479 $ (1,263,215)
Net realized gain on investments,
foreign currency transactions and
written option transactions 50,871,988 26,396,504
Net change in unrealized
appreciation on investments 3,347,059 8,425,972
----------------------------
Net increase in net assets
resulting from operations 54,766,526 33,559,261
----------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A (8,621,454) (1,832,457)
Class B (14,396,932) (2,997,487)
Class C (2,932,150) (612,883)
Class I (39,704) (4,372)
Class R1 (75,079) (16,133)
Class R2 (238,105) (13,805)
----------------------------
Total distributions to
shareholders (26,303,424) (5,477,137)
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 32,693,408 49,642,958
Class B 12,091,737 33,836,862
Class C 4,958,921 10,334,089
Class I 4,600 577,360
Class R1 21,400 211,547
Class R2 965,767 4,355,764
Net asset value of shares issued to
shareholders in reinvestment of distributions:
Class A 7,505,983 1,618,360
Class B 13,348,294 2,758,714
Class C 2,397,333 489,566
Class I 39,704 4,372
Class R1 75,079 16,133
Class R2 238,572 13,805
----------------------------
74,340,798 103,859,530
</Table>
<Table>
<Caption>
2006 2005
Cost of shares redeemed:
Class A $ (54,751,138) $(49,885,936)
Class B (43,255,116) (35,551,146)
Class C (13,019,027) (11,165,156)
Class I (1,100) --
Class R1 (1,283,576) (224,818)
Class R2 (4,948,337) (1,697,454)
----------------------------
(117,258,294) (98,524,510)
Net asset value of shares converted (See Note 1):
Class A 43,972,388 --
Class B (43,972,388) --
Increase (decrease) in net
assets derived from capital
share transactions (42,917,496) 5,335,020
----------------------------
Net increase (decrease) in net
assets (14,454,394) 33,417,144
NET ASSETS:
Beginning of year 383,000,585 349,583,441
----------------------------
End of year $ 368,546,191 $383,000,585
============================
Accumulated undistributed net
investment income at end of year $ 513,813 $ --
============================
</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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 17.04 $ 15.71 $ 13.50 $ 11.51 $ 13.47 $ 13.14
-------- -------- -------- ----------- ------- -------
Net investment income (loss) 0.09(a) 0.03 0.03 0.04 0.06 0.12
Net realized and unrealized gain (loss) on
investments 2.47 1.54 2.18 1.97 (1.90) 0.52
-------- -------- -------- ----------- ------- -------
Total from investment operations 2.56 1.57 2.21 2.01 (1.84) 0.64
-------- -------- -------- ----------- ------- -------
Less dividends and distributions:
From net investment income -- -- -- (0.02) (0.06) (0.12)
From net realized gain on investments (1.17) (0.24) -- -- (0.06) (0.19)
-------- -------- -------- ----------- ------- -------
Total dividends and distributions (1.17) (0.24) -- (0.02) (0.12) (0.31)
-------- -------- -------- ----------- ------- -------
Net asset value at end of period $ 18.43 $ 17.04 $ 15.71 $ 13.50 $ 11.51 $ 13.47
======== ======== ======== =========== ======= =======
Total investment return (b) 15.70% 10.06% 16.37% 17.53%(c) (13.67%) 4.88%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.54% 0.17% 0.27% 0.45%+ 0.71% 0.95%
Net expenses 1.34% 1.35% 1.43% 1.54%+ 1.50% 1.53%
Expenses (before waiver) 1.43% 1.42% 1.43% 1.54%+ 1.50% 1.53%
Portfolio turnover rate 44% 49% 33% 30% 46% 100%
Net assets at end of period (in 000's) $171,908 $127,680 $116,396 $90,349 $80,442 $40,692
</Table>
<Table>
<Caption>
CLASS C
----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41 $ 13.09
------- ------- ------- ----------- ------- -------
Net investment income (loss) (0.03)(a) (0.10) (0.07) (0.03) (0.01) 0.03
Net realized and unrealized gain (loss) on
investments 2.38 1.52 2.14 1.95 (1.92) 0.51
------- ------- ------- ----------- ------- -------
Total from investment operations 2.35 1.42 2.07 1.92 (1.93) 0.54
------- ------- ------- ----------- ------- -------
Less dividends and distributions:
From net investment income -- -- -- -- -- (0.03)
From net realized gain on investments (1.17) (0.24) -- -- (0.06) (0.19)
------- ------- ------- ----------- ------- -------
Total dividends and distributions (1.17) (0.24) -- -- (0.06) (0.22)
------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 17.77 $ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41
======= ======= ======= =========== ======= =======
Total investment return (b) 14.82% 9.27% 15.52% 16.81%(c) (14.35%) 4.17%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.19%) (0.58%) (0.48%) (0.30%)+ (0.04%) 0.20%
Net expenses 2.09% 2.10% 2.18% 2.29% + 2.25% 2.28%
Expenses (before waiver) 2.18% 2.17% 2.18% 2.29% + 2.25% 2.28%
Portfolio turnover rate 44% 49% 33% 30% 46% 100%
Net assets at end of period (in 000's) $39,899 $42,654 $39,884 $33,501 $28,183 $10,586
</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 charge.
(c) 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*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41 $ 13.09
-------- -------- -------- ----------- -------- --------
(0.03)(a) (0.10) (0.07) (0.03) (0.01) 0.03
2.38 1.52 2.14 1.95 (1.92) 0.51
-------- -------- -------- ----------- -------- --------
2.35 1.42 2.07 1.92 (1.93) 0.54
-------- -------- -------- ----------- -------- --------
-- -- -- -- -- (0.03)
(1.17) (0.24) -- -- (0.06) (0.19)
-------- -------- -------- ----------- -------- --------
(1.17) (0.24) -- -- (0.06) (0.22)
-------- -------- -------- ----------- -------- --------
$ 17.77 $ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41
======== ======== ======== =========== ======== ========
14.82% 9.27% 15.52% 16.81%(c) (14.35%) 4.17%
(0.17%) (0.58%) (0.48%) (0.30%)+ (0.04%) 0.20%
2.09% 2.10% 2.18% 2.29% + 2.25% 2.28%
2.18% 2.17% 2.18% 2.29% + 2.25% 2.28%
44% 49% 33% 30% 46% 100%
$156,043 $207,348 $191,390 $156,116 $130,024 $105,146
</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,
2006 2005 2004 2006 2005 2004 2006 2005 2004
$17.16 $15.76 $14.81 $17.14 $15.76 $14.81 $17.04 $15.71 $14.81
------ ------ ----------- ------ ------ ----------- ------ ------ -----------
0.16(a) 0.04 0.07 0.19(a) 0.07 (0.01) 0.13(a) 0.01 (0.02)
2.48 1.60 0.88 2.45 1.55 0.96 2.44 1.56 0.92
------ ------ ----------- ------ ------ ----------- ------ ------ -----------
2.64 1.64 0.95 2.64 1.62 0.95 2.57 1.57 0.90
------ ------ ----------- ------ ------ ----------- ------ ------ -----------
-- -- -- -- -- -- -- -- --
(1.17) (0.24) -- (1.17) (0.24) -- (1.17) (0.24) --
------ ------ ----------- ------ ------ ----------- ------ ------ -----------
(1.17) (0.24) -- (1.17) (0.24) -- (1.17) (0.24) --
------ ------ ----------- ------ ------ ----------- ------ ------ -----------
$18.63 $17.16 $15.76 $18.61 $17.14 $15.76 $18.44 $17.04 $15.71
====== ====== =========== ====== ====== =========== ====== ====== ===========
16.08%(b) 10.48% 6.41%(c) 16.11% 10.35% 6.41%(c) 15.77% 10.06% 6.08%(c)
0.90% 0.37% 0.70%+ 1.11% 0.43% 0.56%+ 0.77% 0.09% 0.26%+
0.99% 0.99% 1.00%+ 0.95% 1.09% 1.14%+ 1.23% 1.34% 1.44%+
1.09% 1.06% 1.00%+ 1.01% 1.16% 1.14%+ 1.28% 1.41% 1.44%+
44% 49% 33% 44% 49% 33% 44% 49% 33%
$ 682 $ 584 $ 1 $ 1 $1,170 $1,075 $ 13 $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 and Class B
shares commenced on June 1, 1998, Class C shares commenced on September 1, 1998
and 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 a 1% contingent deferred sales charge may be imposed on redemptions made
within one year of purchase of Class C shares. Class I, Class R1 and Class R2
shares are not subject to a sales charge. As approved by the Board of Trustees
in 1997, Class B shares convert to Class A shares eight years after the date
they were purchased. The first conversion occurred December 28, 2005. 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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 Mid Cap Value Fund
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated undistributed net
realized loss on investment and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET UNDISTRIBUTED NET ADDITIONAL
INVESTMENT REALIZED LOSS ON PAID-IN-
INCOME INVESTMENTS CAPITAL
$(33,666) $(302,885) $336,551
-------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to real estate trust
distributions. In addition, reclassifications for the Fund are also due to
utilization of current and prior years earnings and profits on shareholder
redemptions.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities,
other than short-term securities, purchased for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 22.)
(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 price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
return for the premium on the option, gives up the opportunity to profit from a
price increase in the underlying securities above the exercise price, but, as
long as the obligation as the writer continues, has retained the risk of loss
should the price of the underlying security decline. 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.
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. (See Note 5 on page 22.)
(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.
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) 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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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, 1.30% 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 written expense
limitation 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, 2006, this limit
was 1.35% of the average daily net assets of the Class A shares. For the year
ended October 31, 2006, the Manager earned fees from the Fund
20 MainStay Mid Cap Value Fund
in the amount of $2,672,927, and waived its fees in the amount of $347,680.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$130,177 $347,680 $477,857
------------------------------
</Table>
*The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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
and Class C shares of the Fund. Class I 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
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 $54,675 for the year ended
October 31, 2006. 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 $2,290, $255,926 and $5,073, respectively, for the year ended October
31, 2006.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $1,269,870.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(F) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 402 0.0*%
- --------------------------------------------------------------------
Class C 214 0.0*
- --------------------------------------------------------------------
Class I 1,365 0.2
- --------------------------------------------------------------------
Class R1 1,363 100.0
- --------------------------------------------------------------------
Class R2 1,352 10.5
- --------------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $10,831.
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 $64,852 the year ended October
31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$513,813 $51,361,605 $58,037,320 $109,912,738
----------------------------------------------------
</Table>
The differences between book-basis unrealized appreciation is primarily due to
wash sale deferrals.
The tax character of distributions paid during the years ended October 31, 2006,
and October 31, 2005, shown in the Statement of Changes in Net Assets, are as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Long-term capital gain $26,303,424 $5,477,137
- -----------------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED AND WRITTEN OPTIONS:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $36,969,408. The Fund received $38,287,386 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.
Securities purchased with collateral received are valued at amortized cost.
During the year ended October 31, 2006, the Fund had the following transactions
in Written Options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUMS
Options Outstanding at October 31,
2005 -- $ --
- --------------------------------------------------------
Options--Written (1,182) (235,043)
- --------------------------------------------------------
Options--Expired 673 77,568
- --------------------------------------------------------
Options--Canceled in Closing
Transactions 509 157,475
- --------------------------------------------------------
Options Outstanding at October 31,
2006 -- $ --
- --------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006 purchases and sales of securities, other
than short-term securities, were $160,929 and $218,932, respectively.
22 MainStay Mid Cap Value Fund
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C
Shares sold 1,866 710 292
- ---------------------------------------------------------------------
Shares issued in reinvestment of
distributions 448 822 148
- ---------------------------------------------------------------------
2,314 1,532 440
Shares redeemed (3,102) (2,546) (766)
- ---------------------------------------------------------------------
Shares converted (See Note 1) 2,625 (2,706) --
- ---------------------------------------------------------------------
Net increase (decrease) 1,837 (3,720) (326)
- ---------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS I CLASS R1 CLASS R2
Shares sold --(a) 1 55
- -----------------------------------------------------------------------
Shares issued in reinvestment of
distributions 2 5 14
- -----------------------------------------------------------------------
2 6 69
Shares redeemed --(a) (74) (278)
- -----------------------------------------------------------------------
Net increase (decrease) 2 (68) (209)
- -----------------------------------------------------------------------
</Table>
<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>
(a) Less than one thousand shares.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
disclosures about fair value measurements. As of October 31, 2006, the Funds do
not believe the adoption of SFAS No. 157 will impact the amounts reported in the
financial statements, however, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
24 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, 2006, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance
relative to certain measures over several time periods, its more favorable
performance over the longest time periods, and a recent portfolio manager
change.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher
26 MainStay Mid Cap Value Fund
investment minimums for some share classes. The Trustees discussed additional
measures that may increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoints that would reduce
the Fund's management fee at asset levels above the breakpoints, and the fact
that the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund had not reached the asset level at
which breakpoints would reduce the Fund's management fee rate. The Trustees
reviewed information about the potential effect of asset growth on Fund
expenses, the difficulty of forecasting its effect on the profitability of the
Manager and its affiliates, and the management fee breakpoints applicable to the
Fund and certain other funds in comparison groups. It was noted that, to the
extent the Fund's gross expenses currently were higher than its net expenses,
the reduction of the Fund's gross expenses through the achievement of economies
of scale might benefit the Manager by reducing the expenses the Manager must
reimburse to the Fund rather than directly benefiting the Fund by reducing its
net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to further limit the
Fund's net expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
www.mainstayfunds.com 27
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, 2006) 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 $26,303,424.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
28 MainStay Mid Cap Value Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
30 MainStay Mid Cap Value Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSMV11-12/06
19
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 17
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 30
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 31
- --------------------------------------------------------------------------------
Federal Income Tax Information 33
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 33
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 33
- --------------------------------------------------------------------------------
Trustees and Officers 34
</Table>
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(1) YEARS INCEPTION
- ----------------------------------------------------
With sales charges 6.72% 15.35% 10.48%
Excluding sales charges 11.75 16.42 11.08
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 9550 10000
7473 8448
8831 10085
10016 11598
10825 12975
12269 14248
16283 17654
18605 19857
20718 21879
10/31/06 23152 24337
</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(1) YEARS INCEPTION
- ----------------------------------------------------
With sales charges 5.87% 15.34% 10.23%
Excluding sales charges 10.87 15.57 10.23
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 10000 10000
7789 8448
9120 10085
10271 11598
11018 12975
12406 14248
16336 17654
18519 19857
20486 21879
10/31/06 22713 24337
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR(1) YEARS INCEPTION
- ----------------------------------------------------
With sales charges 9.87% 15.57% 10.23%
Excluding sales charges 10.87 15.57 10.23
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 10000 10000
7789 8448
9120 10085
10271 11598
11018 12975
12406 14248
16336 17654
18519 19857
20486 21879
10/31/06 22713 24337
</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 as 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. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to this agreement if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense. 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 5
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- ----------------------------------------------------------------------
JPMorgan EMBI Global Diversified Index(2) 11.24% 13.40% 11.14%
Average Lipper emerging markets debt
fund(3) 11.68 16.35 11.30
</Table>
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 25
of the Notes to Financial Statements for further explanation). The effect on
total return (excluding sales charges) was less than 0.01%.
2. 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 in 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.
6 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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,055.90 $ 7.25 $1,018.00 $ 7.12
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,052.65 $11.12 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,052.65 $11.12 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Class A, 2.15% for Class B and Class C) multiplied by the average
account value over the period, divided by 365 and multiplied by 184 (to
reflect the one-half year period). In the absence of waivers and/or
reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Governments & Federal Agencies 69.9
Corporate Bonds 22.4
Short-Term Investments (collateral from securities lending 6.5
is 3.0%)
Brady Bonds 2.2
Yankee Bond 0.4
Loan Participation 0.0*
Liabilities in Excess of Cash and Other Assets (1.4)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal Republic of Brazil, 8.25%, due 1/20/34
2. Russian Federation, Series RegS 5.00%, due
3/31/30
7.50% beginning 3/31/07
3. Republic of Philippines, 9.50%, due 2/2/30
4. Republic of Argentina, 8.28%, due 12/31/33
5. United Mexican States, 8.125%, due 12/30/19
6. Federal Republic of Brazil, 8.00%, due 1/15/18
7. Republic of Venezuela, 8.50%, due 10/8/14
8. Republic of Turkey, 7.375%, due 2/5/25
9. Russian Federation, Series RegS 11.00%, due
7/24/18
10. Gazprom International S.A., 7.201%, due 2/1/20
</Table>
8 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
HOW DID MAINSTAY GLOBAL HIGH INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Global High Income Fund returned 11.75%
for Class A shares, 10.87% for Class B shares, and 10.87% for Class C shares for
the 12 months ended October 31, 2006. Class A shares outperformed--and Class B
and Class C shares underperformed--the 11.24% return of the JPMorgan EMBI Global
Diversified Index,(1) the Fund's broad-based securities-market index, for the
12-month reporting period. Class A shares outperformed--and Class B and Class C
shares underperformed--the 11.68% return of the average Lipper(2) emerging
markets debt fund for the 12 months ended October 31, 2006.(3)
WHAT ISSUES AFFECTED THE MANAGEMENT OF THE FUND DURING THE REPORTING PERIOD?
Despite the challenges of a rising interest-rate environment and the specter of
higher global inflation, emerging-market debt registered strong results. As the
reporting period progressed, it became apparent that credit improvement in the
asset class was not just based on higher commodity prices. The election cycle in
Latin America--which is almost always unpredictable--led to price volatility in
Peru, Mexico, and Ecuador, where left-leaning candidates took early leads. In
Peru and Mexico, candidates who were more market-friendly eventually won. In the
end, the Brazilian election was much ado about nothing, since the incumbent
easily won a second four-year term.
HOW WAS THE FUND POSITIONED IN LATIN AMERICAN MARKETS?
Brazilian dollar bonds have been one of our most favored credits. Despite the
added volatility caused by Brazil's national elections, Brazilian dollar bonds
turned out to be one of the best performers for the Fund. The Fund was
significantly overweighted in Brazilian government dollar-denominated debt for
most of the reporting period.
Other Latin American debt markets also performed well for the Fund. Economic
growth outpaced forecasts, and with rare exceptions, national governments
maintained prudent fiscal and monetary policies. The best-performing Latin
American debt market was Argentina, which emerged from its restructuring last
year. Since then, the Argentine economy has grown dramatically. Argentina's
government has maintained a relatively firm hold on spending, and early in
January 2006, it repaid $9.6 billion to the International Monetary Fund. While
there are still structural issues that need to be addressed, we gradually
increased exposure to Argentine sovereign debt to 6.0% of the Fund's net assets
at the end of October 2006.
WHAT EFFECT DID HIGHER COMMODITY PRICES HAVE ON THE FUND'S INVESTMENTS?
Since many emerging economies are large commodity exporters, the Fund felt the
effects of a run-up in commodity prices during the reporting period. Although
energy prices declined toward the end of the reporting period, pricing trends
remained above historical averages and supported sovereign governments in the
pursuit of prudent fiscal management. We decided to add to the Fund's position
in corporate debt during the reporting period. Metals & mining companies in
emerging economies were trading at attractive levels compared to their
counterparts in developed nations, and we added several names to the Fund in
this industry.
WHICH CORPORATE BONDS DID YOU ADD TO THE FUND DURING THE REPORTING PERIOD?
With copper prices rising, we established a significant position in Southern
Peru Copper, one of the world's largest copper-mine operators, in July 2006.
Early in 2006, we also added CVRD, a Brazilian
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 more
than 100% and may generate taxable short-term capital gains. The Fund is
nondiversified. By concentrating in a smaller number of investments, the Fund's
risk is increased because each investment has a greater effect on the Fund's
performance.
1. See footnote on page 6 for more information on the JPMorgan EMBI Global
Diversified Index.
2. See footnote on page 6 for more information on Lipper Inc.
3. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 6.
www.mainstayfunds.com 9
mining company that made headlines for winning the takeover battle for Canadian
nickel miner Inco.
WHAT OTHER CHANGES DID YOU MAKE TO THE FUND DURING THE REPORTING PERIOD?
We increased the Fund's exposure to local-currency debt, which produced mixed
results. The Fund's exposure to Egyptian pounds was surprisingly stable, despite
geopolitical tensions in the Middle East. Although Argentina's local-currency
bonds rallied along with the nation's dollar-denominated debt, the Argentine
peso depreciated more than 4% relative to the U.S. dollar. The depreciation
eroded some of the Fund's gains on Argentine bonds.
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 forecast
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 Global High Income Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (94.9%)+
BRADY BONDS (2.2%) (a)
- -----------------------------------------------------------------------------------
NIGERIA (0.6%)
Central Bank of Nigeria
Series WW
6.25%, due 11/15/20 $ 1,250,000 $ 1,243,750
------------
PERU (1.4%)
Republic of Peru
Series 20 year
5.00%, due 3/7/17 (b) 2,774,400 2,746,656
------------
VIETNAM (0.2%)
Socialist Republic of Vietnam
Series 30 year
3.75%, due 3/12/28
4.00%, beginning 3/1/07 500,000 414,907
------------
Total Brady Bonds
(Cost $3,547,697) 4,405,313
------------
CORPORATE BONDS (22.4%)
- -----------------------------------------------------------------------------------
ARGENTINA (0.7%)
Loma Negra Compania Industrial Argentina S.A.
7.25%, due 3/15/13 (c) 300,000 295,050
Telecom Personal S.A.
9.25%, due 12/22/10 (c) 1,000,000 1,037,500
------------
1,332,550
------------
BAHAMAS (0.2%)
Ultrapetrol, Ltd.
9.00%, due 11/24/14 450,000 423,562
------------
BERMUDA (1.1%)
AES China Generating Co., Ltd.
8.25%, due 6/26/10 550,000 544,799
Asia Aluminum Holdings, Ltd.
8.00%, due 12/23/11 (c)(d) 500,000 490,000
Series Reg S
8.00%, due 12/23/11 485,000 471,662
Hopson Development Holdings, Ltd.
8.125%, due 11/9/12 (c) 400,000 396,500
Shanghai Real Estate, Ltd.
8.625%, due 4/24/13 250,000 234,781
------------
2,137,742
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
BRAZIL (1.8%)
Braskem S.A.
9.375%, due 6/1/15 (c) $ 150,000 $ 166,500
Series Reg S
9.375%, due 6/1/15 800,000 885,040
Caue Finance, Ltd.
8.875%, due 8/1/15 (c) 750,000 819,375
CIA Brasileira de Bebidas
10.50%, due 12/15/11 125,000 150,625
Cosan S.A. Industria e Comercio
8.25%, due 5/15/49 (c) 1,000,000 949,500
Gol Finance
Series Reg S
8.75%, due 4/29/49 (c) 300,000 291,750
JBS S.A.
10.50%, due 8/4/16 (c) 300,000 312,600
------------
3,575,390
------------
CAYMAN ISLANDS (1.3%)
Agile Property Holdings, Ltd.
9.00%, due 9/22/13 (c) 100,000 99,625
Banco Mercantil del Norte S.A.
Series Reg S
5.875%, due 2/17/14 400,000 401,000
CSN Islands VIII Corp.
9.75%, due 12/16/13 (c) 750,000 853,125
Vale Overseas, Ltd.
6.25%, due 1/11/16 650,000 654,225
8.25%, due 1/17/34 375,000 433,312
Votorantim Overseas III
7.875%, due 1/23/14 (c) 200,000 218,000
------------
2,659,287
------------
CHILE (0.3%)
AES Gener S.A.
7.50%, due 3/25/14 (d) 550,000 578,280
------------
COLOMBIA (0.3%)
AES Chivor S.A. E.S.P.
9.75%, due 12/30/14 (c) 500,000 555,000
------------
GERMANY (0.5%)
Kyivstar GSM
7.75%, due 4/27/12 (c) 400,000 413,444
10.375%, due 8/17/09 (c) 580,000 631,475
------------
1,044,919
------------
HONG KONG (0.2%)
Panva Gas Holdings, Ltd.
8.25%, due 9/23/11 500,000 500,335
------------
</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, 2006 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -----------------------------------------------------------------------------------
LUXEMBOURG (5.9%)
Evraz Group S.A.
8.25%, due 11/10/15 (c) $ 865,000 $ 888,787
Gazprom International S.A.
7.201%, due 2/1/20 (c) 2,445,000 2,568,472
V 7.201%, due 2/1/20 3,635,000 3,816,750
Norilsk Nickel Finance
Luxembourg S.A.
7.125%, due 9/30/09 700,000 717,703
OJSC Russian Agricultural Bank
7.175%, due 5/16/13 (c) 300,000 316,125
OJSC Vimpel Communications
8.25%, due 5/23/16 (c)(d) 900,000 932,625
8.25%, due 5/23/16 500,000 518,425
Tengizchevroil Finance Co. S.A.R.L.
6.124%, due 11/15/14 (c) 320,000 318,400
TNK-BP Finance S.A.
7.50%, due 7/18/16 (c) 1,880,000 1,966,965
------------
12,044,252
------------
MAURITIUS (0.2%)
Antam Finance, Ltd.
7.375%, due 9/30/10 300,000 305,051
------------
MEXICO (1.3%)
America Movil S.A. de C.V.
5.50%, due 3/1/14 400,000 392,230
Controladora Mabe S.A. de C.V.
6.50%, due 12/15/15 (c) 250,000 252,405
Desarrolladora Homex S.A. de C.V.
7.50%, due 9/28/15 100,000 100,350
Grupo Gigante S.A. de C.V.
8.75%, due 4/13/16 (c) 1,200,000 1,212,000
Grupo Transportacion Ferroviaria Mexicana S.A. de
C.V.
12.50%, due 6/15/12 540,000 591,300
Monterrey Power S.A. de C.V.
9.625%, due 11/15/09 (c) 160,613 176,674
------------
2,724,959
------------
NETHERLANDS (1.4%)
Electricidad de Caracas Finance B.V.
10.25%, due 10/15/14 (c) 200,000 212,000
Excelcomindo Finance Co. B.V.
7.125%, due 1/18/13 (c) 300,000 299,250
Indosat Finance Co. B.V.
7.125%, due 6/22/12 (c) 250,000 251,250
Intergas Finance B.V.
6.875%, due 11/4/11 (c) 570,000 586,387
Majapahit Holdings B.V.
7.75%, due 10/17/16 (c) 100,000 102,500
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NETHERLANDS (CONTINUED)
Paiton Energy Funding B.V.
9.34%, due 2/15/14 (c) $ 500,000 $ 531,250
Series Reg S
9.34%, due 2/15/14 550,000 584,375
TuranAlem Finance B.V.
7.75%, due 4/25/13 (c) 300,000 300,750
------------
2,867,762
------------
PANAMA (0.1%)
AES El Salvador Trust
6.75%, due 2/1/16 (c) 300,000 297,766
------------
PHILIPPINES (0.5%)
National Power Corp.
6.875%, due 11/2/16 (c) 300,000 301,125
Philippine Long Distance Telephone Co.
8.35%, due 3/6/17 70,000 78,050
11.375%, due 5/15/12 550,000 675,125
------------
1,054,300
------------
RUSSIA (1.6%)
OAO Gazprom
9.625%, due 3/1/13 (c) 1,720,000 2,042,500
Siberian Oil Co.
Series Reg S
10.75%, due 1/15/09 1,195,000 1,314,261
------------
3,356,761
------------
SOUTH KOREA (0.2%)
C&M Finance, Ltd.
8.10%, due 2/1/16 (c) 500,000 500,625
------------
UNITED STATES (4.8%)
General Motors Acceptance Corp.
6.875%, due 9/15/11 585,000 589,015
8.00%, due 11/1/31 265,000 283,940
K. Hovnanian Enterprises, Inc.
8.625%, due 1/15/17 500,000 515,625
Pemex Project Funding Master Trust
Series Reg S
5.75%, due 12/15/15 3,100,000 3,061,250
7.375%, due 12/15/14 2,960,000 3,248,600
Southern Copper Corp.
