================================================================================
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 811-04847
ECLIPSE 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, New Jersey 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, 2008
================================================================================
ITEM 1. REPORTS TO STOCKHOLDERS
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP CORE FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP CORE FUND
MainStay Funds
Annual Report
October 31, 2008
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 24
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 31
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT 32
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 35
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 35
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 35
- ---------------------------------------------
TRUSTEES AND OFFICERS 36
INVESTMENT AND PERFORMANCE COMPARISON(1)
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, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (42.42%) (2.03%) 2.26%
Excluding sales charges (39.07) (0.91) 2.84
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP CORE
FUND CLASS RUSSELL MIDCAP(R) RUSSELL MIDCAP
A VALUE INDEX INDEX
------------ ----------------- --------------
10/31/98 9450 10000 10000
9446 10570 9791
10380 11822 12115
10111 11660 9932
10049 11313 9135
13089 15100 12412
14747 18081 14285
16899 21607 16869
19078 26040 19806
20521 28573 22823
10/31/08 12503 17479 16197
</Table>
CLASS A SHARES(3)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (42.39%) (2.01%) 2.27%
Excluding sales charges (39.03) (0.90) 2.85
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP CORE
FUND CLASS RUSSELL MIDCAP(R) RUSSELL MIDCAP
A VALUE INDEX INDEX
------------ ----------------- --------------
10/31/98 23625 25000 25000
23614 26425 24478
25951 29556 30286
25278 29149 24829
25123 28283 22837
32723 37751 31031
36868 45203 35712
42248 54018 42172
47695 65099 49514
51302 71432 57058
10/31/08 31277 43697 40494
</Table>
CLASS B SHARES(3)--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 (42.17%) (1.96%) 2.05%
Excluding sales charges (39.54) (1.65) 2.05
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP CORE
FUND CLASS RUSSELL MIDCAP(R) RUSSELL MIDCAP
B VALUE INDEX INDEX
------------ ----------------- --------------
10/31/98 10000 10000 10000
9904 10570 9791
10795 11822 12115
10436 11660 9932
10296 11313 9135
13309 15100 12412
14875 18081 14285
16929 21607 16869
18975 26040 19806
20257 28573 22823
10/31/08 12246 17479 16197
</Table>
1. Performance tables and graphs do not reflect any deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, 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
1.00%, 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 or individual 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 0.50% 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 certain
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(4)--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 (40.04%) (1.66%) 2.05%
Excluding sales charges (39.52) (1.66) 2.05
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP CORE
FUND CLASS RUSSELL MIDCAP(R) RUSSELL MIDCAP
C VALUE INDEX INDEX
------------ ----------------- --------------
10/31/98 10000 10000 10000
9899 10570 9791
10789 11822 12115
10437 11660 9932
10290 11313 9135
13324 15100 12412
14885 18081 14285
16933 21607 16869
18980 26040 19806
20256 28573 22823
10/31/08 12251 17479 16197
</Table>
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
(38.86%) (0.58%) 3.13%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP CORE RUSSELL MIDCAP(R) RUSSELL MIDCAP
FUND VALUE INDEX INDEX
------------ ----------------- --------------
10/31/98 10000 10000 10000
10016 10570 9791
11035 11822 12115
10775 11660 9932
10734 11313 9135
14018 15100 12412
15836 18081 14285
18229 21607 16869
20643 26040 19806
22267 28573 22823
10/31/08 13615 17479 16197
</Table>
CLASS R3 SHARES(5)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
(39.20%) (1.17%) 2.52%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP CORE
FUND CLASS RUSSELL MIDCAP(R) RUSSELL MIDCAP
R3 VALUE INDEX INDEX
------------ ----------------- --------------
10/31/98 10000 10000 10000
9956 10570 9791
10904 11822 12115
10583 11660 9932
10480 11313 9135
13603 15100 12412
15276 18081 14285
17479 21607 16869
19672 26040 19806
21097 28573 22823
10/31/08 12826 17479 16197
</Table>
management fee waivers or expense reimbursements from the Fund pursuant to
the contract 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.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class A and B shares, first offered on January 1,
2004, include the historical performance of Class I shares through December
31, 2003, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class A and B shares might have been
lower.