7.50%, due 7/27/35 1,900,000 2,031,421
------------
9,729,851
------------
Total Corporate Bonds
(Cost $44,441,672) 45,688,392
------------
</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
GOVERNMENTS & FEDERAL AGENCIES (69.9%)
- -----------------------------------------------------------------------------------
ARGENTINA (6.0%)
Republic of Argentina
(zero coupon), due 12/15/35 (e) $ 20,269,323 $ 2,260,030
(zero coupon), due 12/15/35 (e) ARS 8,961,424 285,802
1.33%, due 12/31/38 (d)
2.50%, beginning 3/1/09,
3.75%, beginning 3/1/19,
5.25%, beginning 3/1/29 $ 1,000,000 488,500
5.59%, due 8/3/12 (f) 2,040,000 1,940,713
5.83%, due 12/31/33 ARS 3,256,605 1,348,404
V 8.28%, due 12/31/33 (d) $ 5,866,923 5,907,991
------------
12,231,440
------------
BRAZIL (16.6%)
Federal Republic of Brazil
V 8.00%, due 1/15/18 4,951,000 5,473,331
V 8.25%, due 1/20/34 9,885,000 11,555,565
Series B
8.875%, due 4/15/24 1,475,000 1,800,975
9.25%, due 10/22/10 1,160,000 1,310,800
9.375%, due 4/7/08 2,425,000 2,554,738
10.125%, due 5/15/27 1,500,000 2,040,000
10.50%, due 7/14/14 1,230,000 1,555,335
11.00%, due 1/11/12 2,500,000 3,081,250
11.50%, due 3/12/08 1,360,000 1,466,760
12.25%, due 3/6/30 1,140,000 1,852,500
14.50%, due 10/15/09 900,000 1,127,250
------------
33,818,504
------------
COLOMBIA (4.0%)
Republic of Colombia
7.216%, due 11/16/15 (e) 500,000 516,250
8.125%, due 5/21/24 2,830,000 3,185,165
10.00%, due 1/23/12 1,960,000 2,299,080
10.375%, due 1/28/33 500,000 693,750
11.75%, due 2/25/20 430,000 613,825
12.00%, due 10/22/15 CP 1,600,000,000 815,098
------------
8,123,168
------------
COSTA RICA (0.3%)
Republic of Costa Rica
Series Reg S
8.11%, due 2/1/12 $ 500,000 542,500
------------
DOMINICAN REPUBLIC (0.7%)
Dominican Republic
9.04%, due 1/23/18 (c) 655,786 749,236
Series Reg S
9.04%, due 1/23/18 546,488 624,363
------------
1,373,599
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ECUADOR (1.1%)
Republic of Ecuador
Series Reg S
10.00%, due 8/15/30 $ 2,355,000 $ 2,351,468
------------
EGYPT (0.8%)
Arab Republic of Egypt
Series Reg S
8.75%, due 7/11/11 610,000 685,457
Republic of Egypt
Series 364
(zero coupon), due 3/6/07 EGP 6,250,000 1,054,915
------------
1,740,372
------------
EL SALVADOR (0.2%)
Republic of El Salvador
7.75%, due 1/24/23 (c) $ 100,000 113,750
Series Reg S
7.75%, due 1/24/23 100,000 113,750
8.25%, due 4/10/32 (c) 250,000 292,500
------------
520,000
------------
INDONESIA (1.1%)
Republic of Indonesia
6.875%, due 3/9/17 (c) 1,100,000 1,135,750
7.25%, due 4/20/15 (c) 550,000 581,625
Series Reg S
7.25%, due 4/20/15 500,000 526,568
------------
2,243,943
------------
LEBANON (1.0%)
Republic of Lebanon
Series Reg S
11.625%, due 5/11/16 1,650,000 1,971,750
------------
MEXICO (3.2%)
United Mexican States
7.50%, due 1/14/12 800,000 878,800
V 8.125%, due 12/30/19 4,650,000 5,649,750
------------
6,528,550
------------
PANAMA (3.0%)
Republic of Panama
6.70%, due 1/26/36 1,058,000 1,066,993
7.125%, due 1/29/26 925,000 979,575
8.875%, due 9/30/27 920,000 1,145,400
9.375%, due 7/23/12 350,000 409,850
9.375%, due 4/1/29 1,635,000 2,121,413
9.625%, due 2/8/11 462,000 527,835
------------
6,251,066
------------
</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, 2006 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
- -----------------------------------------------------------------------------------
PERU (2.7%)
Republic of Peru
7.35%, due 7/21/25 $ 935,000 $ 1,021,488
8.75%, due 11/21/33 762,000 965,835
9.125%, due 2/21/12 3,000,000 3,465,000
------------
5,452,323
------------
PHILIPPINES (6.5%)
Republic of Philippines
7.75%, due 1/14/31 (d) 1,400,000 1,529,500
8.00%, due 1/15/16 (d) 650,000 722,313
9.375%, due 1/18/17 830,000 1,003,263
V 9.50%, due 2/2/30 4,660,000 6,017,225
9.875%, due 1/15/19 1,670,000 2,125,075
10.625%, due 3/16/25 1,290,000 1,794,713
------------
13,192,089
------------
RUSSIA (7.5%)
Russian Federation
5.00%, due 3/31/30
7.50%, beginning 3/31/07 (c) 28,205 31,590
Series Reg S
V 5.00%, due 3/31/30
7.50%, beginning 3/31/07 9,699,750 10,864,690
Series Reg S
V 11.00%, due 7/24/18 3,010,000 4,336,507
------------
15,232,787
------------
TURKEY (5.8%)
Republic of Turkey
7.00%, due 6/5/20 300,000 296,250
7.25%, due 3/15/15 1,510,000 1,547,750
V 7.375%, due 2/5/25 4,725,000 4,760,438
9.00%, due 6/30/11 1,000,000 1,100,000
11.00%, due 1/14/13 550,000 662,750
11.75%, due 6/15/10 700,000 821,625
12.375%, due 6/15/09 1,470,000 1,694,175
14.00%, due 1/19/11 TRY 1,680,000 1,026,042
------------
11,909,030
------------
UKRAINE (0.7%)
Ukraine Government
6.875%, due 3/4/11 (c) $ 350,000 358,313
7.65%, due 6/11/13 (c) 900,000 963,000
Series Reg S
11.00%, due 3/15/07 102,042 103,833
------------
1,425,146
------------
URUGUAY (2.7%)
Republic of Uruguay
7.50%, due 3/15/15 1,760,000 1,878,800
7.875%, due 1/15/33 (g) 3,251,442 3,479,043
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
URUGUAY (CONTINUED)
9.25%, due 5/17/17 $ 130,000 $ 154,700
------------
5,512,543
------------
VENEZUELA (6.0%)
Republic of Venezuela
6.00%, due 12/9/20 3,500,000 3,178,000
Series Reg S
6.376%, due 4/20/11 (e) 1,750,000 1,741,250
Series Reg S
7.00%, due 12/1/18 1,000,000 1,005,000
V 8.50%, due 10/8/14 4,670,000 5,188,370
10.75%, due 9/19/13 680,000 834,700
13.625%, due 8/15/18 200,000 300,000
------------
12,247,320
------------
Total Governments & Federal Agencies
(Cost $125,700,553) 142,667,598
------------
LOAN PARTICIPATION (0.0%)++(h)
- -----------------------------------------------------------------------------------
MOROCCO (0.0%)++
Kingdom of Morocco
2.563%, due 1/1/09 53,931 53,877
------------
Total Loan Participation
(Cost $52,637) 53,877
------------
YANKEE BOND (0.4%) (i)
- -----------------------------------------------------------------------------------
ARGENTINA (0.4%)
YPF Sociedad Anonima
9.125%, due 2/24/09 880,000 932,360
------------
Total Yankee Bond
(Cost 860,989) 932,360
------------
Total Long-Term Bonds
(Cost $174,603,548) 193,747,540
------------
SHORT-TERM INVESTMENTS (6.5%)
- -----------------------------------------------------------------------------------
COMMERCIAL PAPER (4.0%)
American Express Credit Corp.
5.23%, due 11/3/06 3,500,000 3,498,983
Fairway Finance Corp.
5.289%, due 11/20/06 (j) 109,331 109,331
Greyhawk Funding
5.286%, due 11/13/06 (j) 145,774 145,774
Jupiter Securitization Corp.
5.303%, due 11/14/06 (j) 179,289 179,289
Lexington Parker Capital Co.
5.282%, due 11/8/06 (j) 145,774 145,774
</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.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
Liberty Street Funding Co.
5.286%, due 11/27/06 (j) $ 180,460 $ 180,460
Old Line Funding LLC
5.287%, due 11/15/06 (j) 145,774 145,774
Sheffield Receivables Corp.
5.272%, due 11/8/06 (j) 145,774 145,774
UBS Finance LLC
5.28%, due 11/1/06 3,570,000 3,570,000
Yorktown Capital LLC
5.282%, due 11/16/06 (j) 127,552 127,552
------------
Total Commercial Paper
(Cost $8,248,711) 8,248,711
------------
SHARES
INVESTMENT COMPANY (0.2%)
BGI Institutional Money
Market Fund (j) 314,694 314,694
------------
Total Investment Company
(Cost $314,694) 314,694
------------
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.1%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $171,710 (Collateralized by
various Corporate Bonds, with rates between
0%-8.40% and maturity dates between
1/30/07-6/15/34, with a Principal Amount of
$173,653 and a Market Value of $178,509) (j) $ 171,684 171,684
------------
Total Repurchase Agreement
(Cost $171,684) 171,684
------------
TIME DEPOSITS (2.2%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (j) 291,548 291,548
Bank of America
5.27%, due 11/21/06 (e)(j) 400,879 400,879
Bank of Montreal
5.28%, due 11/27/06 (j) 291,548 291,548
Bank of Nova Scotia
5.30%, due 11/10/06 (j) 291,548 291,548
Barclays
5.32%, due 1/18/07 (j) 291,548 291,548
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Deutsche Bank AG
5.27%, due 11/9/06 (j) $ 291,548 $ 291,548
Fortis Bank
5.27%, due 11/6/06 (j) 634,117 634,117
Halifax Bank of Scotland
5.30%, due 1/10/07 (j) 291,548 291,548
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (j) 291,548 291,548
Royal Bank of Canada
5.30%, due 12/22/06 (j) 291,548 291,548
Royal Bank of Scotland
5.29%, due 12/12/06 (j) 291,548 291,548
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (j) 291,548 291,548
Societe Generale North America, Inc.
5.28%, due 12/6/06 (j) 291,548 291,548
UBS AG
5.28%, due 12/5/06 (j) 291,548 291,548
------------
Total Time Deposits
(Cost $4,533,572) 4,533,572
------------
Total Short-Term Investments
(Cost $13,268,661) 13,268,661
------------
Total Investments
(Cost $187,872,209) (k) 101.4% 207,016,201(l)
Liabilities in Excess of
Cash and Other Assets (1.4) (2,894,926)
---------------- ------------
Net Assets 100.0% $204,121,275
================ ============
</Table>
<Table>
++ Less than one tenth of a percent.
+++ Fifty percent of the Fund's assets are maintained to cover
"senior securities transactions" which may include, but are
not limited to, forwards, TBA's, options and futures. This
percentage is marked-to-market daily against the value of
the Fund's "senior securities" holdings to ensure proper
coverage for these transactions.
(a) Brady bond--U.S. dollar-denominated bonds of developing
countries.
(b) FLIRB (Floating Loaded Interest Rate Bond) carries a fixed,
below market interest rate which rises incrementally over
the initial 5 to 10 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 under Rule 144a
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(d) Represents a security, or a portion thereof, which is out on
loan.
(e) Floating rate. Rate shown is the rate in effect at October
31, 2006.
(f) Fair valued security. The total market value of these
securities at October 31, 2006 is $1,940,713, which reflects
1.0% of the Fund's 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 15
Portfolio of Investments October 31, 2006 (continued)
<Table>
(g) CIK ("Cash in Kind")--Interest payment is made with
cash or additional securities.
(h) Floating Rate Loan--generally pays interest at rates
which are periodically re-determined at a margin above
the London Inter-Bank Offered Rate ("LIBOR") or other
short-term rates. The rate shown is the rate(s) in
effect at October 31, 2006. Floating Rate Loans are
generally considered restrictive in that the Fund is
ordinarily contractually obligated to receive consent
from the Agent Bank and/or borrower prior to
disposition of a Floating Rate Loan. Under procedures
adopted by the Board, the loans are deemed to be
liquid.
(i) Yankee Bond--dollar-denominated bond issued in the
United States by a foreign bank or corporation.
(j) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(k) The cost for federal income tax purposes is
$187,910,937.
(l) At October 31, 2006 net unrealized appreciation for
securities was $19,105,264, 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
$19,381,559 and aggregate gross unrealized depreciation
for all investments on which there was an excess of
cost over market value of $276,295.
The following abbreviations are used in the above portfolio:
ARS--Argentinian Peso
CP--Colombian Peso
EGP--Egyptian Pound
TRY--New Turkish Lira
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $187,872,209) including $6,047,716
market value of securities loaned $207,016,201
Cash 4,552
Receivables:
Dividends and interest 3,535,304
Investment securities sold 1,799,410
Fund shares sold 990,273
Other assets 25,438
-------------
Total assets 213,371,178
-------------
LIABILITIES:
Securities lending collateral 6,199,678
Payables:
Investment securities purchased 2,093,194
Fund shares redeemed 291,129
NYLIFE Distributors (See Note 3) 97,198
Manager (See Note 3) 96,693
Transfer agent (See Note 3) 89,437
Shareholder communication 41,382
Professional fees 33,648
Custodian 13,509
Trustees 2,586
Accrued expenses 4,245
Dividend payable 279,033
Unrealized depreciation on foreign currency
forward contracts 8,171
-------------
Total liabilities 9,249,903
-------------
Net assets $204,121,275
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 103,054
Class B 36,798
Class C 33,421
Additional paid-in capital 180,450,111
Accumulated distributions in excess of net
investment income (264,790)
Accumulated undistributed net realized gain on
investments 4,627,466
Net unrealized appreciation on investments 19,143,992
Net unrealized depreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts (8,777)
-------------
Net assets $204,121,275
=============
CLASS A
Net assets applicable to outstanding shares $121,809,587
=============
Shares of beneficial interest outstanding 10,305,437
=============
Net asset value per share outstanding $ 11.82
Maximum sales charge (4.50% of offering price) 0.56
-------------
Maximum offering price per share outstanding $ 12.38
=============
CLASS B
Net assets applicable to outstanding shares $ 43,135,548
=============
Shares of beneficial interest outstanding 3,679,825
=============
Net asset value and offering price per share
outstanding $ 11.72
=============
CLASS C
Net assets applicable to outstanding shares $ 39,176,140
=============
Shares of beneficial interest outstanding 3,342,112
=============
Net asset value and offering price per share
outstanding $ 11.72
=============
</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 17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Interest $14,220,848
Income from securities loaned--net 76,501
------------
Total income 14,297,349
------------
EXPENSES:
Manager (See Note 3) 1,357,691
Distribution--Class B (See Note 3) 343,258
Distribution--Class C (See Note 3) 251,814
Transfer agent (See Note 3) 526,624
Distribution/Service--Class A (See Note 3) 286,526
Service--Class B (See Note 3) 114,419
Service--Class C (See Note 3) 83,938
Shareholder communication 131,020
Professional fees 87,712
Custodian 58,671
Registration 54,716
Recordkeeping 46,063
Trustees 11,924
Miscellaneous 15,968
------------
Total expenses before waiver/reimbursement 3,370,344
Expense waiver from Manager (See Note 3) (34,288)
Reimbursement from Manager for professional
fees (See Note 3(B) on page 25.) (23,939)
------------
Net expenses 3,312,117
------------
Net investment income 10,985,232
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on:
Security transactions (a) $ 5,990,960
Foreign currency transactions 241,429
------------
Net realized gain on investments and foreign
currency transactions 6,232,389
------------
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 25.) 11,000
------------
Net change in unrealized appreciation on:
Security transactions 2,983,634
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts (51,164)
------------
Net change in unrealized appreciation on
investments and foreign currency forward
contracts 2,932,470
------------
Net realized and unrealized gain on investments
and foreign currency transactions 9,175,859
------------
Net increase in net assets resulting from
operations $20,161,091
============
</Table>
(a) Realized gain on security transactions net of foreign withholding taxes in
the amount of $1,722.
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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 10,985,232 $ 8,512,764
Net realized gain on investments
and foreign currency transactions 6,232,389 6,157,121
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 25.) 11,000 --
Net change in unrealized
appreciation on investments and
foreign currency forward
contracts 2,932,470 (1,560,055)
---------------------------
Net increase in net assets
resulting from operations 20,161,091 13,109,830
---------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (8,582,897) (4,386,769)
Class B (3,551,703) (2,937,455)
Class C (2,373,184) (1,371,905)
From net realized gain on investments:
Class A -- (779,565)
Class B -- (583,594)
Class C -- (318,843)
---------------------------
Total dividends and distributions
to shareholders (14,507,784) (10,378,131)
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 56,606,389 37,315,909
Class B 11,053,016 17,485,890
Class C 20,518,386 16,717,985
</Table>
<Table>
<Caption>
2006 2005
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 5,379,622 2,772,217
Class B 2,512,281 2,694,234
Class C 1,482,171 986,646
---------------------------
97,551,865 112,629,353
Cost of shares redeemed:
Class A (46,151,317) (16,475,481)
Class B (13,156,518) (10,583,141)
Class C (12,336,949) (8,089,607)
---------------------------
(71,644,784) (35,148,229)
Net asset value of shares converted (See Note
1):
Class A 16,067,544 --
Class B (16,067,544) --
Increase in net assets derived
from capital share transactions 25,907,081 77,481,124
---------------------------
Net increase in net assets 31,560,388 80,212,823
NET ASSETS:
Beginning of year 172,560,887 92,348,064
---------------------------
End of year $204,121,275 $172,560,887
===========================
Accumulated undistributed
(distributions in excess of) net
investment income at end of year $ (264,790) $ 3,157,851
===========================
</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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 11.44 $ 11.17 $ 10.49 $ 8.89 $ 8.72 $ 8.49
-------- ------- ------- --------- ------- ------
Net investment income 0.69 (g) 0.73 0.76 0.63 0.73 0.85 (a)
Net realized and unrealized gain on
investments 0.59 (e) 0.49 0.67 1.56 0.19 0.24 (a)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.01 0.00 (b) 0.00 (b) 0.00 (b) (0.01) --
-------- ------- ------- --------- ------- ------
Total from investment operations 1.29 1.22 1.43 2.19 0.91 1.09
-------- ------- ------- --------- ------- ------
Less dividends and distributions:
From net investment income (0.91) (0.76) (0.75) (0.59) (0.74) (0.86)
From net realized gain on investments -- (0.19) -- -- -- --
-------- ------- ------- --------- ------- ------
Total dividends and distributions (0.91) (0.95) (0.75) (0.59) (0.74) (0.86)
-------- ------- ------- --------- ------- ------
Net asset value at end of period $ 11.82 $ 11.44 $ 11.17 $ 10.49 $ 8.89 $ 8.72
======== ======= ======= ========= ======= ======
Total investment return (c) 11.75%(d)(e) 11.35% 14.26% 25.21%(f) 11.01% 13.59%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 5.97% 6.63% 7.29% 7.75%+ 8.49% 10.11%(a)
Net expenses 1.40% 1.43% 1.53% 1.63%+ 1.70% 1.70%
Expenses (before waiver/reimbursement) 1.43%(d) 1.46% 1.53% 1.63%+ 1.91% 2.27%
Portfolio turnover rate 33% 34% 24% 34% 92% 111%
Net assets at end of period (in 000's) $121,810 $86,515 $44,434 $34,371 $22,754 $9,894
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 11.36 $ 11.10 $ 10.44 $ 8.86 $ 8.68 $8.46
------- ------- ------- --------- ------ -----
Net investment income 0.60 (g) 0.65 0.69 0.57 0.67 0.79 (a)
Net realized and unrealized gain on
investments 0.58 (e) 0.48 0.65 1.54 0.20 0.23 (a)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.01 (0.00)(b) (0.00)(b) 0.00 (b) (0.01) --
------- ------- ------- --------- ------ -----
Total from investment operations 1.19 1.13 1.34 2.11 0.86 1.02
------- ------- ------- --------- ------ -----
Less dividends and distributions:
From net investment income (0.83) (0.68) (0.68) (0.53) (0.68) (0.80)
From net realized gain on investments -- (0.19) -- -- -- --
------- ------- ------- --------- ------ -----
Total dividends and distributions (0.83) (0.87) (0.68) (0.53) (0.68) (0.80)
------- ------- ------- --------- ------ -----
Net asset value at end of period $ 11.72 $ 11.36 $ 11.10 $ 10.44 $ 8.86 $8.68
======= ======= ======= ========= ====== =====
Total investment return (c) 10.87%(d)(e) 10.62% 13.36% 24.33%(f) 10.33% 12.69%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 5.22% 5.88% 6.54% 7.00%+ 7.74% 9.36%(a)
Net expenses 2.15% 2.18% 2.28% 2.38%+ 2.45% 2.45%
Expenses (before waiver/reimbursement) 2.18%(d) 2.21% 2.28% 2.38%+ 2.66% 3.02%
Portfolio turnover rate 33% 34% 24% 34% 92% 111%
Net assets at end of period (in 000's) $39,176 $28,547 $16,455 $11,031 $8,060 $ 957
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) As required, effective January 1, 2001, the Fund has adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended December 31, 2001 is shown below.
Per share ratios and supplemental data for periods prior to January 1, 2001 have not been
restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
Decrease net investment income ($0.00)(b) ($0.00)(b) ($0.00)(b)
Increase net realized and unrealized gains and losses 0.00(b) 0.00(b) 0.00(b)
Decrease ratio of net investment income (0.04%) (0.04%) (0.04%)
</Table>
<Table>
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees costs. The effect
on total return was less than one hundred of a percent. (See Note 3(B) on page 25.)
(e) The impact of nonrecurring dilute effects resulting from shareholder trading arrangements
and the Manager reimbursement of such losses were less than $0.01 per share on net
realized gains on investments; and the effect on total investment return was less than
0.01%, respectively. (See Note 3(B) on page 25.)
(f) Total return is not annualized.
(g) Per share data based on average shares outstanding during the period.
</Table>
20 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- -------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 11.36 $ 11.10 $ 10.44 $ 8.86 $ 8.68 $ 8.46
------- ------- ------- --------- ------- ------
0.60 (g) 0.65 0.69 0.57 0.67 0.79 (a)
0.58 (e) 0.48 0.65 1.54 0.20 0.23 (a)
0.01 (0.00)(b) (0.00)(b) 0.00 (b) (0.01) --
------- ------- ------- --------- ------- ------
1.19 1.13 1.34 2.11 0.86 1.02
------- ------- ------- --------- ------- ------
(0.83) (0.68) (0.68) (0.53) (0.68) (0.80)
-- (0.19) -- -- -- --
------- ------- ------- --------- ------- ------
(0.83) (0.87) (0.68) (0.53) (0.68) (0.80)
------- ------- ------- --------- ------- ------
$ 11.72 $ 11.36 $ 11.10 $ 10.44 $ 8.86 $ 8.68
======= ======= ======= ========= ======= ======
10.87%(d)(e) 10.62% 13.36% 24.33%(f) 10.33% 12.69%
5.22% 5.88% 6.54% 7.00%+ 7.74% 9.36%(a)
2.15% 2.18% 2.28% 2.38%+ 2.45% 2.45%
2.18%(d) 2.21% 2.28% 2.38%+ 2.66% 3.02%
33% 34% 24% 34% 92% 111%
$43,136 $57,500 $31,459 $26,881 $16,708 $6,715
</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 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 and distribution of Class C
shares commenced 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 a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. As approved by the Board of Trustees in 1997, Class B shares
convert to Class A shares eight years after the date they were purchased. The
first conversion occurred December 28, 2005. The three 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 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, as defined in Note 3,
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 trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time).
Temporary cash investments acquired over 60 days prior 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 ask 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 the
Board of Trustees to represent fair value. Equity and non-equity securities
which may be valued in this manner include, but are not limited to: a security
the trading for which has been halted or suspended; a debt security that has
recently gone into default and for which there is not current market quotation;
a security of an issuer that has entered into a restructuring; a security that
has been de-listed from a national exchange; a security the market price of
which is not available from an independent pricing source or, if so provided,
does not, in the opinion of the Fund's investment adviser or sub-adviser (if
applicable), reflect the security's market value; and a security where the
trading on that security's principal market is temporarily closed at a time
when, under normal conditions, it would be open. At October 31, 2006, the Fund
held securities with a value of $1,940,713 that were valued in such manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund
22 MainStay Global High Income 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,
as defined in Note 3, conclude that such events may have affected the accuracy
of the last price reported on the local foreign market, the Manager or
Subadvisor may, pursuant to procedures adopted by the Fund, adjust the value of
the local price to reflect the impact on the price of such securities as a
result of such events. Additionally, international equity securities are also
fair valued whenever the movement of a particular index exceeds certain amounts.
In such cases, the securities are fair valued by applying factors provided by a
third party vendor in accordance with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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, accumulated net
realized gain on investments and additional paid-in-capital arising from
permanent differences, net assets at October 31, 2006, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED NET
DISTRIBUTIONS IN EXCESS OF REALIZED GAIN ON ADDITIONAL
NET INVESTMENT INCOME INVESTMENTS PAID-IN-CAPITAL
$99,911 $(110,911) $11,000
- ------------------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to straddles, paydown,
foreign currency gain (loss) and reimbursement payment (See Note 11 on page 29).
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued as earned using the effective interest rate method. Discounts and
premiums on securities, other than short-term securities, purchased for the Fund
are accreted and amortized, respectively, on the effective interest rate method
over the life of the respective securities or, in the case of a callable
security, over the period to the first date of call. Discounts and premiums on
short-term securities are accreted and amortized, respectively, on the straight
line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. 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.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(H) 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 the
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. For example, 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.
(I) 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
valuation date to credit loss in the event of a counterparty's failure to
perform its obligations. (See Note 5 on page 27.)
(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.
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) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 27.)
(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
24 MainStay Global High Income Fund
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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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, 1.40% 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 written expense
limitation 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. For the year ended October 31, 2006,
the Manager earned fees from the Fund in the amount of $1,357,691, and waived
its fees in the amount of $34,288.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$38,120 $34,288 $72,408
- -------------------------
</Table>
* The expense limitation agreement became effective 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 11 on
page 29.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $23,939. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) 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
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and 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.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $75,700 for the year ended
October 31, 2006. 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 $6,593, $79,068 and $8,025, respectively, for the year ended October
31, 2006.
(E) 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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006 amounted
to $526,624.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $7,683,570 6.3%
- -------------------------------------------------------------------
Class C 314 0.0*
- -------------------------------------------------------------------
</Table>
* Less than one tenth of one percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $4,879.
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 $46,063 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER TOTAL
ORDINARY CAPITAL TEMPORARY UNREALIZED ACCUMULATED
INCOME GAINS LOSSES APPRECIATION GAIN
$6,072 $4,666,194 $(279,033) $19,104,658 $23,497,891
---------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals and straddles loss deferrals.
The other temporary differences are primarily due to distribution payable.
The Fund utilized $1,260,445 of capital loss carryforwards during the year ended
October 31, 2006.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary income $14,507,784 $ 9,043,816
Long-term capital gains -- 1,334,315
- ----------------------------------------------------------------
$14,507,784 $10,378,131
- ----------------------------------------------------------------
</Table>
26 MainStay Global High Income Fund
NOTE 5--FUND SECURITIES LOANED AND FOREIGN CURRENCY FORWARD CONTRACTS:
As of October 31, 2006 the Fund had securities on loan with an aggregate market
value of $6,047,716. The Fund received $6,199,678 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.
Securities purchased with collateral received are valued at amortized cost.
Foreign currency forward contract open at October 31, 2006:
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT UNREALIZED
FOREIGN CURRENCY BUY CONTRACTS PURCHASED SOLD DEPRECIATION
Russian Rouble vs. U.S. Dollar, expiring 3/7/07 RUB 26,430,000 $991,829 $ (8,171)
- -------------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on foreign currency forward
contracts $ (8,171)
- -------------------------------------------------------------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060%. 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006 purchases and sales of securities, other
than short-term securities, were $86,832 and $61,492, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C
Shares sold 4,891 962 1,788
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends 467 220 130
- -----------------------------------------------------------
5,358 1,182 1,918
Shares redeemed (4,020) (1,148) (1,089)
- -----------------------------------------------------------
Shares converted (See Note 1) 1,406 (1,417) --
- -----------------------------------------------------------
Net increase (decrease) 2,744 (1,383) 829
- -----------------------------------------------------------
</Table>
<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>
(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.
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--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>
28 MainStay Global High Income Fund
NOTE 11--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$11,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
www.mainstayfunds.com 29
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,
2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the three-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, 2006, 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, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
30 MainStay Global High Income Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention its compliance program and those of
the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's mid-range investment
performance over certain time periods, and its more favorable performance over
the medium term.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
discussed additional measures that may increase average
www.mainstayfunds.com 31
shareholder account size and/or otherwise reduce the Trust's transfer agency
expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund had not reached the asset level at which the
breakpoint would reduce the Fund's management fee rate. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including separate institutional
accounts having investment strategies similar to that of the Fund, and took
account of explanations and other information relating to the fees and expenses
of those other funds and accounts. The Trustees considered the current and
proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust. The
Trustees noted the Manager's agreement to maintain a limit on the Fund's net
expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
32 MainStay Global High Income Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
should be multiplied by 4.4% to arrive at the amount eligible for qualified
interest income.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
www.mainstayfunds.com 33
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 Global High Income Fund
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 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>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
36 MainStay Global High Income Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.MAINSTAYfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 [RECYCLE LOGO] MS377-06 MSGH11-12/06
20
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
COMMON STOCK FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
COMMON STOCK FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 16
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 27
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management Agreement 28
- --------------------------------------------------------------------------------
Federal Income Tax Information 30
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 30
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 30
- --------------------------------------------------------------------------------
Trustees and Officers 31
</Table>
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 CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 10.02% 4.47% 4.16%
Excluding sales charges 16.43 5.65 4.86
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY COMMON
STOCK FUND S&P 500 INDEX RUSSELL 1000 INDEX
--------------- ------------- ------------------
6/01/98 9450 10000 10000
9894 10133 10036
12606 12734 12603
14580 13510 13744
10706 10146 10166
8902 8613 8681
10255 10404 10619
10946 11385 11609
12106 12378 12825
10/31/06 14095 14400 14880
</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 10.58% 4.56% 4.09%
Excluding sales charges 15.58 4.89 4.09
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY COMMON
STOCK FUND S&P 500 INDEX RUSSELL 1000 INDEX
--------------- ------------- ------------------
6/01/98 10000 10000 10000
10430 10133 10036
13200 12734 12603
15149 13510 13744
11038 10146 10166
9108 8613 8681
10418 10404 10619
11038 11385 11609
12124 12378 12825
10/31/06 14013 14400 14880
</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 14.49% 4.87% 4.08%
Excluding sales charges 15.49 4.87 4.08
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY COMMON
STOCK FUND S&P 500 INDEX RUSSELL 1000 INDEX
--------------- ------------- ------------------
6/01/98 10000 10000 10000
10430 10133 10036
13200 12734 12603
15149 13510 13744
11038 10146 10166
9108 8613 8681
10408 10404 10619
11038 11385 11609
12124 12378 12825
10/31/06 14003 14400 14880
</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 as 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. These fee waivers and/or expense limitations are
contractual and may be
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 CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
17.19% 6.07% 5.20%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY COMMON
STOCK FUND S&P 500 INDEX RUSSELL 1000 INDEX
--------------- ------------- ------------------
6/01/98 10000 10000 10000
10478 10133 10036
13384 12734 12603
15517 13510 13744
11422 10146 10166
9523 8613 8681
10999 10404 10619
11773 11385 11609
13083 12378 12825
10/31/06 15332 14400 14880
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
Russell 1000(R) Index(1) 16.02% 7.92% 4.84%
S&P 500(R) Index(2) 16.34 7.26 4.43
Average Lipper large-cap core fund(3) 14.23 5.78 3.49
</Table>
modified or terminated only with the approval of the Board of Trustees. The
Manager may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to this agreement if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is made
within three years after the year in which the Manager incurred the expense.
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
12/27/04, 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.
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 in 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 in 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.
6 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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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 ON
VALUE (BASED HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,062.80 $ 6.76 $1,018.50 $ 6.61
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,059.05 $10.64 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,059.05 $10.64 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,066.10 $ 3.44 $1,021.70 $ 3.36
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.30% for Class A, 2.05% for Class B and Class C, and 0.66% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period). In the absence of
waivers and/or reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 98.2
Short-Term Investments (collateral from securities lending 11.6
is 11.6%)
Investment Companies 2.0
Liabilities in Excess of Cash and Other Assets (11.8)
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. ExxonMobil Corp.
2. Microsoft Corp.
3. Citigroup, Inc.
4. BellSouth Corp.
5. General Electric Co.
6. Pfizer, Inc.
7. S&P 500 Index-SPDR Trust Series 1
8. Cisco Systems, Inc.
9. Chevron Corp.
10. International Business Machines Corp.
</Table>
8 MainStay Common Stock Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Harvey Fram, CFA, of New York Life
Investment Management LLC
HOW DID MAINSTAY COMMON STOCK FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Common Stock Fund returned 16.43% for
Class A shares, 15.58% for Class B shares, and 15.49% for Class C shares for the
12 months ended October 31, 2006. Over the same period, the Fund's Class I
shares returned 17.19%. Class A and Class I shares outperformed--and Class B and
Class C shares underperformed--the 16.34% return of the S&P 500(R) Index,(1) the
Fund's broad-based securities-market index, for the 12-month period. All share
classes outperformed the 14.23% return of the average Lipper(2) large-cap core
fund for the 12 months ended October 31, 2006.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE THE STRONGEST POSITIVE
CONTRIBUTIONS TO THE FUND'S PERFORMANCE AND WHICH ONES WERE THE WEAKEST?
The sectors that made the greatest positive contributions the Fund's performance
relative to the S&P 500(R) Index were information technology, energy, and
telecommunication services. Within each of these sectors, the greatest impact on
relative return came from security selection. The information technology sector
was led by communications equipment and Internet software companies, while
strong oil prices helped the energy sector advance.
Financials, industrials, and utilities were the Fund's weakest-performing
sectors relative to the S&P 500(R) Index, especially as interest rates trended
higher during most of the reporting period.
WHICH INDIVIDUAL STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD?
The strongest individual contributors to the Fund's absolute performance during
the reporting period were petroleum giant ExxonMobil, telecommunications leader
BellSouth, and pharmaceuticals manufacturer Merck & Company.
It should be noted, however, that the Fund holds approximately 450 to 500
securities and weightings are typically within 75 basis points of the
corresponding position in the benchmark. As a result, no single stock will have
a significant positive or negative impact on the Fund's performance relative to
the Index.
WHICH INDIVIDUAL STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
Major detractors from the Fund's absolute performance during the reporting
period were computer manufacturer Dell, semiconductor giant Intel, and health
care services provider UnitedHealth Group.
WHAT WERE SOME OF THE PURCHASES OR SALES MADE DURING THE REPORTING PERIOD?
The Fund seeks stocks with attractive valuations, reliable earnings, and strong
price trends. Among the stocks purchased by the Fund during the reporting period
were UTStarcom and Big Lots. Securities that were sold included Precision
Castparts and Honeywell International.
WERE THERE ANY CHANGES IN THE FUND'S SECTOR POSITIONING DURING THE REPORTING
PERIOD?
Weighting changes in the Fund result from a combination of security performance
and the Fund's proprietary quantitative security-selection process. During the
reporting period, the Fund's weightings in the consumer discretionary and
financials sectors increased. The Fund's weightings in the utilities and
consumer staples sectors decreased.
As of October 31, 2006, the Fund was overweighted relative to the S&P 500(R)
Index in the financials and consumer discretionary sectors. The Fund was
underweighted in the consumer staples and industrials sectors.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. The Fund may experience a portfolio turnover rate of more
than 100% and may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on the S&P 500(R) Index.
2. See footnote on page 6 for more information on Lipper Inc.
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 forecast 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, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (98.2%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.7%)
Boeing Co. (The) (a) 29,794 $ 2,379,349
Lockheed Martin Corp. 21,771 1,892,553
Raytheon Co. 32,449 1,620,828
------------
5,892,730
------------
AIR FREIGHT & LOGISTICS (0.1%)
Expeditors International of Washington, Inc. 1,394 66,090
United Parcel Service, Inc. Class B 672 50,635
------------
116,725
------------
AIRLINES (0.0%)++
Southwest Airlines Co. 6,310 94,839
------------
AUTO COMPONENTS (0.0%)++
ArvinMeritor, Inc. (a) 5,068 76,121
------------
AUTOMOBILES (1.0%)
Ford Motor Co. (a) 121,002 1,001,897
General Motors Corp. (a) 12,214 426,513
Harley-Davidson, Inc. 8,901 610,876
Thor Industries, Inc. 431 18,886
------------
2,058,172
------------
BEVERAGES (0.5%)
Coca-Cola Co. (The) (a) 5,286 246,962
Coca-Cola Enterprises, Inc. 5,484 109,845
Pepsi Bottling Group, Inc. (The) 7,750 245,055
PepsiCo, Inc. 7,284 462,097
------------
1,063,959
------------
BIOTECHNOLOGY (0.7%)
Amgen, Inc. (b) 1,119 84,943
Celgene Corp. (a) 26,496 1,415,946
------------
1,500,889
------------
BUILDING PRODUCTS (0.6%)
Masco Corp. 46,105 1,274,803
------------
CAPITAL MARKETS (4.3%)
A.G. Edwards, Inc. 1,781 101,606
Ameriprise Financial, Inc. 26,669 1,373,453
Bank of New York Co., Inc. (The) 38,643 1,328,160
Charles Schwab Corp. (The) 92,032 1,676,823
Franklin Resources, Inc. 15,569 1,774,243
Goldman Sachs Group, Inc. (The) 54 10,249
Janus Capital Group, Inc. 17,509 351,581
Morgan Stanley 120 9,172
Northern Trust Corp. 21,617 1,269,350
Raymond James Financial, Inc. 6,904 219,961
SEI Investments Co. 4,854 273,183
</Table>
<Table>
<Caption>
SHARES VALUE
CAPITAL MARKETS (CONTINUED)
State Street Corp. (a) 6,462 $ 415,054
T. Rowe Price Group, Inc. 10,654 504,041
Waddell & Reed Financial, Inc. Class A 1,763 44,956
------------
9,351,832
------------
CHEMICALS (0.3%)
Albemarle Corp. 2,502 162,705
Lyondell Chemical Co. 17,743 455,463
Olin Corp. 1,572 27,196
Rohm & Haas Co. 1,277 66,174
------------
711,538
------------
COMMERCIAL BANKS (4.1%)
AmSouth Bancorp 94,014 2,841,103
Comerica, Inc. 14,044 817,220
Fifth Third Bancorp 22,283 887,978
First Horizon National Corp. 14,410 566,601
National City Corp. 40,869 1,522,370
North Fork Bancorp., Inc. 39,986 1,142,800
Wachovia Corp. 4,852 269,286
Wells Fargo & Co. (a) 19,951 724,022
------------
8,771,380
------------
COMMERCIAL SERVICES & SUPPLIES (0.1%)
Corporate Executive Board Co. (The) 352 31,617
Korn/Ferry International (b) 953 21,071
Manpower, Inc. 1,910 129,441
Waste Management, Inc. 3,649 136,765
------------
318,894
------------
COMMUNICATIONS EQUIPMENT (2.9%)
Avaya, Inc. (b) 33,617 430,634
V Cisco Systems, Inc. (b) 159,547 3,849,869
Motorola, Inc. 72,686 1,676,139
Polycom, Inc. (b) 7,272 199,253
Tellabs, Inc. (b) 1,591 16,769
UTStarcom, Inc. (a)(b) 9,130 98,330
------------
6,270,994
------------
COMPUTERS & PERIPHERALS (4.7%)
Dell, Inc. (b) 96,377 2,344,852
Hewlett-Packard Co. 82,648 3,201,784
V International Business Machines Corp. 41,342 3,817,107
Lexmark International, Inc. Class A (b) 11,906 757,103
Palm, Inc. (a)(b) 813 12,480
------------
10,133,326
------------
CONSTRUCTION & ENGINEERING (0.1%)
Granite Construction, Inc. 2,875 149,787
------------
</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)
- -----------------------------------------------------------------------------
CONSTRUCTION MATERIALS (0.0%)++
Martin Marietta Materials, Inc. 568 $ 49,984
------------
CONSUMER FINANCE (1.0%)
American Express Co. 9,884 571,394
AmeriCredit Corp. (a)(b) 10,356 264,803
Capital One Financial Corp. 16,809 1,333,458
------------
2,169,655
------------
CONTAINERS & PACKAGING (0.2%)
Pactiv Corp. (b) 14,699 453,317
------------
DIVERSIFIED CONSUMER SERVICES (0.3%)
Apollo Group, Inc. Class A (b) 11,746 434,132
Career Education Corp. (b) 8,236 183,498
Corinthian Colleges, Inc. (b) 6,658 81,561
DeVry, Inc. (b) 570 13,880
------------
713,071
------------
DIVERSIFIED FINANCIAL SERVICES (4.5%)
Bank of America Corp. 51,219 2,759,168
V Citigroup, Inc. 109,044 5,469,647
JPMorgan Chase & Co. 29,584 1,403,465
Leucadia National Corp. 1,434 37,815
------------
9,670,095
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (5.2%)
V BellSouth Corp. 120,731 5,444,968
CenturyTel, Inc. 11,328 455,839
Cincinnati Bell, Inc. (b) 5,721 26,831
Citizens Communications Co. 24,281 355,959
Embarq Corp. 17,339 838,341
Qwest Communications International, Inc. (b) 128,740 1,111,026
Verizon Communications, Inc. 78,421 2,901,577
------------
11,134,541
------------
ELECTRIC UTILITIES (0.6%)
Allegheny Energy, Inc. (b) 1,821 78,358
Entergy Corp. 13,200 1,132,956
------------
1,211,314
------------
ELECTRICAL EQUIPMENT (0.0%)++
Cooper Industries, Ltd. Class A 805 72,007
Thomas & Betts Corp. (b) 473 24,374
------------
96,381
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.1%)
Plexus Corp. (b) 998 21,876
Solectron Corp. (b) 3,240 10,822
Symbol Technologies, Inc. 2,222 33,174
Tech Data Corp. (b) 4,725 185,929
------------
251,801
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (0.7%)
Halliburton Co. (a) 32,296 $ 1,044,776
Schlumberger, Ltd. 2,889 182,238
Tidewater, Inc. 2,580 128,303
Transocean, Inc. (b) 1,102 79,939
------------
1,435,256
------------
FOOD & STAPLES RETAILING (0.4%)
SUPERVALU, Inc. 5,101 170,373
Wal-Mart Stores, Inc. 14,219 700,712
------------
871,085
------------
FOOD PRODUCTS (1.4%)
Archer-Daniels-Midland Co. 27,463 1,057,326
Campbell Soup Co. 10,147 379,295
ConAgra Foods, Inc. 23,774 621,690
General Mills, Inc. 11,127 632,236
H.J. Heinz Co. 8,472 357,180
------------
3,047,727
------------
GAS UTILITIES (0.1%)
Equitable Resources, Inc. 1,483 60,091
Nicor, Inc. 3,879 178,279
------------
238,370
------------
HEALTH CARE PROVIDERS & SERVICES (5.1%)
Aetna, Inc. 42,005 1,731,446
AmerisourceBergen Corp. 23,817 1,124,162
Apria Healthcare Group, Inc. (b) 2,225 51,820
Cardinal Health, Inc. 14,921 976,579
Coventry Health Care, Inc. (b) 18,510 869,045
HCA, Inc. (a) 5,331 269,322
Humana, Inc. (b) 19,124 1,147,440
Laboratory Corp. of America Holdings (a)(b) 10,785 738,665
Manor Care, Inc. 5,058 242,733
McKesson Corp. 30,501 1,527,795
Quest Diagnostics, Inc. 4,455 221,592
UnitedHealth Group, Inc. 39,361 1,920,030
WellPoint, Inc. (b) 1,912 145,924
------------
10,966,553
------------
HOTELS, RESTAURANTS & LEISURE (0.4%)
Brinker International, Inc. 2,842 131,954
Darden Restaurants, Inc. 13,631 571,139
Harrah's Entertainment, Inc. 864 64,221
------------
767,314
------------
HOUSEHOLD DURABLES (0.3%)
American Greetings Corp. Class A 4,911 117,422
Blyth, Inc. 1,100 26,312
Furniture Brands International, Inc. (a) 1,969 36,623
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
HOUSEHOLD DURABLES (CONTINUED)
Lennar Corp. Class A 4,514 $ 214,325
Snap-on, Inc. 3,609 169,731
------------
564,413
------------
HOUSEHOLD PRODUCTS (1.0%)
Energizer Holdings, Inc. (b) 1,334 104,252
Procter & Gamble Co. (The) 32,624 2,068,035
------------
2,172,287
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (1.6%)
AES Corp. (The) (b) 73,233 1,610,394
TXU Corp. 28,609 1,806,086
------------
3,416,480
------------
INDUSTRIAL CONGLOMERATES (2.3%)
Carlisle Cos., Inc. 264 22,094
V General Electric Co. 135,380 4,753,192
Teleflex, Inc. 1,083 67,363
------------
4,842,649
------------
INSURANCE (9.6%)
ACE, Ltd. 29,317 1,678,398
AFLAC, Inc. (a) 34,291 1,540,352
Allstate Corp. (The) 32,365 1,985,916
Ambac Financial Group, Inc. 1,247 104,112
American Financial Group, Inc. 4,000 191,440
American International Group, Inc. 23,253 1,561,904
Aon Corp. 36,671 1,275,784
Chubb Corp. (The) 23,627 1,255,775
Fidelity National Financial, Inc. 4,103 91,497
Fidelity National Financial, Inc. Class A (a) 1 8
First American Corp. 7,591 309,941
Genworth Financial, Inc. Class A 29,498 986,413
Hartford Financial Services Group, Inc. (The) 11,832 1,031,395
HCC Insurance Holdings, Inc. 9,506 319,972
Loews Corp. 41,528 1,616,270
MetLife, Inc. (a) 27,325 1,561,077
Old Republic International Corp. 19,606 441,723
Principal Financial Group, Inc. 28,384 1,603,412
Protective Life Corp. 5,077 224,657
Prudential Financial, Inc. 1,622 124,780
SAFECO Corp. 2,571 149,606
Torchmark Corp. 921 56,807
UnumProvident Corp. 26,318 520,570
W.R. Berkley Corp. 14,395 530,600
XL Capital, Ltd. Class A 20,947 1,477,811
------------
20,640,220
------------
</Table>
<Table>
<Caption>
SHARES VALUE
INTERNET SOFTWARE & SERVICES (0.1%)
Google, Inc. Class A (b) 396 $ 188,650
VeriSign, Inc. (b) 2,132 44,090
------------
232,740
------------
IT SERVICES (1.7%)
Acxiom Corp. 5,184 128,304
Computer Sciences Corp. (b) 19,741 1,043,312
Convergys Corp. (b) 5,621 119,221
CSG Systems International, Inc. (b) 4,097 110,537
Electronic Data Systems Corp. 60,220 1,525,373
First Data Corp. 19,236 466,473
MoneyGram International, Inc. 4,824 165,029
MPS Group, Inc. (b) 916 13,969
Unisys Corp. (b) 394 2,577
------------
3,574,795
------------
LEISURE EQUIPMENT & PRODUCTS (0.5%)
Eastman Kodak Co. (a) 21,488 524,307
Hasbro, Inc. 12,117 314,073
Mattel, Inc. 11,140 252,098
------------
1,090,478
------------
LIFE SCIENCES TOOLS & SERVICES (0.0%)++
Applera Corp.-Applied BioSystems Group 1,333 49,721
------------
MACHINERY (0.7%)
AGCO Corp. (b) 7,783 208,195
Caterpillar, Inc. 4,344 263,724
Cummins, Inc. (a) 5,935 753,626
Flowserve Corp. (b) 990 52,470
Joy Global, Inc. 1,534 59,995
Oshkosh Truck Corp. 1,721 77,806
------------
1,415,816
------------
MEDIA (3.5%)
CBS Corp. Class B 59,075 1,709,631
Comcast Corp. Class A (b) 36,039 1,465,706
McGraw-Hill Cos., Inc. (The) 24,189 1,552,208
News Corp. Class A 25,327 528,068
Omnicom Group, Inc. (a) 16,322 1,655,867
Scholastic Corp. (b) 2,322 72,957
Univision Communications, Inc. Class A (a)(b) 3,651 128,004
Walt Disney Co. (The) 16,036 504,493
------------
7,616,934
------------
METALS & MINING (2.5%)
Freeport-McMoRan Copper & Gold, Inc. Class B (a) 17,187 1,039,470
Nucor Corp. 30,225 1,765,442
Phelps Dodge Corp. 17,737 1,780,440
</Table>
12 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
METALS & MINING (CONTINUED)
Steel Dynamics, Inc. 2,742 $ 164,822
United States Steel Corp. 10,359 700,268
------------
5,450,442
------------
MULTILINE RETAIL (3.6%)
Big Lots, Inc. (a)(b) 12,962 273,239
Dillard's, Inc. Class A 5,151 155,406
Dollar Tree Stores, Inc. (b) 8,837 274,742
Federated Department Stores, Inc. 38,320 1,682,631
J.C. Penney Co., Inc. 10,855 816,622
Kohl's Corp. (b) 25,874 1,826,704
Nordstrom, Inc. 20,077 950,646
Sears Holdings Corp. (a)(b) 9,726 1,696,895
------------
7,676,885
------------
MULTI-UTILITIES (0.2%)
Alliant Energy Corp. 2,316 88,819
KeySpan Corp. 2,949 119,670
OGE Energy Corp. 3,397 131,056
SCANA Corp. 1,026 40,999
------------
380,544
------------
OIL, GAS & CONSUMABLE FUELS (9.3%)
Anadarko Petroleum Corp. 33,672 1,563,054
V Chevron Corp. 56,854 3,820,589
ConocoPhillips 6,839 411,981
Devon Energy Corp. 6,800 454,512
V ExxonMobil Corp. 119,294 8,519,977
Kinder Morgan, Inc. 953 100,160
Marathon Oil Corp. 19,882 1,717,805
Noble Energy, Inc. 6,256 304,229
Occidental Petroleum Corp. 9,361 439,405
Overseas Shipholding Group, Inc. 2,535 158,564
Pioneer Natural Resources Co. 4,303 175,261
Plains Exploration & Production Co. (b) 3,402 143,871
Pogo Producing Co. (a) 2,522 112,860
Sunoco, Inc. 3,837 253,741
Valero Energy Corp. 33,688 1,762,893
------------
19,938,902
------------
PAPER & FOREST PRODUCTS (0.0%)++
Louisiana-Pacific Corp. 2,855 56,472
------------
PERSONAL PRODUCTS (0.1%)
Avon Products, Inc. 3,868 117,626
------------
PHARMACEUTICALS (5.1%)
Abbott Laboratories 4,617 219,354
Forest Laboratories, Inc. (b) 2,909 142,366
Johnson & Johnson (a) 29,328 1,976,707
</Table>
<Table>
<Caption>
SHARES VALUE
PHARMACEUTICALS (CONTINUED)
King Pharmaceuticals, Inc. (b) 13,738 $ 229,837
Merck & Co., Inc. 67,485 3,065,169
Mylan Laboratories, Inc. 24,428 500,774
V Pfizer, Inc. 170,571 4,545,717
Watson Pharmaceuticals, Inc. (b) 11,886 319,852
------------
10,999,776
------------
REAL ESTATE INVESTMENT TRUSTS (0.7%)
Apartment Investment & Management Co. Class A 2,666 152,815
Equity Office Properties Trust (a) 26,121 1,110,143
Longview Fibre Co. 512 10,783
Public Storage, Inc. 2,929 262,761
------------
1,536,502
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.3%)
CB Richard Ellis Group, Inc. Class A (b) 22,032 661,621
------------
ROAD & RAIL (0.2%)
Burlington Northern Santa Fe Corp. 1,786 138,469
CSX Corp. 5,131 183,023
Ryder System, Inc. 1,649 86,820
Swift Transportation Co., Inc. (b) 697 17,530
------------
425,842
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.0%)
Applied Materials, Inc. (a) 13,832 240,538
Atmel Corp. (a)(b) 49,997 287,483
Freescale Semiconductor, Inc. Class B (b) 6,201 243,885
Intel Corp. (a) 59,270 1,264,822
Intersil Corp. Class A (a) 1,273 29,852
Lam Research Corp. (a)(b) 1,224 60,527
Micron Technology, Inc. (b) 84,428 1,219,985
National Semiconductor Corp. 27,894 677,545
Texas Instruments, Inc. (a) 9,191 277,384
------------
4,302,021
------------
SOFTWARE (5.7%)
BMC Software, Inc. (b) 24,185 733,047
CA, Inc. 37,560 929,986
Citrix Systems, Inc. (b) 1,588 46,894
Compuware Corp. (b) 14,872 119,571
Fair Isaac Corp. 764 27,985
Intuit, Inc. (b) 39,601 1,397,915
McAfee, Inc. (b) 9,937 287,477
V Microsoft Corp. 194,861 5,594,459
Oracle Corp. (b) 74,415 1,374,445
Sybase, Inc. (b) 3,544 86,296
Symantec Corp. (b) 86,742 1,720,961
Transaction Systems Architects, Inc. (b) 355 11,967
------------
12,331,003
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
SPECIALTY RETAIL (2.6%)
American Eagle Outfitters, Inc. 11,307 $ 517,861
AnnTaylor Stores Corp. (a)(b) 6,254 275,301
AutoNation, Inc. (b) 4,268 85,573
Barnes & Noble, Inc. 4,439 183,375
Circuit City Stores, Inc. 558 15,055
Claire's Stores, Inc. 3,386 95,993
Gap, Inc. (The) 59,601 1,252,813
Home Depot, Inc. (The) 72 2,688
Limited Brands, Inc. 7,385 217,636
Michaels Stores, Inc. 1,162 51,116
Office Depot, Inc. (b) 33,084 1,389,197
OfficeMax, Inc. 8,477 403,336
Payless ShoeSource, Inc. (b) 5,682 151,994
RadioShack Corp. (a) 5,027 89,682
Rent-A-Center, Inc. (b) 4,007 115,241
Sherwin-Williams Co. (The) 12,434 736,466
------------
5,583,327
------------
TEXTILES, APPAREL & LUXURY GOODS (0.2%)
Jones Apparel Group, Inc. 13,109 437,841
------------
THRIFTS & MORTGAGE FINANCE (0.9%)
Radian Group, Inc. 6,603 351,940
Washington Mutual, Inc. (a) 36,432 1,541,074
------------
1,893,014
------------
TOBACCO (1.4%)
Altria Group, Inc. 19,049 1,549,255
Reynolds American, Inc. (a) 9,230 582,967
UST, Inc. 14,404 771,478
------------
2,903,700
------------
TRADING COMPANIES & DISTRIBUTORS (0.0%)++
MSC Industrial Direct Co., Inc. Class A 470 19,232
United Rentals, Inc. (a)(b) 2,692 63,773
------------
83,005
------------
Total Common Stocks
(Cost $192,502,992) 211,257,509
------------
INVESTMENT COMPANIES (2.0%)
- -----------------------------------------------------------------------------
DIAMONDS Trust Series I (a)(c) 602 72,631
V S&P 500 Index--SPDR Trust Series 1 (a)(c) 30,878 4,255,915
------------
Total Investment Companies
(Cost $4,227,075) 4,328,546
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (11.6%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (2.2%)
Fairway Finance Corp.
5.289%, due 11/20/06 (d) $ 439,342 $ 439,342
Greyhawk Funding
5.286%, due 11/13/06 (d) 585,790 585,790
Jupiter Securitization Corp.
5.303%, due 11/14/06 (d) 720,468 720,468
Lexington Parker Capital Co.
5.282%, due 11/8/06 (d) 585,790 585,790
Liberty Street Funding Co.
5.286%, due 11/27/06 (d) 725,176 725,176
Old Line Funding LLC
5.287%, due 11/15/06 (d) 585,790 585,790
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (d) 585,790 585,790
Yorktown Capital LLC
5.282%, due 11/16/06 (d) 512,566 512,566
------------
Total Commercial Paper
(Cost $4,740,712) 4,740,712
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.6%)
BGI Institutional Money Market Fund (d) 1,264,591 1,264,591
------------
Total Investment Company
(Cost $1,264,591) 1,264,591
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.3%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $690,012
(Collateralized by various Corporate Bonds, with
rates between 0%-8.40% and maturity dates between
1/30/07-6/15/34, with a Principal Amount of
$697,819 and a Market Value of $717,335) (d) $ 689,908 689,908
------------
Total Repurchase Agreement
(Cost $689,908) 689,908
------------
TIME DEPOSITS (8.5%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (d) 1,171,579 1,171,579
Bank of America
5.27%, due 11/21/06 (d)(e) 1,610,921 1,610,921
</Table>
14 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
Bank of Montreal
5.28%, due 11/27/06 (d) $1,171,579 $ 1,171,579
Bank of Nova Scotia
5.30%, due 11/10/06 (d) 1,171,579 1,171,579
Barclays
5.32%, due 1/18/07 (d) 1,171,579 1,171,579
Deutsche Bank AG
5.27%, due 11/9/06 (d) 1,171,579 1,171,579
Fortis Bank
5.27%, due 11/6/06 (d) 2,548,185 2,548,185
Halifax Bank of Scotland
5.30%, due 1/10/07 (d) 1,171,579 1,171,579
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (d) 1,171,579 1,171,579
Royal Bank of Canada
5.30%, due 12/22/06 (d) 1,171,579 1,171,579
Royal Bank of Scotland
5.29%, due 12/12/06 (d) 1,171,579 1,171,579
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (d) 1,171,579 1,171,579
Societe Generale North America, Inc.
5.28%, due 12/6/06 (d) 1,171,579 1,171,579
UBS AG 5.28%, due 12/5/06 (d) 1,171,579 1,171,579
------------
Total Time Deposits
(Cost $18,218,054) 18,218,054
------------
Total Short-Term Investments
(Cost $24,913,265) 24,913,265
------------
Total Investments
(Cost $221,643,332) (f) 111.8% 240,499,320(g)
Liabilities in Excess of Cash and Other Assets (11.8) (25,463,886)
---------- ------------
Net Assets 100.0% $215,035,434
========== ============
</Table>
<Table>
++ Less than one tenth of a percent.
(a) Represents a security, or a portion thereof, which is out on loan.
(b) Non-income producing security.
(c) Exchange Traded Fund--represents a basket of securities that are traded on
an exchange.
(d) Represents a 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, 2006.
(f) The cost for federal income tax purposes is $223,116,372.
(g) At October 31, 2006 net unrealized appreciation was $17,382,948, 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 $19,181,294 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,798,346.
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $221,643,332) including $24,128,473
market value of securities loaned $240,499,320
Cash 1,147,761
Receivables:
Investment securities sold 19,391,842
Fund shares sold 394,303
Dividends and interest 232,601
Other assets 16,742
-------------
Total assets 261,682,569
-------------
LIABILITIES:
Securities lending collateral 24,913,265
Payables:
Investment securities purchased 21,368,190
Transfer agent (See Note 3) 80,754
Manager (See Note 3) 74,997
Fund shares redeemed 71,397
NYLIFE Distributors (See Note 3) 45,053
Shareholder communication 43,260
Professional fees 30,964
Custodian 9,894
Trustees 2,791
Accrued expenses 6,570
-------------
Total liabilities 46,647,135
-------------
Net assets $215,035,434
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 26,554
Class B 28,288
Class C 2,360
Class I 90,819
Additional paid-in capital 191,844,065
Accumulated undistributed net investment
income 1,452,018
Accumulated net realized gain on investments 2,735,342
Net unrealized appreciation on investments 18,855,988
-------------
Net assets $215,035,434
=============
CLASS A
Net assets applicable to outstanding shares $ 38,940,101
=============
Shares of beneficial interest outstanding 2,655,386
=============
Net asset value per share outstanding $ 14.66
Maximum sales charge (5.50% of offering price) 0.85
-------------
Maximum offering price per share outstanding $ 15.51
=============
CLASS B
Net assets applicable to outstanding shares $ 39,023,571
=============
Shares of beneficial interest outstanding 2,828,788
=============
Net asset value and offering price per share
outstanding $ 13.80
=============
CLASS C
Net assets applicable to outstanding shares $ 3,253,885
=============
Shares of beneficial interest outstanding 235,979
=============
Net asset value and offering price per share
outstanding $ 13.79
=============
CLASS I
Net assets applicable to outstanding shares $133,817,877
=============
Shares of beneficial interest outstanding 9,081,946
=============
Net asset value and offering price per share
outstanding $ 14.73
=============
</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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 3,794,283
Interest 44,010
Income from securities loaned--net 23,518
------------
Total income 3,861,811
------------
EXPENSES:
Manager (See Note 3) 1,401,016
Transfer agent--Classes A, B and C (See Note
3) 406,554
Transfer agent--Class I (See Note 3) 102,562
Distribution--Class B (See Note 3) 312,427
Distribution--Class C (See Note 3) 21,533
Distribution/Service--Class A (See Note 3) 102,405
Service--Class B (See Note 3) 104,142
Service--Class C (See Note 3) 7,178
Shareholder communication 116,689
Professional fees 60,769
Registration 56,533
Recordkeeping 46,682
Custodian 45,672
Trustees 12,150
Miscellaneous 14,811
------------
Total expenses before waiver 2,811,123
Expense waiver from Manager (See Note 3) (606,802)
------------
Net expenses 2,204,321
------------
Net investment income 1,657,490
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 17,376,847
Net change in unrealized appreciation on
investments 11,381,328
------------
Net realized and unrealized gain on investments 28,758,175
------------
Net increase in net assets resulting from
operations $30,415,665
============
</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 CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 1,657,490 $ 539,776
Net realized gain on investments 17,376,847 5,348,262
Net change in unrealized
appreciation on investments 11,381,328 4,933,686
----------------------------
Net increase in net assets
resulting from operations 30,415,665 10,821,724
----------------------------
Dividends to shareholders:
From net investment income:
Class A (58,341) --
Class I (642,012) --
----------------------------
Total dividends to shareholders (700,353) --
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 6,511,557 5,515,785
Class B 3,989,445 5,493,154
Class C 665,288 744,231
Class I 88,951,353 72,005,439
Net asset value of shares issued
to shareholders in reinvestment of
dividends:
Class A 38,148 --
Class I 642,012 --
----------------------------
100,797,803 83,758,609
Cost of shares redeemed:
Class A (20,987,560) (8,254,644)
Class B (10,653,966) (13,379,710)
Class C (885,563) (911,526)
Class I (41,874,968) (4,633,637)
----------------------------
(74,402,057) (27,179,517)
Net asset value of shares
converted (See Note 1):
Class A 11,276,172 --
Class B (11,276,172) --
Increase in net assets derived
from capital share transactions 26,395,746 56,579,092
----------------------------
Net increase in net assets 56,111,058 67,400,816
NET ASSETS:
Beginning of year 158,924,376 91,523,560
----------------------------
End of year $ 215,035,434 $158,924,376
============================
Accumulated undistributed net
investment income at end of year $ 1,452,018 $ 539,396
============================
</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.