4. Performance figures for Class C shares, first offered on January 1, 2004,
include the historical performance of the L Class shares (which were
redesignated as Class C shares on January 1, 2004) from December 30, 2002,
through December 31, 2003, and the historical performance of the Class I
shares through December 29, 2002, adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for Class C
shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE FOLLOWING PAGE ARE AN INTEGRAL PART
OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Mid Cap Core Fund
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ----------------------------------------------------------------------
Russell Midcap(R) Value Index(6) (38.83%) 2.97% 5.74%
Russell Midcap(R) Index(7) (40.67) 1.76 4.94
Average Lipper mid-cap value fund(8) (39.25) 1.33 6.06
</Table>
5. Performance figures for Class R3 shares, first offered to the public on April
28, 2006, include the performance of Class I shares through April 27, 2006,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class R3 shares might have been lower.
6. 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.
7. The Russell Midcap(R) Index is an unmanaged index that measures the
performance of the 800 smallest companies in the Russell 1000(R) Index and
represents approximately 30% of the total market capitalization of the
Russell 1000(R) Index. 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 for all indices 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.
8. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MID CAP CORE FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
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, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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, 2008, to October 31, 2008.
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, 2008. 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.
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 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $669.00 $6.08 $1,017.80 $ 7.35
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $669.40 $5.67 $1,018.30 $ 6.85
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $666.50 $9.22 $1,014.10 $11.14
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $666.70 $9.22 $1,014.10 $11.14
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $670.30 $4.37 $1,019.90 $ 5.28
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $668.40 $6.88 $1,016.90 $ 8.31
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.45% for Investor Class, 1.35% for Class A, 2.20% for Class B and Class C,
1.04% for Class I and 1.64% for Class R3) multiplied by the average account
value over the period, divided by 366 and multiplied by 184 (to reflect the
one-half year period). The table above represents actual expenses incurred
during the one-half year period and does not take into account the Fund's
written expense limitation agreement.
8 MainStay Mid Cap Core Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Insurance 8.6%
Oil, Gas & Consumable Fuels 6.3
Specialty Retail 5.9
Semiconductors & Semiconductor
Equipment 5.6
IT Services 4.5
Energy Equipment & Services 4.1
Health Care Providers & Services 3.8
Machinery 3.8
Household Durables 3.7
Real Estate Investment Trusts 3.1
Chemicals 3.0
Pharmaceuticals 2.8
Software 2.8
Capital Markets 2.6
Media 2.4
Multi-Utilities 2.4
Computers & Peripherals 2.2
Multiline Retail 2.0
Electronic Equipment & Instruments 1.7
Health Care Equipment & Supplies 1.5
Textiles, Apparel & Luxury Goods 1.5
Road & Rail 1.4
Electric Utilities 1.3
Food & Staples Retailing 1.1
Independent Power Producers & Energy
Traders 1.1
Leisure Equipment & Products 1.1
Professional Services 1.1
Commercial Services & Supplies 1.0
Construction & Engineering 1.0
Airlines 0.9
Hotels, Restaurants & Leisure 0.9
Life Sciences Tools & Services 0.9
Wireless Telecommunication Services 0.9
Food Products 0.8
Internet Software & Services 0.8
Household Products 0.7
Commercial Banks 0.6
Communications Equipment 0.6
Diversified Consumer Services 0.6
Electrical Equipment 0.6
Paper & Forest Products 0.6
Beverages 0.5
Building Products 0.5
Metals & Mining 0.5
Personal Products 0.5
Tobacco 0.5
Aerospace & Defense 0.4
Biotechnology 0.4
Consumer Finance 0.4
Containers & Packaging 0.4
Auto Components 0.3
Diversified Telecommunication
Services 0.2
Gas Utilities 0.2
Internet & Catalog Retail 0.2
Diversified Financial Services 0.1
Health Care Technology 0.1
Industrial Conglomerates 0.1
Marine 0.1
Trading Companies & Distributors 0.1
Real Estate Management & Development 0.0++
Thrifts & Mortgage Finance 0.0++
Exchange Traded Fund 2.2
Short-Term Investment 0.1
Liabilities in Excess of Cash and
Other Assets (0.1)
-----
100.0%
=====
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investment on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. S&P MidCap 400 Index--MidCap SPDR Trust