This page intentionally left blank
www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 12.62 $ 11.41 $ 10.69 $ 9.02 $ 12.12 $ 14.74
------- ------- ------- ----------- ------- -------
Net investment income (loss)
(a) 0.09 0.08(b) (0.01) (0.01) (0.02) (0.05)
Net realized and unrealized
gain (loss) on investments 1.97 1.13 0.73 1.68 (3.08) (2.57)
------- ------- ------- ----------- ------- -------
Total from investment
operations 2.06 1.21 0.72 1.67 (3.10) (2.62)
------- ------- ------- ----------- ------- -------
Less dividends:
From net investment income (0.02) -- -- -- -- --
------- ------- ------- ----------- ------- -------
Net asset value at end of
period $ 14.66 $ 12.62 $ 11.41 $ 10.69 $ 9.02 $ 12.12
======= ======= ======= =========== ======= =======
Total investment return (c) 16.43% 10.60% 6.74% 18.51%(d) (25.58%) (17.77%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.63% 0.67%(b) (0.05%) (0.06%)+ (0.24%) (0.42%)
Net expenses 1.30% 1.38% 1.65% 1.65% + 1.65% 1.58%
Expenses (before waiver) 1.60% 1.72% 1.77% 1.86% + 1.75% 1.58%
Portfolio turnover rate 144% 105% 136% 71% 130% 95%
Net assets at end of period
(in 000's) $38,940 $35,886 $34,957 $38,313 $28,639 $31,389
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $11.94 $10.87 $10.25 $ 8.71 $ 11.79 $ 14.45
------ ------ ------ ----------- ------- -------
Net investment income (loss)
(a) (0.01) (0.01)(b) (0.09) (0.06) (0.10) (0.15)
Net realized and unrealized
gain (loss) on investments 1.86 1.08 0.71 1.60 (2.98) (2.51)
------ ------ ------ ----------- ------- -------
Total from investment
operations 1.85 1.07 0.62 1.54 (3.08) (2.66)
------ ------ ------ ----------- ------- -------
Less dividends:
From net investment income -- -- -- -- -- --
------ ------ ------ ----------- ------- -------
Net asset value at end of
period $13.79 $11.94 $10.87 $10.25 $ 8.71 $ 11.79
====== ====== ====== =========== ======= =======
Total investment return (c) 15.49% 9.84% 6.05% 17.68%(d) (26.12%) (18.41%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.09%) (0.08%)(b) (0.80%) (0.81%)+ (0.99%) (1.17%)
Net expenses 2.05% 2.13% 2.40% 2.40% + 2.40% 2.33%
Expenses (before waiver) 2.35% 2.47% 2.52% 2.61% + 2.50% 2.33%
Portfolio turnover rate 144% 105% 136% 71% 130% 95%
Net assets at end of period
(in 000's) $3,254 $3,045 $2,926 $2,429 $ 1,724 $ 1,683
</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) 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.
(c) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(d) Total return is not annualized.
</Table>
20 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 11.94 $ 10.87 $ 10.26 $ 8.71 $ 11.79 $ 14.45
------- ------- ------- ----------- ------- -------
(0.01) (0.01)(b) (0.09) (0.06) (0.10) (0.15)
1.87 1.08 0.70 1.61 (2.98) (2.51)
------- ------- ------- ----------- ------- -------
1.86 1.07 0.61 1.55 (3.08) (2.66)
------- ------- ------- ----------- ------- -------
-- -- -- -- -- --
------- ------- ------- ----------- ------- -------
$ 13.80 $ 11.94 $ 10.87 $ 10.26 $ 8.71 $ 11.79
======= ======= ======= =========== ======= =======
15.58% 9.84% 5.95% 17.80%(d) (26.12%) (18.41%)
(0.05%) (0.08%)(b) (0.80%) (0.81%)+ (0.99%) (1.17%)
2.05% 2.13% 2.40% 2.40% + 2.40% 2.33%
2.35% 2.47% 2.52% 2.61% + 2.50% 2.33%
144% 105% 136% 71% 130% 95%
$39,024 $50,815 $53,640 $53,946 $48,434 $73,048
</Table>
<Table>
<Caption>
CLASS I
--------------------------------
DECEMBER 28,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2006 2005
$ 12.68 $ 12.25
----------- ------------
0.17 0.10
1.99 0.33
----------- ------------
2.16 0.43
----------- ------------
(0.11) --
----------- ------------
$ 14.73 $ 12.68
=========== ============
17.19% 3.51%(d)
1.24% 0.94%+
0.66% 0.76%+
0.96% 1.10%+
144% 105%
$133,818 $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. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
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 a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I shares are not subject to sales charge. As approved by
the Board of Trustees in 1997, Class B shares convert to Class A shares eight
years after the date they were purchased. The first conversion occurred December
28, 2005. The four classes of shares bear the same voting (except for issues
that relate solely to one class), dividend, liquidation and other rights and
conditions. 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006 the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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 undistributed net investment income, accumulated net realized gain
on investments and
22 MainStay Common Stock Fund
additional paid-in-capital arising from permanent differences; net assets at
October 31, 2006, are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED ACCUMULATED NET ADDITIONAL
NET INVESTMENT REALIZED GAIN ON PAID-IN-
INCOME INVESTMENTS CAPITAL
$(44,515) $8,539 $35,976
--------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to real estate trust
distributions. In addition, reclassifications for the Fund are also due to
utilization of earnings and profits on shareholder redemptions.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 25.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or "Manager"), a
registered investment advisor and an indirect wholly-owned subsidiary of New
York Life Insurance Company ("New York Life"), serves as the Fund's Manager. The
Manager provides offices and conducts clerical, recordkeeping and bookkeeping
services, and is responsible for the financial and accounting records required
to be maintained by 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 the
services performed and the facilities furnished at an annual percentage of the
Fund's average
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2006, NYLIM has
contractually agreed to waive a portion of its management fee so that the
management fee is 0.60% on assets up to $500 million and 0.55% on assets in
excess of $500 million.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total operating
expenses (total annual 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, 1.30% 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 written expense limitation
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. For the year ended October 31, 2006, the
Manager earned fees from the Fund in the amount of $1,401,016, and waived its
fees in the amount of $606,802.
As of October 31, 2006 the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$124,534 $606,802 $731,336
------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts, 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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 and 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 $11,467 for the year ended
October 31, 2006. 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 $865, $47,450 and $464, respectively, for the year ended October 31,
2006 .
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2006,
amounted to $509,116.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $1,000 for attending
meetings
24 MainStay Common Stock Fund
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, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 286 0.0*%
- ------------------------------------------------------------------
Class C 146 0.0*
- ------------------------------------------------------------------
Class I 2,426 0.0
- ------------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $4,844.
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 $46,682 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$1,452,018 $ 4,208,382 $17,382,948 $23,043,348
---------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
The Fund utilized $13,712,258 of capital loss carryforward during the year ended
October 31, 2006.
The tax character of distributions paid during the year ended October 31, 2006
shown in the Statement of Changes in Net Assets was as follows:
<Table>
<Caption>
2006
Distributions paid from:
Ordinary Income $700,353
- --------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $24,128,473. The Fund received $24,913,265 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $311,447 and $287,064, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 478 309 51 6,535
- -------------------------------------------------------------------------------
Shares issued in reinvestment of
dividends 3 -- -- 49
- -------------------------------------------------------------------------------
481 309 51 6,584
Shares redeemed (1,525) (832) (70) (2,957)
- -------------------------------------------------------------------------------
Shares converted (see Note 1) 856 (905) -- --
- -------------------------------------------------------------------------------
Net increase (decrease) (188) (1,428) (19) 3,627
- -------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<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>
* Commenced operations on December 28, 2004.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
26 MainStay Common Stock 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 Common Stock Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2006, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager (the "Agreement") at a meeting held on June 12 and
13, 2006. In connection with the approval of the Agreement, the Trustees
reviewed a wide variety of information that they had requested and received from
the Manager, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of the
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under the Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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
historically provided to the Fund, and also generally to other series of the
Trust. The Manager's services include, among others, investment management
services and administrative services. The investment management services
include, but are not limited to, monitoring and evaluating the Fund's investment
program and investment results, providing the day-to-day portfolio management of
the Fund, determining the composition of assets of the Fund and the timing of
the Fund's execution of the purchase and sale of assets, and the Fund's
compliance with its investment policies and restrictions. The administrative
services include, but are not limited to, working with other service providers
of the Trust, maintaining certain Fund records, providing office space,
performing clerical and bookkeeping services for the Fund, preparing Board
materials and Fund filings, and otherwise managing the Trust's operations.
The Trustees also considered the Manager's management, personnel, resources,
operations and portfolio management capabilities. The Board reviewed reports on
the Manager's brokerage practices, including, but not limited to, reports
related to best execution of portfolio trades. The Trustees received information
about the Manager's supervision of the Fund's service providers, the Manager's
attention to its compliance program and those of the Trust and certain other
service providers. The Trustees noted the generally favorable results of a third
party review of the services and communications that NYLIM Service Company LLC,
an affiliate of the Manager, has provided to Trust shareholders. The Trustees,
including the Non-Interested Trustees, unanimously 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 Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's recent above average
investment performance, the Fund's mid-range longer term performance, measures
that the Manager had recently taken in seeking to improve the Fund's performance
by increasing the Fund's tracking error with respect to its benchmark, a recent
change of portfolio management personnel, and the recent success of the
portfolio management team in attracting investments from certain institutional
investors in other products managed by the team.
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 reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreement, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
discussed additional measures that may increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency expenses.
28 MainStay Common Stock Fund
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund had not reached the asset level at which the
breakpoint would reduce the Fund's management fee rate. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager, including registered and other funds as well as
separate institutional accounts having investment strategies similar to that of
the Fund, and took account of explanations and other information relating to the
fees and expenses of those other funds and accounts. The Trustees considered the
current and proposed contractual and net management fees, its anticipated
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationship between the Manager and the Trust. The Trustees took
account of the Manager's willingness and agreement to reduce the Fund's
contractual fee, while noting that the expense limitation applicable to the Fund
remained unchanged.
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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary describes
the most important, but not all, of the factors considered by the Trustees in
considering 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 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 the
Agreement 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 2007, 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 2006. The amounts that will be reported on such 1099-DIV will
be 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,
2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
30 MainStay Common Stock Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 31
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
32 MainStay Common Stock Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSCS11-12/06
21
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 25
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 26
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 28
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 28
- --------------------------------------------------------------------------------
Trustees and Officers 29
</Table>
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 CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR(1) YEARS INCEPTION
- ----------------------------------------------------
With sales charges 4.05% 5.02% 5.59%
Excluding sales charges 10.11 6.21 6.30
</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
14361 11421 15568
10/31/06 15812 13370 18678
</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(1) YEARS INCEPTION
- ----------------------------------------------------
With sales charges 4.28% 5.10% 5.49%
Excluding sales charges 9.28 5.43 5.49
</Table>
(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
14358 11421 15568
10/31/06 15690 13370 18678
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR(1) YEARS INCEPTION
- ----------------------------------------------------
With sales charges 8.28% 5.43% 5.49%
Excluding sales charges 9.28 5.43 5.49
</Table>
(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
14358 11421 15568
10/31/06 15690 13370 18678
</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 as 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
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
- --------------------------------------------------
10.60% 6.52% 6.59%
</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
9220 8252 8329
16197 10669 9567
20775 12393 11232
12486 8489 9806
10378 6658 8671
13878 9758 12432
14089 10298 13890
15482 11421 15568
10/31/06 17123 13370 18678
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
Russell 2000(R) Growth Index(2) 17.07% 9.51% 3.51%
Russell 2000(R) Index(3) 19.98 13.76 7.71
Average Lipper small-cap growth fund(4) 12.82 8.11 6.52
</Table>
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. These fee waivers and/or expense limitations are contractual
and may be modified or terminated only with the approval of the Board of
Trustees. The Manager may recoup the amount of any management fee waivers or
expense reimbursements from the Fund pursuant to this agreement if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. 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 5/30/06, performance of Class I shares (first offered 5/31/06)
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.
1. Performance figures shown for the year ended October 31, 2006 reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. (See Note 3(B) on page 22
of the Notes to Financial Statements for further explanation). The effect on
total return (excluding sales charges) was less than 0.01%.
2. The Russell 2000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 2000(R) companies with higher price-to-book
ratios and higher forecasted growth values. Results assume the reinvestment
of all income and capital gains. 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 in an index.
3. The Russell 2000(R) Index is an unmanaged index that measures the performance
of the 2,000 smallest companies in the Russell 3000(R) Index, which, in turn,
is an unmanaged index that measures the performance of a the 3,000 largest
U.S. companies based on total market capitalization. Results assume the
reinvestment of all income and capital gains. An investment cannot be made
directly in 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.
6 MainStay Small Cap Growth Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $937.50 $ 7.23 $1,017.60 $ 7.53
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $933.95 $10.87 $1,013.85 $11.32
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $933.95 $10.87 $1,013.85 $11.32
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $940.75 $ 3.15(2) $1,021.15 $ 3.28(2)
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.48% for Class A, 2.23% for Class B and Class C, and 0.77% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 for all share classes except Class I (to reflect the
one-half year period) and multiplied by 154 for Class I (to reflect the since
inception period). In the absence of waivers and/or reimbursements, expenses
would have been higher.
2. Shares were first offered on May 31, 2006. Expenses paid during the period
reflect ongoing costs for the since-inception period ending October 31, 2006.
Had these shares been offered for the six months ended October 31, 2006,
based on a hypothetical 5% annualized return, expenses paid during the period
would be $3.92, and the ending account value would be $1,021.15.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 95.5
Short-Term Investments (collateral from securities lending is 19.0%) 23.8
Liabilities in Excess of Cash and Other Assets (19.3)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Affiliated Managers Group, Inc.
2. Children's Place Retail Stores, Inc. (The)
3. Genlyte Group, Inc.
4. Kirby Corp.
5. Jefferies Group, Inc.
6. MSC Industrial Direct Co., Inc., Class A
7. Jarden Corp.
8. TETRA Technologies, Inc.
9. Trimble Navigation, Ltd.
10. Atwood Oceanics, Inc.
</Table>
8 MainStay Small Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Edmund C. Spelman of MacKay Shields LLC
HOW DID MAINSTAY SMALL CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Small Cap Growth Fund returned 10.11% for
Class A shares, 9.28% for Class B shares, and 9.28% for Class C shares for the
12 months ended October 31, 2006. Over the same period, Class I shares returned
10.60%.(1) All share classes underperformed the 17.07% return of the Russell
2000(R) Growth Index,(2) the Fund's broad-based securities-market index, for the
12-month period. All share classes also underperformed the 12.82% return of the
average Lipper(3) small-cap growth fund for the 12 months ended October 31,
2006.(4)
WHAT SECTORS HAD THE GREATEST IMPACT ON THE FUND'S RELATIVE PERFORMANCE DURING
THE REPORTING PERIOD?
Favorable stock selection in the information technology sector helped the Fund's
performance during the 12 months ended October 31, 2006. An overweighted
position in the industrials sector and an underweighted position in health care
also helped the Fund's relative results. On the other hand, the Fund's stock
selection in the health care, energy, and consumer discretionary sectors
detracted from the Fund's relative performance. An overweighted position in
consumer discretionary stocks and an underweighted position in the materials
sector also hurt the Fund's relative results.
WHAT WERE SOME OF THE FUND'S STOCK-SPECIFIC SUCCESS STORIES AND WHICH STOCKS
LOST GROUND?
Top performers included Terex, a manufacturer of cranes and other heavy
equipment; Tetra Technologies, an oil services company operating in the Gulf of
Mexico; Children's Place, a child-oriented retailer; and Coldwater Creek, a
retailer with catalogue and mail order operations and a growing chain of stores.
Another strong performer was Diodes, which gained share in the discrete
semiconductor business.
Disappointing stocks included James River Coal and Massey Energy, which saw
lagging earnings. ASV, a supplier to the construction-equipment market, declined
on slowing end-market demand. SFBC International was hurt by slowing new
business trends and serious missteps in corporate governance that led to a
government investigation. Shares of Labor Ready, a temporary employment company
for the construction industry, lagged on slowing demand. We sold the Fund's
positions in James River Coal, Massey Energy, and SFBC International during the
reporting period.
WHICH OTHER STOCKS DID THE FUND SELL DURING THE REPORTING PERIOD?
As the housing market cooled, we eliminated several homebuilders, including
Hovnanian Enterprises, MDC Holdings, The Ryland Group, and WCI Communities.
Deteriorating fundamentals led us to sell several energy holdings, including
Alliance Resource Partners, Arch Coal, and Bronco Drilling. Finally, we sold the
Fund's positions in Hughes Supply, Petco, Remington Oil & Gas, and Westcorp
because of merger activity.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
We added a position in Phillips Van Heusen to benefit from the company's core
men's shirt business and expanding Calvin Klein licensing operations. We also
added RBC Bearings, which makes bearing components for the aerospace, defense,
and industrial markets. We established a Fund position in Cash America, a
provider of specialty financial services, including pawn shop lending and cash
advances on paychecks. In the information technology sector, we added WebEx
Communications, a provider of Internet-based conferencing services, and Cymer, a
manufacturer of specialized light-source systems used in semiconductor
manufacturing.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. 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. The Fund may experience a portfolio turnover
rate of more than 100% and may generate taxable short-term capital gains.
1. Class I shares were first offered May 31, 2006.
2. See footnote on page 6 for more information on the Russell 2000(R) Growth
Index.
3. See footnote on page 6 for more information about Lipper Inc.
4. Performance figures for the year ended October 31, 2006, reflect nonrecurring
reimbursements from affiliates. Without these reimbursements, total returns
would have been lower. See Note 1 on page 6.
www.mainstayfunds.com 9
DID THE FUND CHANGE ITS SECTOR WEIGHTINGS DURING THE REPORTING PERIOD?
During the 12 months ended October 31, 2006, we increased the Fund's weighting
in information technology. We decreased the Fund's weightings in the consumer
discretionary and energy sectors, which had a positive effect on performance. We
also eliminated exposure to the materials sector.
As of October 31, 2006, the Fund held overweighted positions relative to the
Russell 2000(R) Growth Index in energy, industrials, and financials. On the same
date, the Fund held underweighted positions in the consumer discretionary,
consumer staples, health care, and information technology sectors. At the end of
the reporting period, the Fund had no holdings in materials, telecommunication
services, or utilities.
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 forecast 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 Small Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (95.5%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.0%)
Ceradyne, Inc. (a)(b) 56,650 $ 2,336,812
DRS Technologies, Inc. 47,700 2,109,294
Stanley, Inc. (a) 1,600 27,872
------------
4,473,978
------------
BIOTECHNOLOGY (1.7%)
Alkermes, Inc. (a) 38,900 653,520
Myogen, Inc. (a)(b) 44,600 2,332,580
Progenics Pharmaceuticals, Inc. (a) 34,500 901,140
------------
3,887,240
------------
CAPITAL MARKETS (4.5%)
V Affiliated Managers Group, Inc. (a)(b) 56,821 5,690,055
V Jefferies Group, Inc. 154,600 4,441,658
------------
10,131,713
------------
COMMERCIAL BANKS (2.4%)
Hanmi Financial Corp. 83,800 1,790,806
UCBH Holdings, Inc. 101,300 1,736,282
Wintrust Financial Corp. 40,300 1,944,878
------------
5,471,966
------------
COMMERCIAL SERVICES & SUPPLIES (2.6%)
CRA International, Inc. (a)(b) 55,000 2,795,650
Labor Ready, Inc. (a) 63,100 1,104,881
Mobile Mini, Inc. (a) 59,500 1,914,115
------------
5,814,646
------------
COMMUNICATIONS EQUIPMENT (1.8%)
ARRIS Group, Inc. (a) 123,000 1,648,200
Avocent Corp. (a) 64,000 2,349,440
------------
3,997,640
------------
COMPUTERS & PERIPHERALS (0.3%)
Synaptics, Inc. (a) 22,700 643,772
------------
CONSTRUCTION & ENGINEERING (1.0%)
Quanta Services, Inc. (a) 126,000 2,305,800
------------
CONSUMER FINANCE (1.1%)
Cash America International, Inc. 57,200 2,364,076
------------
ELECTRICAL EQUIPMENT (2.1%)
V Genlyte Group, Inc. (a) 60,000 4,635,600
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (6.8%)
Anixter International, Inc. (a) 39,300 2,348,568
Daktronics, Inc. 23,800 564,298
FLIR Systems, Inc. (a)(b) 78,000 2,491,320
Global Imaging Systems, Inc. (a) 139,000 3,026,030
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRONIC EQUIPMENT & INSTRUMENTS (CONTINUED)
Itron, Inc. (a)(b) 45,600 $ 2,482,464
V Trimble Navigation, Ltd. (a) 92,300 4,266,106
------------
15,178,786
------------
ENERGY EQUIPMENT & SERVICES (7.9%)
V Atwood Oceanics, Inc. (a) 87,500 4,042,500
Dresser-Rand Group, Inc. (a) 106,600 2,312,154
Grey Wolf, Inc. (a) 200,700 1,404,900
Hercules Offshore, Inc. (a) 65,600 2,336,672
Hydril Co. (a) 27,500 1,651,375
V TETRA Technologies, Inc. (a) 166,100 4,301,990
Todco (a) 46,100 1,573,393
------------
17,622,984
------------
HEALTH CARE EQUIPMENT & SUPPLIES (6.4%)
ArthroCare Corp. (a)(b) 66,800 2,699,388
Dade Behring Holdings, Inc. 94,100 3,428,063
Gen-Probe, Inc. (a) 32,500 1,555,775
Hologic, Inc. (a) 23,100 1,112,265
Immucor, Inc. (a) 126,750 3,489,427
Integra LifeSciences Holdings Corp. (a)(b) 31,500 1,163,295
LifeCell Corp. (a)(b) 38,600 904,398
------------
14,352,611
------------
HEALTH CARE PROVIDERS & SERVICES (5.8%)
Bio-Reference Laboratories, Inc. (a) 70,400 1,663,552
Healthways, Inc. (a)(b) 59,100 2,502,885
inVentiv Health, Inc. (a) 72,500 2,073,500
Matria Healthcare, Inc. (a)(b) 50,800 1,432,560
Sierra Health Services, Inc. (a) 78,700 2,694,688
Symbion, Inc. (a) 45,800 760,280
WellCare Health Plans, Inc. (a) 32,900 1,932,875
------------
13,060,340
------------
HOTELS, RESTAURANTS & LEISURE (1.8%)
Penn National Gaming, Inc. (a) 107,000 3,912,990
------------
HOUSEHOLD DURABLES (3.1%)
Beazer Homes USA, Inc. 31,000 1,343,540
V Jarden Corp. (a)(b) 120,250 4,326,595
Meritage Homes Corp. (a)(b) 29,400 1,345,932
------------
7,016,067
------------
INSURANCE (1.3%)
Tower Group, Inc. 83,700 2,958,795
------------
INTERNET & CATALOG RETAIL (1.5%)
Coldwater Creek, Inc. (a) 110,812 3,378,658
------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES (2.9%)
Digitas, Inc. (a) 129,400 $ 1,366,464
j2 Global Communications, Inc. (a)(b) 91,600 2,513,504
WebEx Communications, Inc. (a)(b) 67,700 2,603,065
------------
6,483,033
------------
LIFE SCIENCES TOOLS & SERVICES (1.1%)
Nektar Therapeutics (a)(b) 104,800 1,512,264
PRA International (a)(b) 32,000 944,000
------------
2,456,264
------------
MACHINERY (6.9%)
A.S.V., Inc. (a)(b) 108,500 1,585,185
Actuant Corp. Class A (b) 56,300 2,890,442
CLARCOR, Inc. 80,300 2,616,174
RBC Bearings, Inc. (a) 70,000 1,902,600
Terex Corp. (a) 61,500 3,183,240
Wabtec Corp. 105,900 3,324,201
------------
15,501,842
------------
MARINE (2.0%)
V Kirby Corp. (a) 127,000 4,448,810
------------
OIL, GAS & CONSUMABLE FUELS (5.2%)
Foundation Coal Holdings, Inc. 52,800 1,938,288
Giant Industries, Inc. (a) 33,400 2,704,732
Helix Energy Solutions Group, Inc. (a)(b) 104,200 3,365,660
Holly Corp. 23,400 1,112,904
World Fuel Services Corp. 61,300 2,637,126
------------
11,758,710
------------
PERSONAL PRODUCTS (1.1%)
Chattem, Inc. (a)(b) 56,000 2,375,520
------------
PHARMACEUTICALS (0.2%)
Adolor Corp. (a)(b) 37,900 519,609
------------
ROAD & RAIL (1.2%)
Knight Transportation, Inc. 61,750 1,125,085
Old Dominion Freight Line, Inc. (a) 59,200 1,637,472
------------
2,762,557
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (5.4%)
Cymer, Inc. (a)(b) 39,100 1,811,503
Diodes, Inc. (a) 88,550 3,899,742
Micrel, Inc. (a) 44,000 491,040
Microsemi Corp. (a)(b) 63,800 1,250,480
Silicon Laboratories, Inc. (a)(b) 26,000 848,380
Tessera Technologies, Inc. (a) 84,000 2,932,440
Trident Microsystems, Inc. (a) 43,200 913,248
------------
12,146,833
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SOFTWARE (5.0%)
Epicor Software Corp. (a) 154,800 $ 2,171,844
FactSet Research Systems, Inc. 69,500 3,537,550
Hyperion Solutions Corp. (a) 27,900 1,043,460
MICROS Systems, Inc. (a) 58,600 2,911,248
Witness Systems, Inc. (a) 86,200 1,529,188
------------
11,193,290
------------
SPECIALTY RETAIL (7.0%)
A.C. Moore Arts & Crafts, Inc. (a)(b) 73,100 1,603,083
V Children's Place Retail Stores,
Inc. (The) (a)(b) 66,800 4,688,692
GameStop Corp. Class A (a)(b) 43,209 2,206,252
Guitar Center, Inc. (a)(b) 76,300 3,309,131
Hibbett Sporting Goods, Inc. (a) 111,925 3,272,687
Jos. A. Bank Clothiers, Inc. (a)(b) 24,074 714,757
------------
15,794,602
------------
TEXTILES, APPAREL & LUXURY GOODS (1.4%)
Phillips-Van Heusen Corp. 66,900 3,061,344
------------
TRADING COMPANIES & DISTRIBUTORS (2.0%)
V MSC Industrial Direct Co., Inc. Class A 107,800 4,411,176
------------
Total Common Stocks
(Cost $156,370,249) 214,121,252
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (23.8%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (8.4%)
Deutsche Bank Financial LLC
5.25%, due 11/13/06 $3,100,000 3,094,575
5.26%, due 11/6/06 3,000,000 2,997,808
Fairway Finance Corp.
5.289%, due 11/20/06 (c) 749,426 749,426
Goldman Sachs Group, Inc.
5.25%, due 11/2/06 3,240,000 3,239,528
Greyhawk Funding
5.286%, due 11/13/06 (c) 999,235 999,235
Jupiter Securitization Corp.
5.303%, due 11/14/06 (c) 1,228,969 1,228,969
Lexington Parker Capital Co.
5.282%, due 11/8/06 (c) 999,235 999,235
Liberty Street Funding Co.
5.286%, due 11/27/06 (c) 1,236,999 1,236,999
Old Line Funding LLC
5.287%, due 11/15/06 (c) 999,235 999,235
Sheffield Receivables Corp.
5.272%, due 11/8/06 (c) 999,235 999,235
</Table>
12 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
UBS Finance LLC
5.28%, due 11/1/06 $1,485,000 $ 1,485,000
Yorktown Capital LLC
5.282%, due 11/16/06 (c) 874,331 874,331
------------
Total Commercial Paper
(Cost $18,903,576) 18,903,576
------------
<Caption>
SHARES
INVESTMENT COMPANY (1.0%)
BGI Institutional Money Market Fund (c) 2,157,128 2,157,128
------------
Total Investment Company
(Cost $2,157,128) 2,157,128
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.5%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/106
Proceeds at Maturity $1,177,016
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$1,190,333 and a Market Value
of $1,223,623) (c) $1,176,838 1,176,838
------------
Total Repurchase Agreement
(Cost $1,176,838) 1,176,838
------------
TIME DEPOSITS (13.9%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (c) 1,998,469 1,998,469
Bank of America
5.27%, due 11/21/06 (c)(d) 2,747,895 2,747,895
Bank of Montreal
5.28%, due 11/27/06 (c) 1,998,469 1,998,469
Bank of Nova Scotia
5.30%, due 11/10/06 (c) 1,998,469 1,998,469
Barclays
5.32%, due 1/18/07 (c) 1,998,469 1,998,469
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Deutsche Bank AG
5.27%, due 11/9/06 (c) $1,998,469 $ 1,998,469
Fortis Bank
5.27%, due 11/6/06 (c) 4,346,671 4,346,671
Halifax Bank of Scotland
5.30%, due 1/10/07 (c) 1,998,469 1,998,469
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (c) 1,998,469 1,998,469
Royal Bank of Canada
5.30%, due 12/22/06 (c) 1,998,469 1,998,469
Royal Bank of Scotland
5.29%, due 12/12/06 (c) 1,998,469 1,998,469
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (c) 1,998,469 1,998,469
Societe Generale North America, Inc.
5.28%, due 12/6/06 (c) 1,998,469 1,998,469
UBS AG
5.28%, due 12/5/06 (c) 1,998,469 1,998,469
------------
Total Time Deposits
(Cost $31,076,194) 31,076,194
------------
Total Short-Term Investments
(Cost $53,313,736) 53,313,736
------------
Total Investments
(Cost $209,683,985) (e) 119.3% 267,434,988(f)
Liabilities in Excess of Cash and Other Assets (19.3) (43,224,513)
---------- ------------
Net Assets 100.0% $224,210,475
========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan.
(c) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(d) Floating rate. Rate shown is the rate in effect at October 31, 2006.
(e) The cost for federal income tax purposes is $209,698,527.
(f) At October 31, 2006 net unrealized appreciation was $57,736,461, based on
cost for federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $64,321,998 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $6,585,537.
</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, 2006
<Table>
ASSETS:
Investment in securities, at value
(identified cost $209,683,985) including
$41,016,460 market value of securities
loaned $ 267,434,988
Cash 2,518
Receivables:
Investment securities sold 82,436
Fund shares sold 38,424
Dividends and interest 23,454
Other assets 26,902
-------------
Total assets 267,608,722
-------------
LIABILITIES:
Securities lending collateral 42,496,825
Payables:
Fund shares redeemed 373,329
Transfer agent (See Note 3) 193,294
NYLIFE Distributors (See Note 3) 125,467
Shareholder communication 69,234
Manager (See Note 3) 68,615
Professional fees 34,815
Custodian 3,314
Trustees 2,833
Accrued expenses 30,521
-------------
Total liabilities 43,398,247
-------------
Net assets $ 224,210,475
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number
of shares authorized:
Class A $ 65,115
Class B 71,262
Class C 4,362
Class I 325
Additional paid-in capital 299,739,778
Accumulated net realized loss on investments (133,421,370)
Net unrealized appreciation on investments 57,751,003
-------------
Net assets $ 224,210,475
=============
CLASS A
Net assets applicable to outstanding shares $ 107,078,266
=============
Shares of beneficial interest outstanding 6,511,472
=============
Net asset value per share outstanding $ 16.44
Maximum sales charge (5.50% of offering
price) 0.96
-------------
Maximum offering price per share outstanding $ 17.40
=============
CLASS B
Net assets applicable to outstanding shares $ 109,871,742
=============
Shares of beneficial interest outstanding 7,126,224
=============
Net asset value and offering price per share
outstanding $ 15.42
=============
CLASS C
Net assets applicable to outstanding shares $ 6,725,055
=============
Shares of beneficial interest outstanding 436,180
=============
Net asset value and offering price per share
outstanding $ 15.42
=============
CLASS I
Net assets applicable to outstanding shares $ 535,412
=============
Shares of beneficial interest outstanding 32,459
=============
Net asset value and offering price per share
outstanding $ 16.50
=============
</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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 506,481
Interest 331,879
Income from securities loaned--net 116,427
------------
Total income 954,787
------------
EXPENSES:
Manager (See Note 3) 2,406,116
Transfer agent--Classes A, B and C (See Note
3) 1,220,671
Transfer agent--Class I (See Note 3) 212
Distribution--Class B (See Note 3) 970,461
Distribution--Class C (See Note 3) 53,415
Distribution/Service--Class A (See Note 3) 259,730
Service--Class B (See Note 3) 323,487
Service--Class C (See Note 3) 17,805
Shareholder communication 177,705
Professional fees 100,654
Registration 52,200
Recordkeeping 50,728
Custodian 15,959
Trustees 14,446
Miscellaneous 21,228
------------
Total expenses before waiver/reimbursement 5,684,817
Expense waiver from Manager (See Note 3) (1,066,861)
Reimbursement from Manager for professional
fees (See Note 3(B) on page 22.) (32,348)
------------
Net expenses 4,585,608
------------
Net investment loss (3,630,821)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 18,179,457
Net increase from payments from Manager for
losses attributable to shareholder trading
arrangements (See Note 3(B) on page 22.) 38,000
Net change in unrealized appreciation on
investments 7,529,379
------------
Net realized and unrealized gain on investments 25,746,836
------------
Net increase in net assets resulting from
operations $22,116,015
============
</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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (3,630,821) $ (3,979,978)
Net realized gain on investments 18,179,457 28,174,588
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 22.) 38,000 --
Net change in unrealized
appreciation on investments 7,529,379 (1,279,874)
----------------------------
Net increase in net assets
resulting from operations 22,116,015 22,914,736
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 23,322,772 14,733,413
Class B 9,913,805 14,988,007
Class C 1,315,905 979,051
Class I 517,821 --
----------------------------
35,070,303 30,700,471
Cost of shares redeemed:
Class A (30,083,104) (23,310,406)
Class B (36,029,805) (43,395,956)
Class C (2,460,076) (1,801,933)
----------------------------
(68,572,985) (68,508,295)
Net asset value of shares converted (See Note 1):
Class A 36,613,954 --
Class B (36,613,954) --
Decrease in net assets derived
from capital share transactions (33,502,682) (37,807,824)
----------------------------
Net decrease in net assets (11,386,667) (14,893,088)
NET ASSETS:
Beginning of year 235,597,142 250,490,230
----------------------------
End of year $ 224,210,475 $235,597,142
============================
</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.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 14.94 $ 13.63 $ 13.46 $ 9.88 $ 13.90 $ 17.11
-------- ------- ------- ----------- ------- -------
Net investment loss (a) (0.18) (0.15) (0.22) (0.18) (0.22) (0.22)
Net realized and unrealized
gain (loss) on investments 1.68(d) 1.46 0.39 3.76 (3.80) (2.99)
-------- ------- ------- ----------- ------- -------
Total from investment
operations 1.50 1.31 0.17 3.58 (4.02) (3.21)
-------- ------- ------- ----------- ------- -------
Net asset value at end of
period $ 16.44 $ 14.94 $ 13.63 $ 13.46 $ 9.88 $ 13.90
======== ======= ======= =========== ======= =======
Total investment return (b) 10.11%(c)(d) 9.61% 1.26% 36.23%(e) (28.92%) (18.76%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.09%) (1.03%) (1.63%) (1.93%)+ (1.86%) (1.56%)
Net expenses 1.48% 1.65% 1.91% 2.12% + 2.07% 1.90%
Expenses (before
waiver/reimbursement) 1.94%(c) 1.94% 1.95% 2.12% + 2.07% 1.90%
Portfolio turnover rate 29% 57% 75% 69% 132% 111%
Net assets at end of period
(in 000's) $107,078 $68,981 $70,616 $71,451 $44,037 $61,197
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $14.11 $12.97 $12.90 $ 9.54 $ 13.51 $ 16.75
------ ------ ------ ----------- ------- -------
Net investment loss (a) (0.28) (0.25) (0.31) (0.24) (0.30) (0.32)
Net realized and unrealized
gain (loss) on investments 1.59(d) 1.39 0.38 3.60 (3.67) (2.92)
------ ------ ------ ----------- ------- -------
Total from investment
operations 1.31 1.14 0.07 3.36 (3.97) (3.24)
------ ------ ------ ----------- ------- -------
Net asset value at end of
period $15.42 $14.11 $12.97 $12.90 $ 9.54 $ 13.51
====== ====== ====== =========== ======= =======
Total investment return (b) 9.28%(c)(d) 8.79% 0.54% 35.22%(e) (29.39%) (19.34%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.83%) (1.78%) (2.38%) (2.68%)+ (2.61%) (2.31%)
Net expenses 2.23% 2.40% 2.66% 2.87% + 2.82% 2.65%
Expenses (before
waiver/reimbursement) 2.69%(c) 2.69% 2.70% 2.87% + 2.82% 2.65%
Portfolio turnover rate 29% 57% 75% 69% 132% 111%
Net assets at end of period
(in 000's) $6,725 $7,236 $7,396 $7,734 $ 5,248 $ 6,628
</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.
(c) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundred of a percent. (See Note 3(B) on page 22.)
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager reimbursement of such losses were less than $0.01 per share
on net realized gains on investments; and the effect on total investment return was 0.01%,
respectively. (See Note 3(B) on page 22.)
(e) Total return is not annualized.
</Table>
18 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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 14.11 $ 12.97 $ 12.90 $ 9.54 $ 13.51 $ 16.75
-------- -------- -------- ----------- -------- --------
(0.28) (0.25) (0.31) (0.24) (0.30) (0.32)
1.59(d) 1.39 0.38 3.60 (3.67) (2.92)
-------- -------- -------- ----------- -------- --------
1.31 1.14 0.07 3.36 (3.97) (3.24)
-------- -------- -------- ----------- -------- --------
$ 15.42 $ 14.11 $ 12.97 $ 12.90 $ 9.54 $ 13.51
======== ======== ======== =========== ======== ========
9.28%(c)(d) 8.79% 0.54% 35.22%(e) (29.39%) (19.34%)
(1.83%) (1.78%) (2.38%) (2.68%)+ (2.61%) (2.31%)
2.23% 2.40% 2.66% 2.87%+ 2.82% 2.65%
2.69%(c) 2.69% 2.70% 2.87%+ 2.82% 2.65%
29% 57% 75% 69% 132% 111%
$109,872 $159,380 $172,478 $178,730 $131,404 $196,859
</Table>
<Table>
<Caption>
CLASS I
-----------
MAY 31,
2006**
THROUGH
OCTOBER 31,
2006
$16.60
-----------
(0.02)
(0.08)(d)
-----------
(0.10)
-----------
$16.50
===========
(0.60%)(c)(d)(e)
(0.32%)+
0.77% +
1.43% +(c)
29%
$ 535
</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 Small Cap
Growth 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 and Class I shares commenced on May 31, 2006. 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 a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are not subject to sales
charge. As approved by the Board of Trustees in 1997, Class B shares convert to
Class A shares eight years after the date they were purchased. The first
conversion occurred December 28, 2005. The four classes of shares bear the same
voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions. 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
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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006 the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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, accumulated net realized loss on investments
and additional paid-
20 MainStay Small Cap Growth Fund
in-capital arising from permanent differences; net assets at October 31, 2006,
are not affected.
<Table>
<Caption>
ACCUMULATED NET
ACCUMULATED NET REALIZED LOSS ON ADDITIONAL
INVESTMENT LOSS INVESTMENTS PAID-IN-CAPITAL
$3,630,821 $(38,000) $(3,592,821)
----------------------------------------------------
</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
miscellaneous adjustments.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 23.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
is responsible for the day-to-day portfolio management of the Fund.
www.mainstayfunds.com 21
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: 1.00% on assets up to $1.0 billion and
0.95% on assets in excess of $1.0 billion. NYLIM has voluntarily agreed to waive
its management fee by 0.15% to 0.85% on assets up to $1.0 billion, and to 0.80%
on assets in excess of $1.0 billion.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total operating
expenses (total annual 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, 1.48% 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 written expense limitation
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. For the year ended October 31, 2006, the
Manager earned fees from the Fund in the amount of $2,406,116 and waived its
fees in the amount of $1,066,861.
As of October 31, 2006, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 TOTAL
$174,275 $705,943 $ 880,218
-------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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 manager has
agreed to reimburse expenses of the Fund, the Subadvisor has voluntarily agreed
to do so proportionately.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 10 on
page 24.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $32,348. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) 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 and 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.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $39,460 for the year ended
October 31, 2006. 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 $2,388, $174,032 and $1,580, respectively, for the year ended October
31, 2006.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing
22 MainStay Small Cap Growth Fund
agent. NYLIM Service has entered into an agreement with Boston Financial Data
Services pursuant to which it performs certain services for which NYLIM Service
is responsible. Transfer agent expenses incurred by the Fund for the year ended
October 31, 2006, amounted to $1,220,883.
(F) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
(G) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $2,826,466 2.6%
- ----------------------------------------------------------------
Class C 178 0.0*
- ----------------------------------------------------------------
Class I 9,940 1.9
- ----------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $6,748.
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 $50,728 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
TOTAL
ACCUMULATED UNREALIZED ACCUMULATED
CAPITAL LOSSES APPRECIATION LOSS
$(133,406,828) $57,736,461 $(75,670,367)
--------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2006, for federal income tax purposes, capital loss carryforwards
of $133,406,828 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 $ 90,230
2010 40,252
2011 2,925
-------------------------------------------
$133,407
-------------------------------------------
</Table>
The Fund utilized $18,102,027 capital loss carryforwards during the year ended
October 31, 2006.
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $41,016,460. The Fund received $42,496,825 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 made or outstanding on the line of credit during the
year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006 purchases and sales of securities, other
than short-term securities, were $67,896 and $114,662, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 1,429 642 85 32
- -------------------------------------------------------------------------------
Shares redeemed (1,845) (2,361) (162) --(a)
- -------------------------------------------------------------------------------
Shares converted (See Note 1): 2,310 (2,449) -- --
- -------------------------------------------------------------------------------
Net increase (decrease) 1,894 (4,168) (77) 32
- -------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I
Shares sold 990 1,061 70 --
- -------------------------------------------------------------------------------
Shares redeemed (1,555) (3,068) (127) --
- -------------------------------------------------------------------------------
Net decrease (565) (2,007) (57) --
- -------------------------------------------------------------------------------
</Table>
(a) Less than one-thousand shares.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. The amount paid to the Fund was
$38,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
24 MainStay Small Cap Growth 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 Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance when
compared over several time periods with groupings of funds having similar
investment mandates, and the Manager's assurance that it was closely monitoring
the Fund's performance.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher invest-
26 MainStay Small Cap Growth Fund
ment minimums for some share classes. The Trustees discussed additional measures
that may increase average shareholder account size and/or otherwise reduce the
Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund had not reached the asset level at which the
breakpoint would reduce the Fund's management fee rate. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to waive a certain portion
of its management fee, and to maintain a limit on the Fund's net expenses at a
certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
www.mainstayfunds.com 27
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
28 MainStay Small Cap Growth Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
30 MainStay Small Cap Growth Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSSG11-12/06
24
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP VALUE FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP VALUE FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 23
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 24
- --------------------------------------------------------------------------------
Federal Income Tax Information 26
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 26
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 26
- --------------------------------------------------------------------------------
Trustees and Officers 27
</Table>
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 7.16% 9.41% 8.79%
Excluding sales charges 13.40 10.65 9.53
</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
17937 19703
10/31/06 20341 24214
</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 7.48% 9.55% 8.71%
Excluding sales charges 12.48 9.83 8.71
</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
17970 19703
10/31/06 20212 24214
</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 11.56% 9.84% 8.72%
Excluding sales charges 12.56 9.84 8.72
</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
17967 19703
10/31/06 20225 24214
</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 as 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. These fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of any management fee
waivers or expense reimbursements from the Fund pursuant to this agreement if
such action does not cause the Fund to exceed existing expense limitations and
the recoupment is made within three years after the year in which the Manager
incurred the expense. From inception (6/1/98) through 8/31/98, performance for
Class C shares (first offered 9/1/98) includes
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
- --------------------------------------------------
13.74% 10.98% 9.83%
</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
19375 19703
10/31/06 22037 24214
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
Russell 2000(R) Value Index(1) 22.90% 17.52% 11.08%
Average Lipper small-cap value fund(2) 16.79 15.57 10.21
</Table>
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.
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 in 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.
6 MainStay Small Cap Value Fund
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $977.30 $ 6.98 $1,018.00 $ 7.12
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $973.15 $10.69 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $973.85 $10.70 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $977.15 $ 5.23 $1,019.75 $ 5.35
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Class A, 2.15% for Class B and Class C, and 1.05% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period). In the absence of
waivers and/or reimbursements, expenses would have been higher.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 91.6
Short-Term Investments (collateral from securities lending 25.0
is 16.4%)
Investment Companies 3.0
Liabilities in Excess of Cash and Other Assets (19.6)
</Table>
* Includes 0.8% of Investment Companies Securities.
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Premiere Global Services, Inc.
2. Actel Corp.
3. Caraustar Industries, Inc.
4. Carmike Cinemas, Inc.
5. American Axle & Manufacturing Holdings, Inc.
6. Cost Plus, Inc.
7. UGI Corp.
8. Kadant, Inc.
9. SafeNet, Inc.
10. Wausau Paper Corp.
</Table>
8 MainStay Small Cap Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Caroline Evascu, CFA, of MacKay Shields
LLC
HOW DID MAINSTAY SMALL CAP VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2006?
Excluding all sales charges, MainStay Small Cap Value Fund returned 13.40% for
Class A shares, 12.48% for Class B shares, and 12.56% for Class C shares for the
12 months ended October 31, 2006. Over the same period, the Fund's Class I
shares returned 13.74%. All share classes underperformed the 22.90% return of
the Russell 2000(R) Value Index,(1) the Fund's broad-based securities-market
index, for the 12-month period. All share classes also underperformed the 16.79%
return of the average Lipper(2) small-cap value fund for the 12 months ended
October 31, 2006.
DURING THE REPORTING PERIOD, WHICH SECTORS WERE THE FUND'S STRONGEST PERFORMERS
AND WHICH SECTORS WERE THE WEAKEST?
For the 12 months ended October 31, 2006, the Fund's strongest-performing
sectors relative to the Russell 2000(R) Value Index were energy and information
technology. On a relative basis, the weakest-performing sectors were consumer
discretionary, financials, and industrials. In the consumer discretionary
sector, the Fund's contrarian investments in such media-related industries as
publishing and broadcasting & cable hurt both absolute and relative returns.
During the reporting period, these media-related industries suffered from
declines in advertising spending because of growth in new advertising media,
mainly the Internet. In the financials sector, specific Fund holdings in
reinsurance and multi-line insurance companies hurt returns.
WHICH STOCKS WERE THE FUND'S STRONGEST PERFORMERS AND WHICH STOCKS
UNDERPERFORMED DURING THE REPORTING PERIOD?
The strongest contributors to the Fund's absolute performance included retailer
Christopher & Banks, chemical-transportation company Quality Distribution, and
software company Mentor Graphics.
Major detractors from the Fund's absolute performance included reinsurance
company Scottish Re Group, newspaper publisher Journal Register, and engineering
and gas-turbine equipment provider Global Power Equipment.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund initiated a new position in Horizon Offshore, a marine construction
company operating primarily in the Gulf of Mexico during the reporting period.
We also purchased shares of Brooks Automation, a designer and manufacturer of
equipment sold primarily into the semiconductor end-market.
The Fund made two significant sales in July 2006. We eliminated the Fund's
position in Scottish Re Group when the company unexpectedly reported large
write-offs that led to the CEO's resignation. We also sold the Fund's position
in Global Power Equipment when the company faced a contract-accounting review
that delayed timely filing of SEC documents. The Fund eliminated its position in
the stock before Global Power Equipment filed for Chapter 11 bankruptcy
protection.
DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
The Fund's sector weightings are primarily a result of our bottom-up
security-selection process, which focuses on attractive valuations. Industry and
security movements may also affect weightings. During the 12-month reporting
period, the Fund's exposure to the materials and telecommunication services
sectors increased relative to the Russell 2000(R) Value Index. On the other
hand, the Fund decreased its exposure to the information technology, consumer
discretionary, and energy sectors.
At the end of October 2006, the Fund's only significantly overweighted sector
relative to the Russell 2000(R) Value Index was consumer discretionary, where
our stock selection detracted from the Fund's relative performance. The Fund had
a significantly underweighted position in financials, which helped relative
results.
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. The principal risk of investing in value stocks is that they may
never reach what the portfolio manager believes is their full value or they may
even go down in value.
1. See footnote on page 6 for more information on the Russell 2000(R) Value
Index.
2. See footnote on page 6 for more information on Lipper Inc.
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 forecast 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, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (91.6%)+
- -----------------------------------------------------------------------------
AUTO COMPONENTS (2.1%)
V American Axle & Manufacturing
Holdings, Inc. (a) 151,200 $ 2,835,000
------------
BIOTECHNOLOGY (1.1%)
Angiotech Pharmaceuticals, Inc. (b) 146,300 1,389,850
------------
BUILDING PRODUCTS (0.8%)
Apogee Enterprises, Inc. 65,535 1,054,458
------------
CAPITAL MARKETS (1.4%)
Waddell & Reed Financial, Inc. Class A 74,900 1,909,950
------------
CHEMICALS (2.0%)
Omnova Solutions, Inc. (b) 483,800 2,119,044
Quaker Chemical Corp. 30,000 570,900
------------
2,689,944
------------
COMMERCIAL BANKS (10.5%)
Chittenden Corp. 72,268 2,131,183
Citizens Banking Corp. (a) 50,000 1,298,500
Cullen/Frost Bankers, Inc. 39,700 2,150,152
Irwin Financial Corp. (a) 102,200 2,265,774
Mercantile Bank Corp. 56,406 2,237,626
S&T Bancorp, Inc. (a) 53,642 1,815,782
Sandy Spring Bancorp, Inc. 26,100 956,826
Sterling Financial Corp. 30,000 997,800
------------
13,853,643
------------
COMMERCIAL SERVICES & SUPPLIES (1.1%)
Banta Corp. 31,500 1,394,820
------------
COMMUNICATIONS EQUIPMENT (1.9%)
V SafeNet, Inc. (b) 116,100 2,484,540
------------
COMPUTERS & PERIPHERALS (1.1%)
McData Corp. Class A (b) 265,000 1,502,550
------------
CONTAINERS & PACKAGING (3.0%)
V Caraustar Industries, Inc. (b) 274,200 2,969,586
Chesapeake Corp. 66,000 1,023,660
------------
3,993,246
------------
DIVERSIFIED CONSUMER SERVICES (1.8%)
Stewart Enterprises, Inc. Class A 387,800 2,396,604
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.0%)
Iowa Telecommunications Services, Inc. 37,200 741,768
V Premiere Global Services, Inc. (b) 385,400 3,206,528
------------
3,948,296
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRIC UTILITIES (2.5%)
Cleco Corp. 50,300 $ 1,292,710
Sierra Pacific Resources (b) 137,000 2,076,920
------------
3,369,630
------------
ELECTRICAL EQUIPMENT (1.7%)
GrafTech International, Ltd. (b) 367,643 2,224,240
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.8%)
Benchmark Electronics, Inc. (b) 37,500 995,625
------------
ENERGY EQUIPMENT & SERVICES (3.4%)
Hanover Compressor Co. (a)(b) 115,814 2,144,875
Horizon Offshore, Inc. (b) 140,000 2,416,400
------------
4,561,275
------------
FOOD & STAPLES RETAILING (1.3%)
Performance Food Group Co. (b) 19,900 578,493
Smart & Final, Inc. (b) 60,000 1,080,600
------------
1,659,093
------------
FOOD PRODUCTS (0.3%)
Chiquita Brands International, Inc. 30,000 411,000
------------
GAS UTILITIES (2.9%)
SEMCO Energy, Inc. (b) 222,200 1,266,540
V UGI Corp. 96,000 2,544,000
------------
3,810,540
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.5%)
CONMED Corp. (b) 47,600 1,056,244
HealthTronics, Inc. (b) 135,000 935,550
------------
1,991,794
------------
HEALTH CARE PROVIDERS & SERVICES (1.7%)
Hanger Orthopedic Group, Inc. (b) 105,000 814,800
Hooper Holmes, Inc. (b) 386,475 1,391,310
------------
2,206,110
------------
HOUSEHOLD DURABLES (1.6%)
La-Z-Boy, Inc. (a) 168,148 2,059,813
------------
HOUSEHOLD PRODUCTS (0.8%)
Spectrum Brands, Inc. (a)(b) 115,400 1,121,688
------------
IT SERVICES (0.7%)
Keane, Inc. (b) 76,572 887,470
------------
</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)
- -----------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS (2.4%)
Arctic Cat, Inc. 120,100 $ 2,150,991
Callaway Golf Co. (a) 73,374 985,413
------------
3,136,404
------------
LIFE SCIENCES TOOLS & SERVICES (1.9%)
Cambrex Corp. 104,801 2,452,343
------------
MACHINERY (3.3%)
V Kadant, Inc. (b) 92,400 2,522,520
Lydall, Inc. (b) 204,700 1,856,629
------------
4,379,149
------------
MEDIA (5.4%)
V Carmike Cinemas, Inc. (a) 144,700 2,886,765
Journal Register Co. 307,400 2,422,312
Nexstar Broadcasting Group, Inc. Class A (b) 489,500 1,860,100
------------
7,169,177
------------
OIL, GAS & CONSUMABLE FUELS (1.7%)
Cimarex Energy Co. 28,925 1,041,879
Houston Exploration Co. (b) 21,418 1,159,999
------------
2,201,878
------------
PAPER & FOREST PRODUCTS (3.3%)
Buckeye Technologies, Inc. (a)(b) 178,300 1,852,537
V Wausau Paper Corp. 183,067 2,482,389
------------
4,334,926
------------
REAL ESTATE INVESTMENT TRUSTS (5.1%)
Cedar Shopping Centers, Inc. 88,600 1,480,506
DiamondRock Hospitality Co. 55,000 927,850
Education Realty Trust, Inc. (a) 61,200 946,764
Highland Hospitality Corp. 107,000 1,478,740
Parkway Properties, Inc. 13,000 641,420
Windrose Medical Properties Trust 70,000 1,306,200
------------
6,781,480
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT (1.0%)
Trammell Crow Co. (b) 28,200 1,374,750
------------
ROAD & RAIL (2.5%)
Quality Distribution, Inc. (b) 133,900 1,995,110
RailAmerica, Inc. (b) 116,500 1,364,215
------------
3,359,325
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (6.2%)
V Actel Corp. (b) 188,921 3,096,415
Brooks Automation, Inc. (b) 150,000 2,130,000
Mattson Technology, Inc. (b) 145,000 1,418,100
</Table>
<Table>
<Caption>
SHARES VALUE
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
MKS Instruments, Inc. (b) 48,000 $ 1,039,200
Zoran Corp. (b) 35,400 492,768
------------
8,176,483
------------
SOFTWARE (0.9%)
Mentor Graphics Corp. (b) 72,700 1,226,449
------------
SPECIALTY RETAIL (5.7%)
Christopher & Banks Corp. 29,663 800,604
V Cost Plus, Inc. (a)(b) 230,400 2,753,280
CSK Auto Corp. (b) 92,473 1,442,579
HOT Topic, Inc. (a)(b) 160,000 1,617,600
Stein Mart, Inc. 60,000 982,200
------------
7,596,263
------------
THRIFTS & MORTGAGE FINANCE (3.2%)
Berkshire Hills Bancorp, Inc. (a) 23,500 849,760
Brookline Bancorp, Inc. 100,200 1,335,666
First Niagara Financial Group, Inc. 70,900 1,015,288
W Holding Co., Inc. (a) 191,300 1,088,497
------------
4,289,211
------------
Total Common Stocks
(Cost $110,469,895) 121,229,017
------------
INVESTMENT COMPANIES (3.0%)
- -----------------------------------------------------------------------------
iShares Russell 2000 Index Fund (c) 26,000 1,978,860
iShares Russell 2000 Value Index Fund (c) 25,500 1,974,975
------------
Total Investment Companies
(Cost $3,973,396) 3,953,835
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (25.0%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (11.7%)
Abbey National North America LLC
5.24%, due 11/13/06 $3,300,000 3,294,236
Fairway Finance Corp.
5.289%, due 11/20/06 (d) 383,475 383,475
Goldman Sachs Group, Inc.
5.25%, due 11/2/06 2,735,000 2,734,601
Greyhawk Funding
5.286%, due 11/13/06 (d) 511,300 511,300
Jupiter Securitization Corp.
5.303%, due 11/14/06 (d) 628,853 628,853
Lexington Parker Capital Co.
5.282%, due 11/8/06 (d) 511,300 511,300
Liberty Street Funding Co.
5.286%, due 11/27/06 (d) 632,961 632,961
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
Old Line Funding LLC
5.287%, due 11/15/06 (d) $ 511,300 $ 511,300
Sheffield Receivables Corp.
5.272%, due 11/8/06 (d) 511,300 511,300
Toyota Motor Credit Corp.
5.22%, due 11/3/06 1,885,000 1,884,453
UBS Finance LLC
5.28%, due 11/1/06 3,500,000 3,500,000
Yorktown Capital LLC
5.282%, due 11/16/06 (d) 447,387 447,387
------------
Total Commercial Paper
(Cost $15,551,166) 15,551,166
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.8%)
BGI Institutional Money Market Fund (d) 1,103,784 1,103,784
------------
Total Investment Company
(Cost $1,103,784) 1,103,784
------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.5%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $602,269
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$609,083 and a Market Value
of $626,118) (d) $ 602,178 602,178
------------
Total Repurchase Agreement
(Cost $602,178) 602,178
------------
TIME DEPOSITS (12.0%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (d) 1,022,599 1,022,599
Bank of America
5.27%, due 11/21/06 (d)(e) 1,406,074 1,406,074
Bank of Montreal
5.28%, due 11/27/06 (d) 1,022,599 1,022,599
Bank of Nova Scotia
5.30%, due 11/10/06 (d) 1,022,599 1,022,599
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Barclays
5.32%, due 1/18/07 (d) $1,022,600 $ 1,022,600
Deutsche Bank AG
5.27%, due 11/9/06 (d) 1,022,600 1,022,600
Fortis Bank
5.27%, due 11/6/06 (d) 2,224,154 2,224,154
Halifax Bank of Scotland
5.30%, due 1/10/07 (d) 1,022,599 1,022,599
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (d) 1,022,599 1,022,599
Royal Bank of Canada
5.30%, due 12/22/06 (d) 1,022,600 1,022,600
Royal Bank of Scotland
5.29%, due 12/12/06 (d) 1,022,599 1,022,599
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (d) 1,022,599 1,022,599
Societe Generale North America, Inc.
5.28%, due 12/6/06 (d) 1,022,600 1,022,600
UBS AG
5.28%, due 12/5/06 (d) 1,022,600 1,022,600
------------
Total Time Deposits
(Cost $15,901,421) 15,901,421
------------
Total Short-Term Investments
(Cost $33,158,549) 33,158,549
------------
Total Investments
(Cost $147,601,840) (f) 119.6% 158,341,401(g)
Liabilities in Excess of
Cash and Other Assets (19.6) (25,936,563)
---------- ------------
Net Assets 100.0% $132,404,838
========== ============
</Table>
<Table>
(a) Represents a security, or a portion thereof, which is out on
loan.
(b) Non-income producing security.
(c) Exchange Traded Fund--represents a basket of securities that
are traded on an exchange.
(d) Represents a 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, 2006.
(f) The cost for federal income tax purposes is $148,208,256.
(g) At October 31, 2006 net unrealized appreciation was
$10,133,145, based on cost for federal income tax purposes.
This consisted of aggregate gross unrealized appreciation
for all investments on which there was an excess of market
value over cost of $18,027,089 and aggregate gross
unrealized depreciation for all investments on which there
was an excess of cost over market value of $7,893,944.
</Table>
12 MainStay Small Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2006
<Table>
ASSETS:
Investment in securities, at value (identified
cost $147,601,840) including $20,833,440
market value of securities loaned $158,341,401
Cash 3,207
Receivables:
Investment securities sold 525,654
Fund shares sold 250,125
Dividends and interest 204,705
Other assets 17,504
-------------
Total assets 159,342,596
-------------
LIABILITIES:
Securities lending collateral 21,745,259
Payables:
Investment securities purchased 4,697,402
Fund shares redeemed 204,735
Transfer agent (See Note 3) 82,275
Manager (See Note 3) 72,873
NYLIFE Distributors (See Note 3) 58,776
Shareholder communication 35,835
Professional fees 27,458
Custodian 3,229
Trustees 1,653
Accrued expenses 8,263
-------------
Total liabilities 26,937,758
-------------
Net assets $132,404,838
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 37,346
Class B 33,035
Class C 8,331
Class I 17,761
Additional paid-in capital 110,375,177
Accumulated undistributed net realized gain on
investments 11,193,627
Net unrealized appreciation on investments 10,739,561
-------------
Net assets $132,404,838
=============
CLASS A
Net assets applicable to outstanding shares $ 52,995,279
=============
Shares of beneficial interest outstanding 3,734,642
=============
Net asset value per share outstanding $ 14.19
Maximum sales charge (5.50% of offering price) 0.83
-------------
Maximum offering price per share outstanding $ 15.02
=============
CLASS B
Net assets applicable to outstanding shares $ 43,136,609
=============
Shares of beneficial interest outstanding 3,303,474
=============
Net asset value and offering price per share
outstanding $ 13.06
=============
CLASS C
Net assets applicable to outstanding shares $ 10,879,094
=============
Shares of beneficial interest outstanding 833,114
=============
Net asset value and offering price per share
outstanding $ 13.06
=============
CLASS I
Net assets applicable to outstanding shares $ 25,393,856
=============
Shares of beneficial interest outstanding 1,776,066
=============
Net asset value and offering price per share
outstanding $ 14.30
=============
</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 YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,756,506
Interest 400,906
Income from securities loaned--net 86,704
------------
Total income 2,244,116
------------
EXPENSES:
Manager (See Note 3) 1,198,218
Distribution--Class B (See Note 3) 383,262
Distribution--Class C (See Note 3) 86,328
Transfer agent--Classes A, B and C
(See Note 3) 406,973
Transfer agent--Class I (See Note 3) 56,923
Distribution/Service--Class A (See Note 3) 136,901
Service--Class B (See Note 3) 127,754
Service--Class C (See Note 3) 28,776
Shareholder communication 101,028
Registration 59,434
Professional fees 54,383
Recordkeeping 40,764
Custodian 14,717
Trustees 8,511
Miscellaneous 14,521
------------
Total expenses before waiver 2,718,493
Expense waiver from Manager (See Note 3) (352,417)
------------
Net expenses 2,366,076
------------
Net investment loss (121,960)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 11,894,756
Net change in unrealized appreciation on
investments 5,788,422
------------
Net realized and unrealized gain on investments 17,683,178
------------
Net increase in net assets resulting from
operations $17,561,218
============
</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, 2006 AND OCTOBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss $ (121,960) $ (1,036,304)
Net realized gain on investments 11,894,756 10,789,577
Net change in unrealized
appreciation on investments 5,788,422 (6,250,635)
---------------------------
Net increase in net assets
resulting from operations 17,561,218 3,502,638
---------------------------
Distributions to shareholders:
From net realized gain on
investments:
Class A (3,270,204) (10,051,244)
Class B (4,639,877) (12,713,000)
Class C (858,745) (1,876,623)
Class I (1,420,830) --
---------------------------
Total distributions to
shareholders (10,189,656) (24,640,867)
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 16,076,412 38,889,055
Class B 3,728,360 10,484,181
Class C 2,212,479 6,421,148
Class I 4,435,276 23,599,634
Net asset value of shares issued to
shareholders in reinvestment of distributions:
Class A 2,704,372 7,791,228
Class B 4,372,876 11,787,756
Class C 627,211 1,441,315
Class I 1,420,830 --
---------------------------
35,577,816 100,414,317
Cost of shares redeemed:
Class A (29,946,202) (46,831,991)
Class B (17,642,017) (14,302,649)
Class C (4,560,732) (4,143,783)
Class I (2,248,105) (2,194,635)
---------------------------
(54,397,056) (67,473,058)
Net asset value of shares converted
(see Note 1):
Class A 12,833,164 --
Class B (12,833,164) --
Increase (decrease) in net
assets derived from capital
share transactions (18,819,240) 32,941,259
---------------------------
Net increase (decrease) in net
assets (11,447,678) 11,803,030
NET ASSETS:
Beginning of year 143,852,516 132,049,486
---------------------------
End of year $132,404,838 $143,852,516
===========================
</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
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 13.39 $ 15.59 $ 14.09 $ 11.10 $ 12.84 $ 11.30
------- ------- ------- ----------- ------- -------
Net investment income (loss) (a) 0.03 (0.05) (0.09) (0.08) (0.09) (0.05)
Net realized and unrealized gain (loss) on
investments 1.70 0.68 2.09 3.07 (1.47) 1.79
------- ------- ------- ----------- ------- -------
Total from investment operations 1.73 0.63 2.00 2.99 (1.56) 1.74
------- ------- ------- ----------- ------- -------
Less distributions:
From net realized gain on investments (0.93) (2.83) (0.50) -- (0.18) (0.20)
------- ------- ------- ----------- ------- -------
Net asset value at end of period $ 14.19 $ 13.39 $ 15.59 $ 14.09 $ 11.10 $ 12.84
======= ======= ======= =========== ======= =======
Total investment return (b) 13.40% 3.41% 14.46% 26.94%(c) (12.16%) 15.43%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.19% (0.32%) (0.62%) (0.78%)+ (0.74%) (0.41%)
Net expenses 1.40% 1.47% 1.70% 1.90%+ 1.87% 1.88%
Expenses (before waiver) 1.65% 1.72% 1.78% 1.94%+ 1.87% 1.88%
Portfolio turnover rate 44% 75% 103% 41% 46% 46%
Net assets at end of period (in 000's) $52,995 $47,849 $55,640 $44,496 $35,197 $43,761
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 12.48 $ 14.80 $ 13.49 $10.70 $12.48 $ 11.07
------- ------- ------- ----------- ------ -------
Net investment income (loss) (a) (0.07) (0.15) (0.20) (0.15) (0.18) (0.13)
Net realized and unrealized gain (loss) on
investments 1.58 0.66 2.01 2.94 (1.42) 1.74
------- ------- ------- ----------- ------ -------
Total from investment operations 1.51 0.51 1.81 2.79 (1.60) 1.61
------- ------- ------- ----------- ------ -------
Less distributions:
From net realized gain on investments (0.93) (2.83) (0.50) -- (0.18) (0.20)
------- ------- ------- ----------- ------ -------
Net asset value at end of period $ 13.06 $ 12.48 $ 14.80 $13.49 $10.70 $ 12.48
======= ======= ======= =========== ====== =======
Total investment return (b) 12.56% 2.65% 13.67% 26.07%(c) (12.83%) 14.57%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.56%) (1.07%) (1.37%) (1.53%)+ (1.49%) (1.16%)
Net expenses 2.15% 2.22% 2.45% 2.65% + 2.62% 2.63%
Expenses (before waiver) 2.40% 2.47% 2.53% 2.69% + 2.62% 2.63%
Portfolio turnover rate 44% 75% 103% 41% 46% 46%
Net assets at end of period (in 000's) $10,879 $12,070 $10,054 $9,501 $9,403 $12,250
</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.
</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*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 12.48 $ 14.80 $ 13.50 $ 10.70 $ 12.48 $ 11.07
------- ------- ------- ----------- ------- -------
(0.07) (0.14) (0.20) (0.15) (0.18) (0.13)
1.58 0.65 2.00 2.95 (1.42) 1.74
------- ------- ------- ----------- ------- -------
1.51 0.51 1.80 2.80 (1.60) 1.61
------- ------- ------- ----------- ------- -------
(0.93) (2.83) (0.50) -- (0.18) (0.20)
------- ------- ------- ----------- ------- -------
$ 13.06 $ 12.48 $ 14.80 $ 13.50 $ 10.70 $ 12.48
======= ======= ======= =========== ======= =======
12.48% 2.67% 13.59% 26.17%(c) (12.83%) 14.57%
(0.57%) (1.07%) (1.37%) (1.53%)+ (1.49%) (1.16%)
2.15% 2.22% 2.45% 2.65%+ 2.62% 2.63%
2.40% 2.47% 2.53% 2.69%+ 2.62% 2.63%
44% 75% 103% 41% 46% 46%
$43,137 $63,611 $66,355 $60,384 $53,819 $67,377
</Table>
<Table>
<Caption>
CLASS I
-----------------------------
FEBRUARY 16,
2005**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2006 2005
$ 13.44 $ 14.01
----------- ------------
0.08 0.02
1.71 (0.59)
----------- ------------
1.79 (0.57)
----------- ------------
(0.93) --
----------- ------------
$ 14.30 $ 13.44
=========== ============
13.74% (4.07%)(c)
0.56% 0.25% +
1.05% 0.96% +
1.30% 1.21% +
44% 75%
$25,394 $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 commenced on
September 1, 1998 and 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 a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are not subject to sales
charge. As approved by the Board of Trustees in 1997, Class B shares convert to
Class A shares eight years after the date they were purchased. The first
conversion occurred December 28, 2005. The four classes of shares bear the same
voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions. 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 each day the Fund is open for business
("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 prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund did not hold securities that were valued
in such manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
(C) 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 distributions in excess of the net investment and accumulated net
realized loss on
18 MainStay Small Cap Value Fund
investments arising from permanent differences; net assets at October 31, 2006
are not affected.
<Table>
<Caption>
ACCUMULATED
NET INVESTMENT NET REALIZED GAIN ADDITIONAL
LOSS ON INVESTMENTS PAID-IN-CAPITAL
$121,960 $6,391 $(128,351)
----------------------------------------------------
</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.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 21.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life, serves as subadvisor to the Fund and
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 the
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. NYLIM has voluntarily agreed to
waive its management fee by 0.25% to 0.60% on assets up to $1.0 billion, and
0.55% on assets in excess of $1.0 billion.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total ordinary
operating expenses (total annual 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, 1.55% 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 written expense
limitation 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, 2006, this limit
was 1.90% of the average daily net assets of the Class A shares. For the year
ended October 31, 2006, the Manager earned fees from the Fund in the amount of
$1,198,218, and waived its fees in the amount of $352,417.
As of October 31, 2006, there is no amount of waived fees that are subject to
possible recoupment by the Manager.
Pursuant to the terms of a Subadvisory Agreement between NYLIM and the
Subadvisor, 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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 and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $20,645 for the year ended
October 31, 2006. 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 $793, $63,861 and $5,229, respectively, for the year ended October 31,
2006.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2006,
amounted to $463,896.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
20 MainStay Small Cap Value Fund
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 355 0.0*%
- -------------------------------------------------------------------
Class C 222 0.0*
- -------------------------------------------------------------------
Class I 2,182 0.0*
- -------------------------------------------------------------------
</Table>
* Less than one tenth of one percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations, were $4,113.
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 $40,764 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
CAPITAL UNREALIZED ACCUMULATED
GAINS APPRECIATION GAIN
$11,800,043 $10,133,145 $21,933,188
- -------------------------------------------
</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, 2006
and October 31, 2005, shown in the Statements of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $ 4,082,368 $ --
Long-term Capital Gains 6,107,288 24,640,867
- -----------------------------------------------------------
$10,189,656 $24,640,867
- -----------------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $20,833,440. The Fund received $21,745,259 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $59,928 and $94,865, respectively.
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2006
CLASS A CLASS B CLASS C CLASS I
Shares sold 1,174 293 175 321
- -------------------------------------------------------------------------------
Shares issued in reinvestment of
distributions 205 357 51 107
- -------------------------------------------------------------------------------
1,379 650 226 428
Shares redeemed (2,192) (1,392) (360) (164)
- -------------------------------------------------------------------------------
Shares converted (See Note 1) 975 (1,053) -- --
- -------------------------------------------------------------------------------
Net increase (decrease) 162 (1,795) (134) 264
- -------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
PERIOD 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>
* Commenced operations on February 16, 2005.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
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, 2006, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and financial highlights for each of the years in the three-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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the three-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 23
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreement between the Manager and
the Subadvisor (each an "Agreement") at a meeting held on June 12 and 13, 2006.
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
the Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees reviewed various industry trends and regulatory
developments in their deliberations. In considering the approval of each
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund under each Agreement, the Trustees met a number of times as a full Board,
and in executive session with no Interested Trustee present, to discuss the
Board's consideration of the approval of the Agreement. The Trustees considered
the factors 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 the Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
the Subadvisor's investment program and investment results with respect to the
Fund and the Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets.
In addition, the Subadvisor provides reports to the Manager and reviews certain
aspects of Fund filings.
The Trustees also considered the Manager's and Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Subadvisor's brokerage practices, including, but
not limited to, reports related to best execution of portfolio trades. The
Trustees received information about the Manager's supervision of the Fund's
service providers, the Manager's attention to its compliance program and those
of the Trust, the Subadvisor and certain other service providers, and the
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders. The Trustees, including the
Non-Interested Trustees, unanimously concluded that, overall, the nature, extent
and quality of the services expected to be provided by the Manager and the
Subadvisor were such that, in the context of the Board's overall review of
various factors, each Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance over
several time periods relative to groupings of funds having similar mandates, and
the Manager's assurance that it was closely monitoring the Fund's performance.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information indicating that the profitability to the Manager and its affiliates
from the Agreements, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
24 MainStay Small Cap Value Fund
discussed additional measures that may increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund had not reached the asset level at which the
breakpoint would reduce the Fund's management fee rate. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds in comparison groups. It was noted that, to the extent the
Fund's gross expenses currently were higher than its net expenses, the reduction
of the Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. The Trustees considered that comparative data with respect to other
clients of the Manager or Subadvisor was not available as such clients did not
have similar investment mandates as the Fund. The Trustees considered the
current and proposed contractual and net management fees, its anticipated gross
and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust. The Trustees noted the Manager's agreement to waive a certain portion
of its management fee, and the Manager's willingness to further lower the limit
on the Fund's net expenses to a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the unanimous judgment
of the Trustees and the Non-Interested Trustees that approval of each Agreement
was in the best interests of the Fund and its shareholders.
www.mainstayfunds.com 25
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, 2006) 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 $6,107,288.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
26 MainStay Small Cap Value Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
28 MainStay Small Cap Value Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
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 ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2006 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A09806 (RECYCLE LOGO) MS377-06 MSSV11-12/06
25
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MAP FUND
Message from the President
and
Annual Report
October 31, 2006
MESSAGE FROM
THE PRESIDENT
Most stock and bond markets around the world provided positive total returns
during the 12 months ended October 31, 2006. International stocks were
exceedingly strong, with all industry sectors providing positive returns. Of
course, past performance is no guarantee of future results.
On average, U.S. stocks at all capitalization levels provided double-digit total
returns. According to Russell data, value stocks outperformed growth stocks for
companies of all sizes. Strong growth in corporate profits contributed to the
stock market's advance, and positive earnings surprises continued to outnumber
negative ones. The price of oil and other commodities rose during the reporting
period but softened somewhat toward the end. This helped alleviate inflation
concerns, as did a noticeable softening in the housing market.
In February 2006, Dr. Ben Bernanke replaced Dr. Alan Greenspan as Chairman of
the Federal Reserve Board. Although the Federal Open Market Committee continued
to raise the targeted federal funds rate during the reporting period, the
monetary-tightening policy that began on June 30, 2004, finally abated after the
federal funds target reached 5.25% on June 29, 2006.
The effects of Federal Reserve tightening were not felt uniformly across the
Treasury yield curve. Although short-term rates rose substantially during the
reporting period, longer-term rates moved relatively little. At various times
the yield curve inverted, and toward the end of the reporting period, the yield
curve remained relatively flat. The shape of the yield curve was influenced by
the reintroduction of the 30-year bond, projections of a cooler economy, Federal
Reserve efforts to keep inflation in check, and an increase in buying by hedge
funds, foreign banks, and other liquidity buyers. Most bond sectors provided
positive total returns. High-yield corporate bonds and emerging-market debt were
particularly strong.
We are pleased to inform our shareholders that on June 30, 2006, New York Life
Investment Management LLC closed a definitive merger agreement with
Institutional Capital Corporation (ICAP), a premier value-equity institutional
investment firm based in Chicago, Illinois. In July 2006, ICAP also began
serving as comanager of MainStay MAP Fund. In the fall of 2006, we added three
new Funds managed by ICAP--MainStay ICAP International Fund, MainStay ICAP
Select Equity Fund, and MainStay ICAP Equity Fund.
Each MainStay Fund is managed using a time-tested investment approach that
includes investment strategies and processes appropriate to the Fund's
investment objective. The Funds' portfolio managers seek to consistently apply
this investment approach even when markets shift or company fundamentals change.
In this way, the portfolio managers seek to avoid style drift and unnecessary
risk exposure as they pursue long-term performance for the assets under their
care.
The following report provides more detailed information about the market factors
and management decisions that influenced your MainStay investment during the 12
months ended October 31, 2006. We thank you for entrusting your assets to
MainStay, and we hope that you will be encouraged by the positive performance of
your Fund.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MAP FUND
The MainStay Funds
Annual Report
October 31, 2006
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 10
- --------------------------------------------------------------------------------
Portfolio of Investments 12
- --------------------------------------------------------------------------------
Financial Statements 18
- --------------------------------------------------------------------------------
Notes to Financial Statements 25
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 31
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 32
- --------------------------------------------------------------------------------
Federal Income Tax Information 34
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 34
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 34
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 34
- --------------------------------------------------------------------------------
Trustees and Officers 35
</Table>
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 10.38% 10.09% 8.87%
Excluding sales charges 16.80 11.34 9.70
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP RUSSELL 3000(R)
MAINSTAY MAP FUND INDEX S&P 500 INDEX INDEX
----------------- -------------- ------------- ---------------
6/8/99 9450 10000 10000 10000
9407 9791 10395 10311
11215 12115 11028 11304
10959 9932 8282 8459
9538 9135 7031 7245
12364 12412 8493 8961
14145 14285 9293 9813
16056 16869 10104 10854
10/31/06 18754 19806 11754 12630
</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 10.94% 10.25% 8.89%
Excluding sales charges 15.94 10.52 8.89
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP RUSSELL 3000(R)
MAINSTAY MAP FUND INDEX S&P 500 INDEX INDEX
----------------- -------------- ------------- ---------------
6/8/99 10000 10000 10000 10000
9929 9791 10395 10311
11757 12115 11028 11304
11395 9932 8282 8459
9840 9135 7031 7245
12667 12412 8493 8961
14386 14285 9293 9813
16205 16869 10104 10854
10/31/06 18788 19806 11754 12630
</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 14.94% 10.52% 8.89%
Excluding sales charges 15.94 10.52 8.89
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP RUSSELL 3000(R)
MAINSTAY MAP FUND INDEX S&P 500 INDEX INDEX
----------------- -------------- ------------- ---------------
6/8/99 10000 10000 10000 10000
9929 9791 10395 10311
11757 12115 11028 11304
11395 9932 8282 8459
9840 9135 7031 7245
12667 12412 8493 8961
14386 14285 9293 9813
16205 16869 10104 10854
10/31/06 18788 19806 11754 12630
</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 as 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. Class R3 shares are sold with no initial sales charge or CDSC,
have an annual 12b-1 fee of .50%, and are available in certain individual
retirement accounts or in certain retirement plans. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns may
have been lower. These fee waivers and/or expense limitations are contractual
and may be modified or terminated only with the approval of the Board of
Trustees. The Manager
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.
www.mainstayfunds.com 5
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
- ----------------------------------------------
With sales charges 17.21% 11.70% 13.28%
Excluding sales charges 17.21 11.70 13.84
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP RUSSELL 3000(R)
MAINSTAY MAP FUND INDEX S&P 500 INDEX INDEX
----------------- -------------- ------------- ---------------
10/31/96 9525 10000 10000 10000
12737 12877 13211 13160
14765 13452 16117 15331
17094 15755 20253 19129
20436 19493 21487 20971
20016 15980 16136 15693
17462 14698 13698 13441
22694 19972 16548 16625
26059 22985 18107 18205
29696 27143 19686 20136
10/31/06 34806 31868 22903 23432
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
17.08% 11.57% 9.91%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
RUSSELL MIDCAP RUSSELL 3000(R)
MAINSTAY MAP FUND INDEX S&P 500 INDEX INDEX
----------------- -------------- ------------- ---------------
6/8/99 10000 10000 10000 10000
9963 9791 10395 10311
11896 12115 11028 11304
11638 9932 8282 8459
10146 9135 7031 7245
13170 12412 8493 8961
15096 14285 9293 9813
17185 16869 10104 10854
10/31/06 20121 19806 11754 12630
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
16.80% 11.30% 9.63%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
RUSSELL MIDCAP RUSSELL 3000(R)
MAINSTAY MAP FUND INDEX S&P 500 INDEX INDEX
----------------- -------------- ------------- ---------------
6/8/99 10000 10000 10000 10000
9950 9791 10395 10311
11851 12115 11028 11304
11566 9932 8282 8459
10057 9135 7031 7245
13022 12412 8493 8961
14894 14285 9293 9813
16911 16869 10104 10854
10/31/06 19753 19806 11754 12630
</Table>
may recoup the amount of any management fee waivers or expense reimbursements
from the Fund pursuant to this agreement if such action does not cause the Fund
to exceed existing limitations and the recoupment is made within three years
after the year in which the Manager incurred the expense. On 6/9/99, MAP-Equity
Fund was reorganized as MainStay MAP Fund Class I shares. From inception
(1/21/71) through 6/8/99, performance for MainStay MAP Fund Class I shares
(first offered 6/9/99) includes the performance of MAP-Equity Fund.
Prior to the reorganization, shares of MAP-Equity Fund were subject to a maximum
4.75% sales charge. From inception (6/9/99) through 12/31/03, performance for
Class R1 and R2 shares (first offered 1/2/04) includes the historical
performance of Class A shares adjusted to reflect the applicable fees and
expenses for Class R1 and R2 shares.
Prior to 4/28/06, performance for Class R3 shares (first offered 4/28/06)
includes the historical performance of Class A shares adjusted to reflect the
applicable sales charge (or CDSC) and fees and expenses for Class R3 shares.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE AND FOLLOWING PAGE ARE AN
INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN
CONJUNCTION WITH THEM.
6 MainStay MAP Fund
CLASS R3 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
16.39% 10.95% 9.32%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
RUSSELL MIDCAP RUSSELL 3000(R)
MAINSTAY MAP FUND INDEX S&P 500 INDEX INDEX
----------------- -------------- ------------- ---------------
6/8/99 10000 10000 10000 10000
9940 9791 10395 10311
11810 12115 11028 11304
11499 9932 8282 8459
9974 9135 7031 7245
12883 12412 8493 8961
14688 14285 9293 9813
16614 16869 10104 10854
10/31/06 19336 19806 11754 12630
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
Russell 3000(R) Index(1) 16.37% 8.35% 3.20%
Russell Midcap(R) Index(2) 17.41 14.80 9.67
S&P 500(R) Index(3) 16.34 7.26 2.21
Average Lipper multi-cap core fund(4) 14.49 7.80 4.56
</Table>
1. Going forward, the Fund will measure its performance against the Russell
3000(R) Index. The Fund selected the Russell 3000(R) Index because it
believes that this index is more reflective of the Fund's investment style.
The Russell 3000(R) Index 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 in an
index.
2. 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 in 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 in 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 TWO PRECEDING PAGES ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 7
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, 2006, to October 31, 2006,
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,
2006, to October 31, 2006.
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, 2006. 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 with the ongoing costs of
investing in 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% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/06 10/31/06 PERIOD(1) 10/31/06 PERIOD(1)
CLASS A SHARES $1,000.00 $1,029.55 $ 6.91 $1,018.25 $ 6.87
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,025.90 $10.72 $1,014.50 $10.66
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,025.90 $10.72 $1,014.50 $10.66
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,030.55 $ 5.27 $1,019.85 $ 5.24
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,030.05 $ 5.78 $1,019.35 $ 5.75
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,029.10 $ 7.06 $1,018.10 $ 7.02
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,027.40 $ 8.79 $1,016.40 $ 8.74
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1.03% for Class I, 1.13%
for Class R1, 1.38% for Class R2, and 1.72% for R3) multiplied by the average
account value over the period, divided by 365 and multiplied by 184 (to
reflect the one-half year period).
8 MainStay MAP Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2006
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 95.3
Short-Term Investments (collateral from securities lending 11.6
is 7.8%)
Warrants 0.1
Convertible Preferred Stock 0.1
Convertible Bonds 0.1
Corporate Bond 0.0*
Liabilities in Excess of Cash and Other Assets (7.2)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2006 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. General Electric Co.
2. Citigroup, Inc.
3. St. Paul Travelers Cos., Inc. (The)
4. McDonald's Corp.
5. Novartis AG, ADR
6. JPMorgan Chase & Co.
7. ExxonMobil Corp.
8. American International Group, Inc.
9. Bank of America Corp.
10. Altria Group, Inc.
</Table>
www.mainstayfunds.com 9
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
Robert H. Lyon and Jerrold K. Senser, CFA, of Institutional Capital LLC
WERE THERE ANY SIGNIFICANT CHANGES IN THE MANAGEMENT OF MAINSTAY MAP FUND DURING
THE 12 MONTHS ENDED OCTOBER 31, 2006?
During the reporting period, Institutional Capital LLC (ICAP), a Chicago-based
large-cap value oriented investment management firm, replaced Jennison
Associates as one of the Fund's two subadvisors. ICAP served under an interim
subadvisory agreement until shareholders approved the new subadvisory agreement
at a meeting on October 5, 2006. During the reporting period, the Fund also
changed its primary benchmark from the Russell Midcap(R) Index(1) to the Russell
3000(R) Index(2) to better reflect the Fund's investment style.
HOW DID MAINSTAY MAP FUND PERFORM RELATIVE TO ITS BENCHMARK AND ITS PEERS DURING
THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay MAP Fund returned 16.80% for Class A
shares, 15.94% for Class B shares, and 15.94% for Class C shares for the 12
months ended October 31, 2006. Over the same period, the Fund's Class I shares
returned 17.21%, Class R1 shares returned 17.08%, Class R2 shares returned
16.80%, and Class R3 shares(3) returned 16.39%. Class A, Class I, Class R1,
Class R2, and Class R3 shares outperformed--and Class B and Class C shares
underperformed--the 16.37% return of Russell 3000(R) Index, the Fund's
broad-based securities-market index, for the 12-month reporting period. All
share classes outperformed the 14.49% return of the average Lipper(4) multi-cap
core fund for the 12 months ended October 31, 2006.
WHICH SECTORS OR INDUSTRIES WERE THE BIGGEST CONTRIBUTORS TO THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH ONES DETRACTED THE MOST?
Markston International:
In our portion of the Fund, the three strongest-performing sectors in absolute
terms were industrials, consumer discretionary, and consumer staples.
Investments in agriculture-related industrial stocks benefited from strong
demand and robust prices. Investments in the health care sector, along with
minor positions in cash and fixed-income, detracted from performance in our
portion of the Fund. We eliminated our holding in Bristol-Myers Squibb after
realizing that a turnaround would be more difficult than we originally expected.
ICAP:
In our portion of the Fund, health care, consumer discretionary, and utilities
were the strongest-performing sectors relative to the S&P 500(R) Index.(5)
Stock-specific catalysts drove the price of our stocks in these sectors higher,
leading to strong absolute performance as well. Energy, materials, and
telecommunication services were the weakest-performing sectors for our portion
of the Fund relative to the S&P 500(R) Index. The falling price of crude oil and
commodities during the period in which we subadvised a portion of the Fund
diminished our returns in the energy and materials sectors. Stock selection in
the telecommunication services sector negatively affected performance.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG CONTRIBUTORS TO THE FUND'S
PERFORMANCE AND WHICH STOCKS DETRACTED?
Markston International:
In our portion of the Fund, positive contributors to overall performance
included Monsanto, Archer-Daniels-Midland, and barge builder and operator
American Commercial Lines. All three companies are related in one way or another
to agriculture. Holdings that detracted from absolute performance included
Vitesse Semiconductor, Boston Scientific, and Yahoo! We reduced the Fund's
exposure to Vitesse Semiconductor during the third calendar quarter of 2006.
The principal risk of investing in value stocks is that they may never reach
what the portfolio manager believes is their full value or they may even go down
in value. 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 issuers of
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 7 for more information on the Russell Midcap(R) Index.
2. See footnote on page 7 for more information on the Russell 3000(R) Index.
3. Class R3 shares were first offered on April 28, 2006.
4. See footnote on page 7 for more information on Lipper Inc.
5. See footnote on page 7 for more information on the S&P 500(R) Index.
10 MainStay MAP Fund
ICAP:
In our portion of the Fund, stock-specific catalysts were key to our strongest
contributors, which included McDonald's, Baxter International, and St. Paul
Travelers. Weak contributors were Hess, Norfolk Southern, and United States
Steel. For the limited period during which we subadvised a portion of the Fund,
energy and commodity prices declined, which affected some of our holdings.
United States Steel was eliminated from our portion of the Fund during the
reporting period.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
Markston International:
During the reporting period, we initiated new positions in biotechnology company
Celgene, industrial conglomerate General Electric, and software company
Microsoft. Significant sales that either eliminated or reduced positions in our
portion of the Fund included drug company Bristol-Meyers Squibb, semiconductor
company Vitesse Semiconductor, and American Commercial Lines.
ICAP:
During the reporting period, we added retailer Target, based on expectations of
increased same-store sales, which we believe may lead to improved cash flow and
margins. Intercontinental Hotels Group was also added during the limited period
in which we served as subadvisor to the a portion of Fund. The company operates
a global hotel business that includes name brands such as Holiday Inn Express,
Intercontinental, and Crowne Plaza. Intercontinental Hotels Group is
experiencing strong growth in lodging revenues. We eliminated Abbott
Laboratories and Caterpillar as these stocks achieved the price targets we had
previously established for them.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE OVER THE REPORTING PERIOD?
Markston International:
During the reporting period, our portion of the Fund increased its exposure
relative to the Russell 3000(R) Index in the health care and financials sectors.
We slightly decreased our weightings relative to the Index in the energy and
industrials sectors. As of October 31, 2006, our portion of the Fund was
slightly overweighted relative to the Index in industrials and materials. The
overweighted position in the industrials sector helped performance. At the same
time, our portion of the Fund was underweighted in the consumer discretionary
and information technology sectors.
ICAP:
In our portion of the Fund, we reduced our weighting in telecommunication
services relative to the S&P 500(R) Index and increased our weighting in retail
stocks relative to the same Index. Both changes were the result of bottom-up
stock selection.
During our service as subadvisor, our portion of the portfolio was significantly
underweighted relative to the S&P 500(R) Index in the information technology
sector and overweighted in the energy sector. Our weightings in both of these
sectors detracted from the Fund's performance.
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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2006
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (95.3%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.7%)
Boeing Co. (The) 45,100 $ 3,601,686
GenCorp, Inc. (a)(b) 69,200 906,520
Hexcel Corp. (a)(b) 43,000 696,170
Honeywell International, Inc. 598,150 25,194,078
Lockheed Martin Corp. 25,300 2,199,329
Northrop Grumman Corp. 194,328 12,901,436
Orbital Sciences Corp. (a) 126,700 2,300,872
Raytheon Co. 173,600 8,671,320
--------------
56,471,411
--------------
AIRLINES (0.3%)
Southwest Airlines Co. 349,100 5,246,973
--------------
AUTO COMPONENTS (0.1%)
Goodyear Tire & Rubber Co. (The) (a)(b) 95,650 1,466,314
--------------
BEVERAGES (0.5%)
Coca-Cola Co. (The) 82,400 3,849,728
PepsiCo, Inc. 47,241 2,996,969
--------------
6,846,697
--------------
BIOTECHNOLOGY (3.0%)
Amgen, Inc. (a) 202,200 15,349,002
Celgene Corp. (a)(b) 125,292 6,695,604
Cubist Pharmaceuticals, Inc. (a)(b) 89,859 2,001,160
Genentech, Inc. (a) 251,900 20,983,270
--------------
45,029,036
--------------
CAPITAL MARKETS (4.0%)
Ameriprise Financial, Inc. 73,560 3,788,340
Jefferies Group, Inc. 132,600 3,809,598
Legg Mason, Inc. 12,500 1,125,250
Merrill Lynch & Co., Inc. 158,600 13,864,812
Morgan Stanley 381,460 29,154,988
Northern Trust Corp. 20,055 1,177,630
State Street Corp. 72,500 4,656,675
Waddell & Reed Financial, Inc.
Class A 78,000 1,989,000
--------------
59,566,293
--------------
CHEMICALS (3.8%)
Chemtura Corp. 16,900 145,002
E.I. du Pont de Nemours & Co. 378,200 17,321,560
Eastman Chemical Co. 19,150 1,166,618
Imperial Chemical Industries PLC,
Sponsored ADR (b)(c) 505,950 15,775,521
Monsanto Co. 497,414 21,995,647
Mosaic Co. (The) (a) 13,250 248,040
--------------
56,652,388
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
COMMERCIAL BANKS (0.8%)
Popular, Inc. 431,271 $ 7,844,819
Wachovia Corp. 73,300 4,068,150
--------------
11,912,969
--------------
COMMERCIAL SERVICES & SUPPLIES (0.7%)
Adesa, Inc. (b) 40,800 1,025,712
Coinstar, Inc. (a) 34,167 1,037,993
Covanta Holding Corp. (a) 261,473 5,315,746
Korn/Ferry International (a) 24,600 543,906
On Assignment, Inc. (a) 19,300 219,055
PHH Corp. (a) 36,220 999,672
Waste Management, Inc. 38,000 1,424,240
--------------
10,566,324
--------------
COMMUNICATIONS EQUIPMENT (2.1%)
ADC Telecommunications, Inc. (a) 61,725 883,285
Blue Coat Systems, Inc. (a) 30,163 672,635
CommScope, Inc. (a)(b) 5,659 180,579
Finisar Corp. (a)(b) 333,489 1,160,542
Harris Corp. 213,100 9,078,060
Motorola, Inc. 709,650 16,364,529
NETGEAR, Inc. (a) 10,868 291,262
NMS Communications Corp. (a) 167,936 309,002
Nortel Networks Corp. (a) 5,472 12,203
Polycom, Inc. (a) 68,298 1,871,365
Stratex Networks, Inc. (a) 113,608 530,549
--------------
31,354,011
--------------
COMPUTERS & PERIPHERALS (2.0%)
ActivIdentity Corp. (a) 49,567 275,593
Hewlett-Packard Co. 677,650 26,252,161
Innovex, Inc. (a) 31,000 65,100
McData Corp. Class A (a) 65,100 369,117
Sun Microsystems, Inc. (a) 561,797 3,050,558
--------------
30,012,529
--------------
CONSTRUCTION & ENGINEERING (0.4%)
Chicago Bridge & Iron Co. N.V. 42,000 1,031,520
Foster Wheeler, Ltd. (a) 32,836 1,475,978
Jacobs Engineering Group, Inc. (a) 47,200 3,565,488
--------------
6,072,986
--------------
CONSTRUCTION MATERIALS (0.3%)
Vulcan Materials Co. 51,889 4,227,916
--------------
CONSUMER FINANCE (1.4%)
American Express Co. 372,800 21,551,568
--------------
</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 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)
- ------------------------------------------------------------------------------
CONTAINERS & PACKAGING (1.0%)
Smurfit-Stone Container Corp. (a) 8,050 $ 85,813
Temple-Inland, Inc. 364,300 14,367,992
--------------
14,453,805
--------------
DIVERSIFIED CONSUMER SERVICES (0.0%)++
Vertrue, Inc. (a)(b) 3,800 170,886
--------------
DIVERSIFIED FINANCIAL SERVICES (8.3%)
V Bank of America Corp. 653,274 35,191,870
CIT Group, Inc. 90,100 4,689,705
V Citigroup, Inc. 946,650 47,483,964
V JPMorgan Chase & Co. 778,000 36,908,320
--------------
124,273,859
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
AT&T, Inc. 7,500 256,875
Cincinnati Bell, Inc. (a) 188,750 885,237
Embarq Corp. 5,245 253,596
Global Crossing, Ltd. (a)(b) 24,823 610,149
--------------
2,005,857
--------------
ELECTRIC UTILITIES (1.8%)
ALLETE, Inc. 9,100 410,410
American Electric Power Co., Inc. 60,000 2,485,800
Duquesne Light Holdings, Inc. 61,800 1,225,494
Entergy Corp. 241,600 20,736,528
Westar Energy, Inc. 112,300 2,843,436
--------------
27,701,668
--------------
ELECTRICAL EQUIPMENT (0.2%)
Rockwell Automation, Inc. 59,900 3,713,800
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.0%)
Agilent Technologies, Inc. (a) 222,850 7,933,460
Itron, Inc. (a)(b) 4,246 231,152
Sanmina-SCI Corp. (a) 384,039 1,516,954
Solectron Corp. (a) 385,500 1,287,570
Symbol Technologies, Inc. 286,556 4,278,281
--------------
15,247,417
--------------
ENERGY EQUIPMENT & SERVICES (1.5%)
Halliburton Co. (b) 501,600 16,226,760
Key Energy Services, Inc. (a) 64,300 900,200
Newpark Resources, Inc. (a) 125,350 737,058
Parker Drilling Co. (a) 71,600 586,404
Schlumberger, Ltd. 27,100 1,709,468
Tidewater, Inc. 37,000 1,840,010
--------------
21,999,900
--------------
FOOD & STAPLES RETAILING (2.5%)
CVS Corp. 115,176 3,614,223
Longs Drug Stores Corp. (b) 21,200 912,448
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (CONTINUED)
Pathmark Stores, Inc. (a) 92,017 $ 932,132
Rite Aid Corp. (a) 69,350 324,558
Wal-Mart Stores, Inc. 658,600 32,455,808
--------------
38,239,169
--------------
FOOD PRODUCTS (0.8%)
Archer-Daniels-Midland Co. 233,340 8,983,590
Bunge, Ltd. (b) 41,000 2,628,510
--------------
11,612,100
--------------
GAS UTILITIES (0.2%)
National Fuel Gas Co. 13,900 519,860
Nicor, Inc. (b) 21,050 967,458
Peoples Energy Corp. 31,600 1,380,604
--------------
2,867,922
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.9%)
ArthroCare Corp. (a)(b) 21,110 853,055
Baxter International, Inc. (b) 668,650 30,737,840
Boston Scientific Corp. (a) 472,850 7,523,043
Gen-Probe, Inc. (a) 25,068 1,200,005
Hospira, Inc. (a) 60,200 2,188,270
SurModics, Inc. (a)(b) 12,992 453,421
--------------
42,955,634
--------------
HEALTH CARE PROVIDERS & SERVICES (1.1%)
Aetna, Inc. 355,720 14,662,778
Humana, Inc. (a) 29,200 1,752,000
SunLink Health Systems, Inc. (a) 47,425 407,855
Universal Health Services, Inc. Class B 3,000 158,850
--------------
16,981,483
--------------
HEALTH CARE TECHNOLOGY (0.1%)
Emdeon Corp. (a)(b) 91,346 1,064,181
--------------
HOTELS, RESTAURANTS & LEISURE (4.3%)
Hilton Hotels Corp. 140,000 4,048,800
InterContinental Hotels Group
PLC, ADR (b)(c) 950,950 18,505,487
V McDonald's Corp. 975,000 40,872,000
Wyndham Worldwide Corp. (a) 52,540 1,549,930
--------------
64,976,217
--------------
HOUSEHOLD DURABLES (0.0%)++
Newell Rubbermaid, Inc. 9,500 273,410
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.4%)
AES Corp. (The) (a) 127,957 2,813,774
Black Hills Corp. 14,150 488,316
Dynegy, Inc. Class A (a) 265,700 1,615,456
Mirant Corp. (a) 29,700 878,229
--------------
5,795,775
--------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES (5.0%)
3M Co. 16,390 $ 1,292,188
V General Electric Co. 1,413,000 49,610,430
Textron, Inc. 50,450 4,587,419
Tyco International, Ltd. 650,758 19,151,808
--------------
74,641,845
--------------
INSURANCE (9.6%)
Allstate Corp. (The) 123,400 7,571,824
V American International Group, Inc. 532,300 35,754,591
Aon Corp. 597,750 20,795,723
Marsh & McLennan Cos., Inc. 14,700 432,768
MetLife, Inc. (b) 424,900 24,274,537
Ohio Casualty Corp. 126,873 3,480,126
Phoenix Cos., Inc. (The) 11,700 185,328
Principal Financial Group, Inc. 63,000 3,558,870
V St. Paul Travelers Cos., Inc. (The) 805,010 41,160,161
USI Holdings Corp. (a) 48,271 768,957
W.R. Berkley Corp. 175,850 6,481,831
--------------
144,464,716
--------------
INTERNET & CATALOG RETAIL (0.4%)
Liberty Media Corp.--Interactive Class A (a) 160,325 3,538,373
Priceline.com, Inc. (a)(b) 37,936 1,528,441
Stamps.com, Inc. (a) 34,174 548,493
--------------
5,615,307
--------------
INTERNET SOFTWARE & SERVICES (0.4%)
Internet Capital Group, Inc. (a) 18,400 192,832
S1 Corp. (a) 330,066 1,630,526
VeriSign, Inc. (a) 24,300 502,524
Yahoo!, Inc. (a) 131,554 3,465,132
--------------
5,791,014
--------------
IT SERVICES (0.6%)
BISYS Group, Inc. (The) (a) 19,400 214,176
CheckFree Corp. (a) 24,038 949,020
Computer Sciences Corp. (a) 37,400 1,976,590
eFunds Corp. (a) 190,994 4,736,651
Electronic Data Systems Corp. 38,000 962,540
First Data Corp. 15,526 376,506
Western Union Co. (The) (a) 15,526 342,348
--------------
9,557,831
--------------
LIFE SCIENCES TOOLS & SERVICES (0.2%)
Nektar Therapeutics (a)(b) 165,157 2,383,216
--------------
MACHINERY (0.1%)
Caterpillar, Inc. 28,000 1,699,880
Greenbrier Cos., Inc. (The) (b) 4,800 180,000
--------------
1,879,880
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
MARINE (0.5%)
American Commercial Lines, Inc. (a)(b) 124,996 $ 8,018,493
--------------
MEDIA (0.8%)
Cablevision Systems Corp. Class A 25,475 707,950
Comcast Corp. Class A (a) 64,800 2,635,416
DIRECTV Group, Inc. (The) (a) 39,600 882,288
Discovery Holding Co. Class A (a) 43,787 649,799
Dow Jones & Co., Inc. (b) 5,500 192,995
Gemstar-TV Guide International, Inc. (a) 143,586 499,679
Liberty Global, Inc. Class A (a) 9,060 237,734
Liberty Global, Inc. Class C (a) 23,670 601,928
Liberty Media Holding Corp.--Capital Class A (a) 32,065 2,855,709
PRIMEDIA, Inc. (a) 107,778 182,145
Time Warner, Inc. 133,300 2,667,333
--------------
12,112,976
--------------
METALS & MINING (0.2%)
United States Steel Corp. 37,300 2,521,480
--------------
MULTILINE RETAIL (0.9%)
Big Lots, Inc. (a) 22,000 463,760
Target Corp. 212,700 12,587,586
--------------
13,051,346
--------------
MULTI-UTILITIES (4.6%)
CMS Energy Corp. (a) 122,600 1,825,514
Dominion Resources, Inc. 376,750 30,512,983
DTE Energy Co. (b) 52,300 2,375,989
Duke Energy Corp. 1,047,600 33,146,064
Sempra Energy 29,000 1,538,160
--------------
69,398,710
--------------
OFFICE ELECTRONICS (0.0%)++
Xerox Corp. (a) 25,100 426,700
--------------
OIL, GAS & CONSUMABLE FUELS (8.9%)
Anadarko Petroleum Corp. 88,400 4,103,528
Apache Corp. 108,800 7,106,816
Chesapeake Energy Corp. 86,500 2,806,060
Chevron Corp. 60,374 4,057,133
ConocoPhillips 41,278 2,486,587
Devon Energy Corp. (b) 186,542 12,468,467
V ExxonMobil Corp. 514,200 36,724,164
Hess Corp. (b) 559,800 23,735,520
International Coal Group, Inc. (a)(b) 252,500 1,310,475
James River Coal Co. (a)(b) 8,783 102,410
Kinder Morgan, Inc. 54,450 5,722,695
Marathon Oil Corp. 48,300 4,173,120
Murphy Oil Corp. 4,500 212,220
Noble Energy, Inc. 31,318 1,522,994
</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)
- ------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS (CONTINUED)
Pogo Producing Co. (b) 173,700 $ 7,773,075
Total S.A., Sponsored ADR (b)(c) 244,900 16,687,486
Williams Cos., Inc. (The) 113,100 2,763,033
--------------
133,755,783
--------------
PAPER & FOREST PRODUCTS (0.3%)
MeadWestvaco Corp. 75,005 2,064,138
Weyerhaeuser Co. 38,600 2,454,574
--------------
4,518,712
--------------
PHARMACEUTICALS (4.8%)
Andrx Corp. (a)(b) 30,400 747,536
Bristol-Myers Squibb Co. 518,150 12,824,213
V Novartis AG, ADR (c) 668,600 40,604,078
Sanofi-Aventis, ADR (c) 291,150 12,429,194
Schering-Plough Corp. 80,900 1,791,126
Teva Pharmaceutical Industries, Ltd.
Sponsored ADR (c) 117,998 3,890,394
--------------
72,286,541
--------------
REAL ESTATE INVESTMENT TRUSTS (0.6%)
Crescent Real Estate Equities Co. 19,100 416,380
Friedman, Billings, Ramsey Group, Inc. Class A (b) 23,100 176,253
Health Care Property Investors, Inc. (b) 135,846 4,265,564
Thornburg Mortgage, Inc. (b) 14,700 377,496
United Dominion Realty Trust, Inc. 98,470 3,187,474
--------------
8,423,167
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.3%)
Realogy Corp. (a) 252 6,497
St. Joe Co. (The) (b) 87,900 4,727,262
--------------
4,733,759
--------------
ROAD & RAIL (3.4%)
Avis Budget Group, Inc. 63,870 1,263,987
Celadon Group, Inc. (a) 151,658 2,845,104
CSX Corp. 623,900 22,254,513
Norfolk Southern Corp. 46,550 2,447,134
Swift Transportation Co., Inc. (a) 47,063 1,183,634
Union Pacific Corp. 230,000 20,844,900
Werner Enterprises, Inc. 15,265 280,113
--------------
51,119,385
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.5%)
Applied Micro Circuits Corp. (a) 317,050 967,003
Intel Corp. 19,100 407,594
NVIDIA Corp. (a) 128,730 4,488,815
ON Semiconductor Corp. (a)(b) 49,489 307,822
Skyworks Solutions, Inc. (a) 83,278 552,133
Three-Five Systems, Inc. (a) 26,700 4,005
</Table>
<Table>
<Caption>
SHARES VALUE
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
Vitesse Semiconductor Corp. (a)(b) 75,852 $ 88,747
Zoran Corp. (a) 15,200 211,584
--------------
7,027,703
--------------
SOFTWARE (1.3%)
Blackboard, Inc. (a)(b) 30,939 857,320
Compuware Corp. (a) 374,872 3,013,971
i2 Technologies, Inc. (a)(b) 63,781 1,289,014
Microsoft Corp. 459,933 13,204,676
MSC.Software Corp. (a) 41,800 562,210
TIBCO Software, Inc. (a) 36,000 333,000
Wind River Systems, Inc. (a)(b) 73,899 811,411
--------------
20,071,602
--------------
SPECIALTY RETAIL (0.0%)++
Circuit City Stores, Inc. 15,900 428,982
--------------
THRIFTS & MORTGAGE FINANCE (0.1%)
New York Community Bancorp, Inc. (b) 16,900 276,315
Washington Mutual, Inc. 48,225 2,039,918
--------------
2,316,233
--------------
TOBACCO (2.3%)
V Altria Group, Inc. 431,050 35,057,297
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.2%)
Sprint Nextel Corp. 188,808 3,528,822
--------------
Total Common Stocks
(Cost $1,167,582,299) 1,434,441,998
--------------
CONVERTIBLE PREFERRED STOCK (0.1%)
- ------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE (0.1%)
Six Flags, Inc.
7.25% (a) 63,800 1,419,550
--------------
Total Convertible Preferred Stock
(Cost $1,450,092) 1,419,550
--------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (0.1%)
- ------------------------------------------------------------------------------
MARINE (0.1%)
American Commercial Lines, Inc.
Strike Price $12.00
Expire 1/12/09 (a)(d) 6,765 1,652,013
--------------
Total Warrants
(Cost $3,173,826) 1,652,013
--------------
</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, 2006 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (0.1%)
CONVERTIBLE BONDS (0.1%)
- ------------------------------------------------------------------------------
COMMERCIAL SERVICES (0.1%)
Rewards Network, Inc.
3.25%, due 10/15/23 $ 800,000 $ 654,000
--------------
INTERNET (0.0%)++
i2 Technologies, Inc.
5.25%, due 12/15/06 98,000 97,878
--------------
PHARMACEUTICALS (0.0%)++
NPS Pharmaceuticals, Inc.
3.00%, due 6/15/08 583,000 500,651
--------------
Total Convertible Bonds
(Cost $1,310,852) 1,252,529
--------------
CORPORATE BOND (0.0%)++
- ------------------------------------------------------------------------------
MARINE (0.0%)++
American Commercial Lines LLC
11.25%, due 1/1/08 (a)(d)(e)(f) 5,511,870 37,419
--------------
Total Corporate Bond
(Cost $0) 37,419
--------------
Total Long-Term Bonds
(Cost $1,310,852) 1,289,948
--------------
SHORT-TERM INVESTMENTS (11.6%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (5.3%)
Fairway Finance Corp.
5.289%, due 11/20/06 (g) 2,059,950 2,059,950
Greyhawk Funding
5.286%, due 11/13/06 (g) 2,746,600 2,746,600
Investors Bank & Trust Depository Receipt
3.60%, due 11/1/06 57,469,368 57,469,368
Jupiter Securitization Corp.
5.303%, due 11/14/06 (g) 3,378,070 3,378,070
Lexington Parker Capital Co.
5.282%, due 11/8/06 (g) 2,746,600 2,746,600
Liberty Street Funding Co.
5.286%, due 11/27/06 (g) 3,400,142 3,400,142
Old Line Funding LLC
5.287%, due 11/15/06 (g) 2,746,600 2,746,600
Sheffiled Receivables Corp.
5.272%, due 11/8/06 (g) 2,746,600 2,746,600
Yorktown Capital LLC
5.282%, due 11/16/06 (g) 2,403,276 2,403,276
--------------
Total Commercial Paper
(Cost $79,697,206) 79,697,206
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
INVESTMENT COMPANY (0.4%)
BGI Institutional Money Market Fund (g) 5,929,305 $ 5,929,305
--------------
Total Investment Company
(Cost $5,929,305) 5,929,305
--------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT (0.2%)
Morgan Stanley & Co.
5.42%, dated 10/31/06
due 11/1/06
Proceeds at Maturity $3,235,267
(Collateralized by various Corporate Bonds,
with rates between 0%-8.40% and
maturity dates between 1/30/07-6/15/34,
with a Principal Amount of
$3,271,875 and a Market Value
of $3,363,379) (g) $3,234,780 3,234,780
--------------
Total Repurchase Agreement
(Cost $3,234,780) 3,234,780
--------------
TIME DEPOSITS (5.7%)
Banco Bilbao Vizcaya Argentaria S.A.
5.30%, due 1/9/07 (g) 5,493,201 5,493,201
Bank of America
5.27%, due 11/21/06 (g)(h) 7,553,150 7,553,150
Bank of Montreal
5.28%, due 11/27/06 (g) 5,493,201 5,493,201
Bank of Nova Scotia
5.30%, due 11/10/06 (g) 5,493,201 5,493,201
Barclays
5.32%, due 1/18/07 (g) 5,493,201 5,493,201
Deutsche Bank AG
5.27%, due 11/9/06 (g) 5,493,201 5,493,201
Fortis Bank
5.27%, due 11/6/06 (g) 11,947,711 11,947,711
Halifax Bank of Scotland
5.30%, due 1/10/07 (g) 5,493,200 5,493,200
Lloyds TSB Bank PLC
5.30%, due 12/21/06 (g) 5,493,200 5,493,200
Royal Bank of Canada
5.30%, due 12/22/06 (g) 5,493,200 5,493,200
Royal Bank of Scotland
5.29%, due 12/12/06 (g) 5,493,200 5,493,200
Skandinaviska Enskilda Banken AB
5.31%, due 11/3/06 (g) 5,493,200 5,493,200
</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.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
Societe Generale North America, Inc.
5.28%, due 12/6/06 (g) $5,493,200 $ 5,493,200
UBS AG
5.28%, due 12/5/06 (g) 5,493,200 5,493,200
--------------
Total Time Deposits
(Cost $85,419,266) 85,419,266
--------------
Total Short-Term Investments
(Cost $174,280,557) 174,280,557
--------------
Total Investments
(Cost $1,347,797,626) (i) 107.2% 1,613,084,066(j)
Liabilities in Excess of
Cash and Other Assets (7.2) (108,737,782)
--------- --------------
Net Assets 100.0% $1,504,346,284
========= ==============
</Table>
<Table>
++ Less than one tenth of a percent.
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan.
(c) ADR--American Depositary Receipt.
(d) Fair valued security. The total market value of these securities at October
31, 2006 is $1,689,432, which reflects 0.1% of the Fund's net assets.
(e) Escrow reserve-reserve account for disputed claims.
(f) Issue in default.
(g) Represents a 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, 2006.
(i) The cost for federal income tax purposes is $1,354,646,935.
(j) At October 31, 2006 net unrealized appreciation was $258,437,131, 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 $288,995,723 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $30,558,592.
</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, 2006
<Table>
ASSETS:
Investment in securities, at value (identified cost
$1,347,797,626) including $112,679,493 market
value of securities loaned $1,613,084,066
Cash 12,275,172
Receivables:
Investment securities sold 6,693,074
Fund shares sold 3,675,913
Dividends and interest 820,076
Other assets 46,337
--------------
Total assets 1,636,594,638
--------------
LIABILITIES:
Securities lending collateral 116,811,189
Payables:
Investment securities purchased 11,958,886
Fund shares redeemed 1,028,771
Manager (See Note 3) 968,427
NYLIFE Distributors (See Note 3) 630,656
Transfer agent (See Note 3) 499,385
Shareholder communication 192,421
Professional fees 91,072
Trustees 18,392
Custodian 15,097
Accrued expenses 34,058
--------------
Total liabilities 132,248,354
--------------
Net assets $1,504,346,284
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized:
Class A $ 136,074
Class B 97,174
Class C 67,275
Class I 91,549
Class R1 4,018
Class R2 1,506
Class R3 3
Additional paid-in capital 1,122,075,600
Accumulated undistributed net investment
income 784,905
Accumulated net realized gain on investments
and foreign currency transactions 115,801,740
Net unrealized appreciation on investments 265,286,440
--------------
Net assets $1,504,346,284
==============
CLASS A
Net assets applicable to outstanding shares $ 524,522,558
==============
Shares of beneficial interest outstanding 13,607,365
==============
Net asset value per share outstanding $ 38.55
Maximum sales charge (5.50% of offering
price) 2.24
--------------
Maximum offering price per share outstanding $ 40.79
==============
CLASS B
Net assets applicable to outstanding shares $ 354,543,471
==============
Shares of beneficial interest outstanding 9,717,361
==============
Net asset value and offering price per share
outstanding $ 36.49
==============
CLASS C
Net assets applicable to outstanding shares $ 245,457,905
==============
Shares of beneficial interest outstanding 6,727,537
==============
Net asset value and offering price per share
outstanding $ 36.49
==============
CLASS I
Net assets applicable to outstanding shares $ 358,423,117
==============
Shares of beneficial interest outstanding 9,154,920
==============
Net asset value and offering price per share
outstanding $ 39.15
==============
CLASS R1
Net assets applicable to outstanding shares $ 15,582,853
==============
Shares of beneficial interest outstanding 401,814
==============
Net asset value and offering price per share
outstanding $ 38.78
==============
CLASS R2
Net assets applicable to outstanding shares $ 5,806,109
==============
Shares of beneficial interest outstanding 150,645
==============
Net asset value and offering price per share
outstanding $ 38.54
==============
CLASS R3
Net assets applicable to outstanding shares $ 10,271
==============
Shares of beneficial interest outstanding 267
==============
Net asset value and offering price per share
outstanding $ 38.49*
==============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 19,699,112
Interest 2,734,677
Income from securities loaned--net 439,772
-------------
Total income 22,873,561
-------------
EXPENSES:
Manager (See Note 3) 10,273,366
Distribution--Class B (See Note 3) 2,657,892
Distribution--Class C (See Note 3) 1,609,844
Distribution--Class R3 (See Note 3) 13
Transfer agent--Classes A, B and C
(See Note 3) 2,388,025
Transfer agent--Classes I, R1, R2 and R3
(See Note 3) 586,546
Distribution/Service--Class A (See Note 3) 1,168,478
Service--Class B (See Note 3) 885,964
Service--Class C (See Note 3) 536,615
Distribution/Service--Class R2 (See Note 3) 7,555
Distribution/Service--Class R3 (See Note 3) 13
Shareholder communication 877,855
Professional fees 231,273
Recordkeeping 166,287
Registration 149,045
Trustees 83,663
Custodian 65,270
Shareholder service--Class R1 (See Note 3) 14,442
Shareholder service--Class R2 (See Note 3) 3,022
Shareholder service--Class R3 (See Note 3) 5
Miscellaneous 65,802
-------------
Total expenses 21,770,975
Net recouped fees (See Note 3) 222,593
-------------
Net expenses 21,993,568
-------------
Net investment income 879,993
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $119,393,882
Foreign currency transactions (7,733)
-------------
Net realized gain on investments and foreign
currency transactions 119,386,149
-------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 91,402,720
Translation of other assets and liabilities
in foreign currencies 290
-------------
Net change in unrealized appreciation on
investments and foreign currency
transactions 91,403,010
-------------
Net realized and unrealized gain on
investments and foreign currency
transactions 210,789,159
-------------
Net increase in net assets resulting from
operations $211,669,152
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$29,648.
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, 2006 AND DECEMBER 31, 2005
<Table>
<Caption>
2006 2005
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 879,993 $ 693,270
Net realized gain on investments
and foreign currency
transactions 119,386,149 79,085,373
Net change in unrealized
appreciation (depreciation) on
investments and foreign
currency transactions 91,403,010 57,297,055
-------------------------------
Net increase in net assets
resulting from operations 211,669,152 137,075,698
-------------------------------
Dividends and distributions to shareholders:
From net investment income:
Class I (654,970) --
Class R1 (14,914) --
From net realized gain on investments:
Class A (22,183,084) (11,258,532)
Class B (24,673,394) (13,518,830)
Class C (11,859,654) (6,021,722)
Class I (19,312,266) (11,235,228)
Class R1 (804,376) (2,567)
Class R2 (128,903) (156)
-------------------------------
Total dividends and
distributions to shareholders (79,631,561) (42,037,035)
-------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 151,664,198 123,387,655
Class B 46,980,327 82,339,822
Class C 71,645,762 53,745,766
Class I 73,749,456 76,879,879
Class R1 2,661,114 15,708,676
Class R2 4,308,739 4,110,453
Class R3 10,000 --
</Table>
<Table>
<Caption>
2006 2005
Net asset value of shares issued to shareholders
in reinvestment of
dividends and distributions:
Class A $ 18,769,060 $ 9,720,883
Class B 22,482,584 12,315,724
Class C 9,268,154 4,699,860
Class I 19,681,601 11,074,218
Class R1 819,290 2,567
Class R2 128,903 156
-------------------------------
422,169,188 393,985,659
Cost of shares redeemed:
Class A (118,817,447) (70,533,864)
Class B (64,515,985) (48,504,915)
Class C (36,010,552) (27,109,580)
Class I (89,673,740) (70,141,243)
Class R1 (2,722,592) (3,013,804)
Class R2 (1,104,582) (2,071,751)
-------------------------------
(312,844,898) (221,375,157)
Net asset value of shares converted (See Note
1):
Class A 67,090,646 --
Class B (67,090,646) --
Increase in net assets derived
from capital share
transactions 109,324,290 172,610,502
-------------------------------
Net increase in net assets 241,361,881 267,649,165
NET ASSETS:
Beginning of year 1,262,984,403 995,335,238
-------------------------------
End of year $1,504,346,284 $1,262,984,403
===============================
Accumulated undistributed net
investment income at end of year $ 784,905 $ 671,475
===============================
</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.
This page intentionally left blank
www.mainstayfunds.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 35.03 $ 32.08 $ 28.04 $ 21.95 $ 27.66 $ 27.25
-------- -------- -------- ----------- -------- --------
Net investment income (loss) 0.11(a) 0.10(a)(b) (0.01)(a) (0.04) 0.15 0.03
Net realized and unrealized
gain (loss) on investments 5.54 4.16 4.05 6.13 (5.69) 0.55
-------- -------- -------- ----------- -------- --------
Total from investment
operations 5.65 4.26 4.04 6.09 (5.54) 0.58
-------- -------- -------- ----------- -------- --------
Less dividends and
distributions:
From net investment income -- -- -- -- (0.11) (0.03)
From net realized gain on
investments (2.13) (1.31) -- -- (0.06) (0.14)
-------- -------- -------- ----------- -------- --------
Total dividends and
distributions (2.13) (1.31) -- -- (0.17) (0.17)
-------- -------- -------- ----------- -------- --------
Net asset value at end of
period $ 38.55 $ 35.03 $ 32.08 $ 28.04 $ 21.95 $ 27.66
======== ======== ======== =========== ======== ========
Total investment return (c) 16.80% 13.51% 14.41% 27.74% (d) (20.04%) 2.11%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.28% 0.29%(b) (0.05%) (0.17%)+ 0.63% 0.37%
Net expenses 1.35% 1.35% 1.35% 1.35% + 1.33% 1.25%
Expenses (before
recoupment/waiver) 1.33% 1.37% 1.38% 1.45% + 1.44% 1.43%
Portfolio turnover rate 100% 56% 64% 61% 77% 19%
Net assets at end of period
(in 000's) $524,523 $358,214 $268,513 $176,932 $123,461 $103,402
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
Net asset value at beginning of period $ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13 $ 26.92
-------- -------- -------- ----------- ------- -------
Net investment income (loss) (0.16)(a) (0.15)(a)(b) (0.24)(a) (0.16) (0.03) (0.06)
Net realized and unrealized gain (loss) on
investments 5.28 4.00 3.94 5.95 (5.57) 0.41
-------- -------- -------- ----------- ------- -------
Total from investment operations 5.12 3.85 3.70 5.79 (5.60) 0.35
-------- -------- -------- ----------- ------- -------
Less dividends and distributions:
From net investment income -- -- -- -- -- --
From net realized gain on investments (2.13) (1.31) -- -- (0.06) (0.14)
-------- -------- -------- ----------- ------- -------
Total dividends and distributions (2.13) (1.31) -- -- (0.06) (0.14)
-------- -------- -------- ----------- ------- -------
Net asset value at end of period $ 36.49 $ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13
======== ======== ======== =========== ======= =======
Total investment return (c) 15.94% 12.64% 13.57% 26.97% (d) (20.63%) 1.29%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.46%) (0.46%)(b) (0.80%) (0.92%)+ (0.12%) (0.38%)
Net expenses 2.10% 2.10% 2.10% 2.10% + 2.08% 2.00%
Expenses (before recoupment/waiver) 2.08% 2.12% 2.13% 2.20% + 2.19% 2.18%
Portfolio turnover rate 100% 56% 64% 61% 77% 19%
Net assets at end of period (in 000's) $245,458 $181,398 $138,044 $95,004 $69,077 $51,234
</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) 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.
(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.
(e) Less than one cent per share.
</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.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- --------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13 $ 26.92
-------- -------- -------- ----------- -------- --------
(0.15)(a) (0.15)(a)(b) (0.24)(a) (0.16) (0.03) (0.06)
5.27 4.00 3.94 5.95 (5.57) 0.41
-------- -------- -------- ----------- -------- --------
5.12 3.85 3.70 5.79 (5.60) 0.35
-------- -------- -------- ----------- -------- --------
-- -- -- -- -- --
(2.13) (1.31) -- -- (0.06) (0.14)
-------- -------- -------- ----------- -------- --------
(2.13) (1.31) -- -- (0.06) (0.14)
-------- -------- -------- ----------- -------- --------
$ 36.49 $ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13
======== ======== ======== =========== ======== ========
15.94% 12.64% 13.57% 26.97% (d) (20.63%) 1.29%
(0.45%) (0.46%)(b) (0.80%) (0.92%)+ (0.12%) (0.38%)
2.10% 2.10% 2.10% 2.10% + 2.08% 2.00%
2.08% 2.12% 2.13% 2.20% + 2.19% 2.18%
100% 56% 64% 61% 77% 19%
$354,543 $387,772 $313,765 $220,932 $153,581 $134,883
</Table>
<Table>
<Caption>
CLASS I
- -------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2006 2005 2004 2003 2002 2001
$ 35.50 $ 32.37 $ 28.19 $ 22.03 $ 27.75 $ 27.31
-------- -------- -------- ----------- -------- -------
0.23(a) 0.24(a)(b) 0.09(a) 0.00(a)(e) 0.19 0.07
5.62 4.20 4.09 6.16 (5.69) 0.58
-------- -------- -------- ----------- -------- -------
5.85 4.44 4.18 6.16 (5.50) 0.65
-------- -------- -------- ----------- -------- -------
(0.07) -- -- -- (0.16) (0.07)
(2.13) (1.31) -- -- (0.06) (0.14)
-------- -------- -------- ----------- -------- -------
(2.20) (1.31) -- -- (0.22) (0.21)
-------- -------- -------- ----------- -------- -------
$ 39.15 $ 35.50 $ 32.37 $ 28.19 $ 22.03 $ 27.75
======== ======== ======== =========== ======== =======
17.21% 13.96% 14.83% 27.96%(d) (19.81%) 2.36%
0.61% 0.69%(b) 0.31% 0.08%+ 0.88% 0.62%
1.03% 0.95% 0.99% 1.10%+ 1.08% 1.00%
1.01% 0.97% 1.02% 1.20%+ 1.19% 1.18%
100% 56% 64% 61% 77% 19%
$358,423 $320,099 $274,975 $183,283 $115,186 $96,726
</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 R1 CLASS R2
------------------------------------- -----------------------------------
JANUARY 2, JANUARY 2,
2004** 2004**
YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2006 2005 2004 2006 2005 2004
Net asset value at beginning of period $ 35.19 $ 32.13 $30.38 $35.03 $32.07 $30.38
------- ------- ----------- ------ ------ -----------
Net investment income (loss) 0.19(a) 0.16(a)(b) 0.05(a) 0.07(a) 0.07(a)(b) (0.01)(a)
Net realized and unrealized gain on
investments 5.57 4.21 1.70 5.57 4.20 1.70
------- ------- ----------- ------ ------ -----------
Total from investment operations 5.76 4.37 1.75 5.64 4.27 1.69
------- ------- ----------- ------ ------ -----------
Less dividends and distributions:
From net investment income (0.04) -- -- -- -- --
From net realized gain on investments (2.13) (1.31) -- (2.13) (1.31) --
------- ------- ----------- ------ ------ -----------
Total dividends and distributions (2.17) (1.31) -- (2.13) (1.31) --
------- ------- ----------- ------ ------ -----------
Net asset value at end of period $ 38.78 $ 35.19 $32.13 $38.54 $35.03 $32.07
======= ======= =========== ====== ====== ===========
Total investment return (c) 17.08% 13.84% 5.76%(d) 16.80% 13.54% 5.56% (d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.51% 0.59%(b) 0.21%+ 0.17% 0.34%(b) (0.04%)+
Net expenses 1.13% 1.05% 1.09%+ 1.38% 1.30% 1.34% +
Expenses (before recoupment/waiver) 1.11% 1.07% 1.12%+ 1.36% 1.32% 1.37% +
Portfolio turnover rate 100% 56% 64% 100% 56% 64%
Net assets at end of period (in 000's) $15,583 $13,379 $ 34 $5,806 $2,122 $ 4
</Table>
<Table>
<Caption>
CLASS R3
-----------
APRIL 28,
2006**
THROUGH
OCTOBER 31,
2006
Net asset value at beginning of period $37.46
-----------
Net investment loss (0.02)(a)
Net realized and unrealized gain on
investments 1.05
-----------
Total from investment operations 1.03
-----------
Net asset value at end of period $38.49
===========
Total investment return (c) 2.75% (d)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.10%)+
Net expenses 1.72% +
Expenses (before recoupment) 1.73% +
Portfolio turnover rate 100%
Net assets at end of period (in 000's) $ 10
</Table>
<Table>
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) 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.
(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>
24 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 seven classes of shares. Class A shares, Class B
shares, Class C shares and Class I shares commenced on June 9, 1999. Class R1
shares and Class R2 shares commenced on January 2, 2004. Class R3 shares
commenced on April 28, 2006. 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 a 1% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. Class I, Class R1, Class R2 and Class R3 shares are not subject to a
sales charge. As approved by the Board of Trustees in 1997, Class B shares
convert to Class A shares eight years after the date they were purchased. The
first conversion occurred December 28, 2005. The seven 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 and Class C
shares are subject to higher distribution fee rates than Class A, Class R2 and
Class R3 shares under a distribution plan pursuant to Rule 12b-1 under the 1940
Act. Class I and Class R1 shares are not subject to a distribution or service
fee. Class R1, Class R2 and Class R3 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,
Class R2 or Class R3 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 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. 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 each day the Fund is open for business
("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, as defined in Note 3, 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 trading of the New York Stock Exchange
(generally 4:00 p.m. Eastern time).
Temporary cash investments acquired over 60 days prior 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 the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; and a security where the trading on that security's principal
market is temporarily closed at a time when, under normal conditions, it would
be open. At October 31, 2006, the Fund held securities with a value of
$1,689,432 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
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, as defined in Note 3, conclude that
such events may have affected the accuracy of the last price reported on the
local foreign market, the Manager or Subadvisor may, pursuant to procedures
adopted by the Fund, adjust the value of the local price to reflect the impact
on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain amounts. In such cases, the securities are fair
valued by applying factors provided by a third party vendor in accordance with
the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. By so doing, the Fund will be relieved from all or
substantially all of federal and state income and excise taxes.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay 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
accumulated undistributed net investment income and accumulated net realized
gain on investments arising from permanent differences; net assets at October
31, 2006 are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED ACCUMULATED NET
NET INVESTMENT REALIZED GAIN ON
INCOME INVESTMENTS
$(96,679) $ 96,679
--------------------------------
</Table>
The reclassification for the Fund is primarily due to foreign currency gain
(loss) and real estate investment trusts investments.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities,
other than short-term securities, purchased for the Fund are accreted and
amortized, respectively, on the effective interest rate 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.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than 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.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian and other banks acting in a sub-custodian capacity take
possession of the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market basis to determine
that the value, including accrued interest, exceeds the repurchase price. In the
event of the seller's default of the obligation to repurchase, the Fund has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of
26 MainStay MAP Fund
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
(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) SECURITIES LENDING. In order to realize additional income 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. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. 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 5 on page 29.)
(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 which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by 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 Institutional Capital LLC (the "Subadvisors") each act as
subadvisors to the Fund and manage a portion of the Fund's assets, as designated
by NYLIM from time to time, subject to the oversight of NYLIM. During the
period, Institutional Capital LLC replaced Jennison Associates LLC pursuant to
the terms of an interim subadvisory agreement. Institutional Capital LLC was
approved by the shareholders of the Fund as a subadvisor to the Fund on October
5, 2006. Please see Special Meeting of Shareholders. 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 the
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 to 0.70% on assets in excess of $1.0 billion.
In addition, the Manager has entered into a written expense limitation
agreement, under which the Manager has agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the Fund so that the total operating
expenses (total annual 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, 1.35% 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 written expense limitation
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
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Board of Trustees. For the year ended October 31, 2006, the Manager earned
fees from the Fund in the amount of $10,273,366 and recouped $222,593 which
represents the total amount eligible for recoupment at October 31, 2006.
Pursuant to the terms of a Subadvisory 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.
Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston,
Massachusetts 02116 ("IBT") provides sub-administration and sub-accounting
services to the Fund pursuant to an agreement with NYLIM. These services include
calculating daily net asset values of the Fund, maintaining general ledger and
sub-ledger accounts for the calculation of the Fund's respective net asset
values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, IBT is
compensated by NYLIM.
(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, Class R2 and Class R3 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
and Class C shares of the Fund. Pursuant to the Class R3 Plan, the Distributor
receives a monthly fee from the Fund at the annual rate of 0.50% of the average
daily net assets of the Fund's Class R3 shares, which is an expense of the Class
R3 shares of the Fund for distribution or service activities as designated by
the Distributor. Class I 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, Class
R2 and Class R3 shares. Under the terms of this plan, Class R1, Class R2 and
Class R3 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, Class R2 and Class R3 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 $297,146 for the year
ended October 31, 2006. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $7,862, $490,842 and $31,421, respectively, for the year ended October
31, 2006.
(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 pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses for the year ended October 31, 2006, amounted to $2,974,571.
(E) NON-INTERESTED TRUSTEES FEES. For the year ended October 31, 2006,
Non-Interested Trustees were paid an annual retainer of $45,000, $2,000 for each
Board meeting attended, $1,000 for each Committee meeting attended and $500 for
each Valuation Subcommittee telephonic meeting attended plus reimbursement for
travel and out-of-pocket expenses. The Lead Non-Interested Trustee received an
additional annual retainer of $20,000. The Audit and Compliance Committee
Chairman received 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 received an
additional $1,000 for each meeting of the respective committee meetings
attended. In addition, each Non-Interested Trustee received $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.
28 MainStay MAP Fund
(F) CAPITAL. At October 31, 2006, New York Life and its affiliates held shares
of the Fund with the following values and percentages of net assets as follows:
<Table>
Class A $ 328 0.0*%
- ----------------------------------------------------------------
Class C 159 0.0*
- ----------------------------------------------------------------
Class I 63,376,921 17.7
- ----------------------------------------------------------------
Class R1 1,410 0.0*
- ----------------------------------------------------------------
Class R2 1,400 0.0*
- ----------------------------------------------------------------
Class R3 10,272 100.0
- ----------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2006, these fees, which are included in Professional fees
shown on the Statement of Operations were $36,516.
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 $166,287 for the year ended
October 31, 2006.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2006, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED ACCUMULATED TOTAL
NET INVESTMENT CAPITAL UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$31,305,426 $92,130,528 $258,437,131 $381,873,085
---------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
The tax character of distributions paid during the years ended October 31, 2006
and October 31, 2005, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2006 2005
Distributions paid from:
Ordinary Income $34,573,479 $ --
Long-term Capital Gains 45,058,082 42,037,035
- --------------------------------------------------------
$79,631,561 $42,037,035
- --------------------------------------------------------
</Table>
NOTE 5--FUND SECURITIES LOANED:
As of October 31, 2006, the Fund had securities on loan with an aggregate market
value of $112,679,493. The Fund received $116,811,189 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.
Securities purchased with collateral received are valued at amortized cost.
NOTE 6--CUSTODIAN:
IBT 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.
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.
These funds paid a commitment fee, at an annual rate of .070%, up to September
6, 2006 at which time the rate changed to .060% 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 made or
outstanding on the line of credit during the year ended October 31, 2006.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2006, purchases and sales of securities, other
than short-term securities, were $1,369,012 and $1,325,291, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS A CLASS B CLASS C
Shares sold 4,181 1,361 2,076
- ---------------------------------------------------------
Shares issued in
reinvestment of dividend
and distributions 540 680 280
- ---------------------------------------------------------
4,721 2,041 2,356
Shares redeemed (3,269) (1,876) (1,043)
- ---------------------------------------------------------
Shares converted (See Note
1) 1,928 (2,024) --
- ---------------------------------------------------------
Net increase (decrease) 3,380 (1,859) 1,313
- ---------------------------------------------------------
</Table>
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2006
CLASS I CLASS R1 CLASS R2 CLASS R3*
Shares sold 2,005 73 117 --(a)
- ---------------------------------------------------------------
Shares issued in
reinvestment of
dividend and
distributions 559 24 4 --
- ---------------------------------------------------------------
2,564 97 121 --
Shares redeemed (2,426) (75) (31) --
- ---------------------------------------------------------------
Net increase 138 22 90 --(a)
- ---------------------------------------------------------------
</Table>
<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>
* Commenced operations on April 28, 2006.
(a) Less than one thousand shares.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission and the New York State Attorney
General, and, as noted in the notes to the year-end 2004 and 2005 financial
statements of each fund of the Trust, NYLIM was previously 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 undertook a review of 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 $5.882 million to nine MainStay funds. No payment was made with respect
to the Fund. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
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.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax provisions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Management of the Fund is
currently evaluating the impact that FIN 48 will have on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2006, the Funds do not believe the
adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
30 MainStay MAP Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay MAP Fund ("the Fund"), one of the
funds constituting The MainStay Funds, as of October 31, 2006, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended, and
financial highlights for each of the years in the three-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, 2006, 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, 2006, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and financial highlights for
each of the years in the three-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 21, 2006
www.mainstayfunds.com 31
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with the Manager and the Subadvisory Agreements between the Manager
and Markston International LLC ("Markston") and approved a new Subadvisory
Agreement (each of the Management Agreement and the Subadvisory Agreements, an
"Agreement") between the Manager and Institutional Capital LLC ("ICAP") (each of
Markston and ICAP, a "Subadvisor"). In considering the new Subadvisory Agreement
with ICAP, the Board considered that ICAP had entered into an agreement with an
affiliate of the Manager, New York Life Investment Management Holdings LLC
("NYLIM Holdings"), providing for ICAP to become a wholly-owned indirect
subsidiary of NYLIM Holdings. (This transaction closed on June 30, 2006.)
In connection with the approval of each Agreement, the Trustees reviewed a wide
variety of information that they had requested and received from the Manager and
each Subadvisor, and data and analysis from an outside data provider and a third
party consultant. The Trustees also considered additional information that they
had recently reviewed in approving the initial Subadvisory Agreement with ICAP
and in connection with the subsequently scheduled meeting of the Fund's
shareholders relating to the engagement of ICAP as a new Subadvisor with respect
to a portion of the Fund's assets. The Trustees considered a wide range of
information about the previous subadvisor of that portion of the Fund's assets
in determining to replace that subadvisor with ICAP. The Trustees reviewed
various industry trends and regulatory developments in their deliberations. In
considering the approval of each Agreement, and in evaluating the fairness of
the compensation to be paid by the Fund under each Agreement, the Trustees met a
number of times as a full Board, and in executive session with no Interested
Trustee present, to discuss the Board's consideration of the approval of the
Agreement. The Trustees considered the factors discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and each Subadvisor. The Trustees reviewed the services
that the Manager and each Subadvisor have historically provided to the Fund, and
also generally to other series of the Trust. The Manager's services include,
among others, investment management services, such as monitoring and evaluating
each Subadvisor's investment program and investment results with respect to the
Fund and each Subadvisor's compliance with the Fund's investment policies and
restrictions. They also include administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. Each Subadvisor is responsible for the day-to-day portfolio
management of their respective portions of the Fund, including determining the
composition of applicable assets of the Fund and the timing of the Fund's
execution of the purchase and sale of these assets. In addition, the Subadvisors
provide reports to the Manager and review certain aspects of Fund filings.
The Trustees also considered the Manager's and each Subadvisor's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed information about each Subadvisor's brokerage practices,
including, but not limited to, reports related to best execution of portfolio
trades. The Trustees noted that the Fund's assets represented a significant
portion of Markston's assets under management, and a smaller portion of ICAP's
assets under management. The Trustees received information about the Manager's
supervision of the Fund's service providers, the Manager's attention to its
compliance program and those of the Trust, each Subadvisor and certain other
service providers, as well as each Subadvisor's attention to its compliance
program. The Trustees noted the generally favorable results of a third party
review of the services and communications that NYLIM Service Company LLC, an
affiliate of the Manager and each Subadvisor, has provided to Trust
shareholders. The Trustees, including the Non-Interested Trustees, unanimously
concluded that, overall, the nature, extent and quality of the services expected
to be provided by the Manager and each Subadvisor were such that, in the context
of the Board's overall review of various factors, each Agreement should be
renewed.
The Board also considered the proposed subadvisory fee rate payable by the
Manager to each Subadvisor under the Subadvisory Agreements. The Board noted
that the subadvisory fee arrangement between the Manager and each Subadvisor
included breakpoints based on the amount of assets in its portion of the Fund's
portfolio. The Board also considered and compared the rate of each Subadvisor's
proposed subadvisory fee to advisory fees paid by funds identified by fund data
services as comparable to the Fund. Based on these considerations, the Board
concluded that each Subadvisor's proposed subadvisory fee rate under its
Agreement was reasonable in comparison to other subadvisory fee rates.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board
took into consideration information it received on, among other things, the
favorable long- and short-term performance of the Fund, the favorable
performance of Markston, and ICAP's performance in managing the ICAP Select
Equity Fund (another mutual fund advised by ICAP with an investment focus
similar to the manner in which ICAP manages its portion of the Fund), noting
that ICAP's performance compared favorably over certain time periods to funds
viewed as comparable by a third party data provider. The Board further
considered the experience level,
32 MainStay MAP Fund
tenure and compensation of the management team of each Subadvisor. The Board
concluded that the investment program of each Subadvisor appeared appropriate to
complement the investment program of the other Subadvisor.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In this regard, the Board considered the effect
that the pending affiliation between ICAP and the Manager may have on the
Manager's future profitability with respect to this Fund. In reviewing
profitability information, the Trustees reviewed, among other things,
information about the allocation of expenses among the Manager and its
affiliates, and the subadvisory fee payments made by the Manager to each
Subadvisor. The Trustees were provided information indicating that the
profitability to the Manager and its affiliates from the Agreements, and from
the overall relationship with the Trust, was low. The Trustees considered other
benefits that the Manager and its affiliates receive from the relationship with
the Trust, including benefits that NYLIFE Distributors and MainStay Shareholder
Services receive in exchange for services they provide to the Funds, and certain
benefits from soft dollar arrangements. The Trustees acknowledged certain
benefits to the reputation of the Manager and the Trust from their association
with each other.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They noted that, across the Trust (though
not every series or share class), transfer agency fees tended to be relatively
high and, therefore, adversely affected gross expense ratios. Noting that the
Trust historically permitted smaller investor accounts, the Trustees discussed
that the Board had approved certain measures and the Manager had taken certain
actions intended to increase the average size of shareholder accounts, including
imposing higher investment minimums for some share classes. The Trustees
discussed additional measures that may increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency expenses.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the contractual breakpoint that would reduce the
Fund's management fee at asset levels above the breakpoint and the fact that the
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund's management fee rate had been reduced by the
breakpoint schedule applicable to the Fund. The Trustees reviewed information
about the potential effect of asset growth on Fund expenses, the difficulty of
forecasting its effect on the profitability of the Manager and its affiliates,
and the management fee breakpoints applicable to the Fund and certain other
funds in comparison groups. It was noted that, to the extent the Fund's gross
expenses currently were higher than its net expenses, the reduction of the
Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by 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
the Fund's. Although the Trustees received fee and expense data with respect to
other clients of the Manager generally, they were advised that no other client
of the Manager had an investment strategy similar to that of the Fund. The
Trustees considered the current and proposed contractual and net management
fees, its anticipated gross and net expense ratio, and various components of the
expense ratio, in comparison to other funds in comparison groupings. The
Trustees generally acknowledged the historical relationships among the Manager,
each Subadvisor and the Trust. The Trustees noted the Manager's agreement to
maintain the limit on the Fund's net expenses at a certain 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
legal counsel to the Non-Interested Trustees. The materials and other
information also were considered by the Non-Interested Trustees meeting
separately and with independent legal 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. This summary
describes the most important, but not all, of the factors considered by the
Trustees in considering each Agreement. On the basis of their review, the
Trustees, including all of the Non-Interested Trustees, unanimously concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal or approval, as applicable, of each Agreement, and
it was the unanimous judgment of the Trustees and the Non-Interested Trustees
that approval of each Agreement 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 end (October 31, 2006) 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 $45,058,082.
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
should be multiplied by 46.2% to arrive at the amount eligible for qualified
dividend income and 45.6% for the corporate dividends received deduction.
In January 2007, 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 2006. 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, 2006.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) 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 also can obtain and review copies
of Form N-Q by 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).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting and four adjournment meetings of the
shareholders of MainStay MAP Fund (the "Fund") were held on September 8, 2006,
September 28, 2006 at 10:00 a.m. and 5:00 p.m., October 2, 2006 and October 5,
2006 at the Parsippany, New Jersey offices of New York Life Investment
Management LLC. The purpose of the meeting was to have shareholders approve a
new subadvisory agreement between New York Life Investment Management LLC and
ICAP to appoint ICAP as a new subadvisor to the Fund. No action was taken with
regard to the Fund's other subadvisor, Markston International LLC.
The proposal was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
VOTES FOR VOTES AGAINST WITHHELD TOTAL
18,639,783.364 257,117.500 793,483.630 19,690,384.494
- ------------------------------------------------------------
</Table>
34 MainStay MAP Fund
TRUSTEES AND OFFICERS
Following are the Trustees and Officers of The MainStay Funds as of October 31,
2006, 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>
TERM OF OFFICE,
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*
BRIAN A. MURDOCK Indefinite; Chairman Member of the Board of Managers and 65 Chairman and
3/14/56 and Trustee since President (since 2004) and Chief Executive Director since
September 2006 and Officer (since July 2006), New York Life September 2006,
Chief Executive Investment Management LLC and New York MainStay VP
Officer since July Life Investment Management Holdings LLC; Series Fund,
2006 Senior Vice President, New York Life Inc.; Director,
Insurance Company (since 2004); Chairman ICAP Funds, Inc.,
of the Board and President, NYLIFE since August
Distributors LLC (since 2004); Member of 2006.
the Board of Managers, Madison Capital
Funding LLC (since 2004), NYLCAP Manager
LLC (since 2004) and Institutional Capital
LLC (since July 2006); Chief Executive
Officer, Eclipse Funds and Eclipse Funds
Inc. (since July 2006); Chairman and
Director (since September 2006) and Chief
Executive Officer (since July 2006),
MainStay VP Series Fund, Inc.; Director
and Chief Executive Officer, ICAP Funds,
Inc. (since August 2006); Chief Operating
Officer, Merrill Lynch Investment Managers
(2003 to 2004); Chief Investment Officer,
MLIM Europe and Asia (2001 to 2003);
President, Merrill Japan and Chairman,
MLIM Pacific Region (1999 to 2001).
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
EDWARD J. HOGAN Indefinite; Trustee Rear Admiral, U.S. Navy (Retired); 19 None
8/17/32 since 1996 Independent Management Consultant (1997 to
2002).
---------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Trustee Retired. Partner, Ernst & Young LLP 19 Trustee, State
3/27/51 and Audit Committee (2002 to 2003); Partner, Arthur Andersen Farm Associates
Financial Expert LLP (1976 to 2002). Funds Trusts;
since 2006 Trustee, State
Farm Mutual
Fund Trust;
Trustee, State
Farm Variable
Product Trust;
Trustee, Utopia
Funds.
---------------------------------------------------------------------------------------------------------------------------
</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, Institutional Capital LLC, Eclipse
Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., ICAP Funds,
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 35
<Table>
<Caption>
TERM OF OFFICE,
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
TERRY L. LIERMAN Indefinite; Trustee Chair, Maryland Democratic Party; 19 None
1/4/48 since 1991 Chairman, 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. Indefinite; Trustee Chairman, Ulster Television Plc; Pro 19 Non-Executive
MCGUCKIAN since 1997 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. Indefinite; Trustee Retired. Vice Chairman, Harbour Group 19 Director,
NICKELSON since 1994 and Lead Industries, Inc. (leveraged buyout Adolor
12/9/32 Non-Interested firm); President, PaineWebber Group Corporation;
Trustee since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (1990 to present) and Chief 19 None
TRUTANIC since 1994 Executive Officer (1990 to 1999),
2/13/52 Somerset Group (financial advisory
firm); Managing Director and Advisor,
The Carlyle Group (private investment
firm) (2002 to 2004); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2002).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General Counsel and Secretary, New
ANSELMI since 2003 York Life Investment Management LLC (including predecessor
10/19/46 advisory organizations) and 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, Madison Capital Funding LLC and
Institutional Capital LLC (since October 2006); Chief Legal
Officer, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since 2003), McMorgan Funds (since 2005)
and ICAP Funds, Inc. (since August 2006); Managing Director
and Senior Counsel, Lehman Brothers Inc. (1998 to 1999);
General Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998).
-----------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Managing Director, Mutual Fund Accounting (since September
ARIZMENDI Principal Financial 2006) and Director and Manager of Fund Accounting and
10/26/56 and Accounting Administration (2003 to August 2006), New York Life
Officer since 2005 Investment Management LLC; Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.
and McMorgan Funds (since 2005), MainStay VP Series Fund,
Inc. (since March 2006) and ICAP Funds, Inc. (since August
2006); Assistant Treasurer, NYLIFE Distributors LLC;
Assistant Treasurer, The MainStay Funds, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and
McMorgan Funds (1992 to 2005).
-----------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life Investment
BLUNT Management LLC and New York Life Investment Management
5/13/62 Holdings LLC (since 2004); Manager and Executive Vice
President, NYLIM Product Distribution, NYLIFE Distributors
LLC (since 2005); Chairman, NYLIM Service Company LLC (since
2005); Chairman and Class C Director, New York Life Trust
Company, FSB (since 2004); Chairman, New York Life Trust
Company (since 2005); President, Eclipse Funds and Eclipse
Funds Inc. (since 2005), MainStay VP Series Fund, Inc.
(since July 2006) and ICAP Funds, Inc. (since August 2006);
Chairman and Chief Executive Officer, Giving Capital, Inc.
(2001 to 2004); Chief Marketing Officer--Americas, Merrill
Lynch Investment Managers (1999 to 2001); President, Mercury
Funds Distributors (1999 to 2001).
-----------------------------------------------------------------------------------------------------
</Table>
36 MainStay MAP Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD
WITH
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S)
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES**
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration since predecessor advisory organizations); Executive Vice
2/8/59 2005 President, New York Life Trust Company and New York Life
Trust Company, FSB (since January 2006); Vice
President--Administration, MainStay VP Series Fund, Inc.,
Eclipse Funds and Eclipse Funds Inc. (since 2005) and ICAP
Funds, Inc. (since August 2006).
-----------------------------------------------------------------------------------------------------
ALAN J. Senior Vice President Managing Director, Chief Operating Officer and Chief
KIRSHENBAUM since July 2006 Financial Officer of Retail Investments, New York Life
6/25/71 Investment Management LLC (since July 2006); Senior Vice
President, Eclipse Funds, Eclipse Funds Inc. and MainStay VP
Series Fund, Inc. (since June 2006) and ICAP Funds, Inc.
(since August 2006); Chief Financial Officer, Bear Stearns
Asset Management (1999 to May 2006).
-----------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Senior Managing Director and Chief Compliance Officer (since
MICUCCI Compliance (2004 to March 2006) and Managing Director and Chief Compliance
12/16/65 June 2006); Senior Officer (2003 to February 2006), New York Life Investment
Vice President and Management LLC and New York Life Investment Management
Chief Compliance Holdings LLC; Senior Managing Director, Compliance (since
Officer since July March 2006) and Managing Director, Compliance (2003 to
2006 February 2006), NYLIFE Distributors LLC; Chief Compliance
Officer, NYLCAP Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since June 2006) and ICAP
Funds, Inc. (since August 2006); Vice President--Compliance,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (until June 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002).
-----------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary since 2004 Managing Director and Associate General Counsel, New York
MORRISON Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC; Secretary,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), and ICAP Funds, Inc. (since August
2006); Chief Legal Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004).
-----------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 37
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
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(3)
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 Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay ICAP International 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
INSTITUTIONAL CAPITAL LLC(4)
Chicago, Illinois
MACKAY SHIELDS LLC(4)
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 investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. Closed to new investors as of June 1, 2006.
4. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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 be distributed only 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-A09806 (RECYCLE LOGO) MS377-06 MSMP11-12/06
30
FORM N-CSR
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 not
amended during the period covered by the report. A copy of the 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 has
one member that qualifies as an "audit committee financial expert" as defined
under rules adopted by the Securities and Exchange Commission. Alan R. Latshaw
is the audit committee financial expert and is considered independent.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for the fiscal year ended October 31, 2006 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 $812,750.
The aggregate fees billed for the fiscal year ended October 31, 2005 for
professional services rendered by 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 (includes $38,500 for an additional audit of MainStay Large
Cap Growth Fund).
(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)
$0 for the fiscal year ended October 31, 2006, and (ii) $15,000 for the
fiscal year ended October 31, 2005. 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.
(c) Tax Fees
The aggregate fees billed for professional services rendered by KPMG for tax
compliance, tax advice, and tax planning were: (i) $90,100 during the fiscal
year ended October 31, 2006, and (ii) $95,700 during the fiscal year ended
October 31, 2005. These services primarily included preparation of federal,
state and local income tax returns and excise tax returns, as well as services
relating to 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, 2006, and (ii) $0 during the fiscal
year ended October 31, 2005.
(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.
(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, 2006 and October 31, 2005 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) $25,000 for the fiscal year ended October 31, 2006, and (ii)
$15,000 for the fiscal year ended October 31, 2005.
(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, 2006
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.
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.
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 8, 2007
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 8, 2007
By: /s/ Arphiela Arizmendi
---------------------------------
ARPHIELA ARIZMENDI
Treasurer and Principal Financial
and Accounting Officer
Date: January 8, 2007
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.