Series 1
2. PG&E Corp.
3. Sherwin-Williams Co. (The)
4. Edison International
5. Southwest Airlines Co.
6. Applied Biosystems, Inc.
7. W.R. Berkley Corp.
8. Axis Capital Holdings, Ltd.
9. Forest Laboratories, Inc.
10. Ross Stores, Inc.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS HARVEY FRAM, CFA, AND MIGENE KIM, CFA,
OF
NEW YORK LIFE INVESTMENT MANAGEMENT LLC, THE FUND'S MANAGER.
HOW DID MAINSTAY MID CAP CORE FUND (FORMERLY MAINSTAY MID CAP OPPORTUNITY FUND)
PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK FOR THE 12 MONTHS ENDED OCTOBER
31, 2008?
Excluding all sales charges, MainStay Mid Cap Core Fund returned -39.07% for
Investor Class shares,(1) -39.03% for Class A shares, -39.54% for Class B shares
and -39.52% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, Class I shares returned -38.86% and Class R3 shares returned
- -39.20%. Investor Class shares, Class A shares, Class I shares and Class R3
shares outperformed and Class B shares and Class C shares underperformed the
- -39.25% return of the average Lipper(2) mid-cap value fund and underperformed
the -38.83% return of the Russell Midcap(R) Value Index(3) for the 12 months
ended October 31, 2008. Over the same period, all share classes outperformed the
- -40.67% return of the Russell Midcap(R) Index.(4) The Russell Midcap(R) Value
Index was the Fund's broad-based securities-market index until September 28,
2008. Thereafter, the Fund adopted the Russell Midcap(R) Index as its broad-
based securities-market index, because we believe that this index more
accurately reflects the Fund's investment style. See pages 5 and 6 for Fund
returns with sales charges.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND'S INVESTMENT APPROACH OR
PORTFOLIO MANAGEMENT DURING THE REPORTING PERIOD?
On September 29, 2008, the Fund changed its name from MainStay Mid Cap
Opportunity Fund to MainStay Mid Cap Core Fund. At that time, the Fund's
principal investment strategy, investment process and principal risks were
adjusted as described in the Supplement dated September 29, 2008, to the
MainStay Equity Funds Prospectus dated February 28, 2008. The Supplement
contained additional information about the Fees and Expenses of the Fund,
portfolio manager changes and other matters.
WHAT FACTORS WERE RESPONSIBLE FOR THE FUND'S RELATIVE PERFORMANCE DURING THE
REPORTING PERIOD?
In a 12-month reporting period that was the most volatile in recent memory, the
Fund kept its sector, industry and individual stock exposures fairly close to
those of the Russell Midcap(R) Value Index. The Fund slightly outperformed the
Russell Midcap(R) Index because of good stock selection within sectors.
WHICH SECTORS HAD THE STRONGEST POSITIVE IMPACT ON THE FUND'S RELATIVE
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH SECTORS WERE THE WEAKEST?
Relative to the Russell Midcap(R) Value Index, the strongest contributors to the
Fund's performance were the consumer discretionary and information technology
sectors. Both sectors underperformed the benchmark, but the Fund was able to
avoid the worst-performing stocks in these sectors. In addition, good stock
selection in the health care sector aided the Fund's relative results.
The worst-contributing sectors relative to the Russell Midcap(R) Value Index
were utilities, industrials and energy. Our proprietary investment model, and
hence the Fund, was not expecting as severe a market environment as we have seen
during the reporting period. As a result, the Fund held an underweight position
in the recession-resistant utilities sector. Within industrials, the Fund's
overweight position in airlines was a negative contributor because of higher
crude oil prices and recession concerns.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Mid-capitalization
companies are generally less established and their stocks may be more volatile
and less liquid than the securities of larger companies. 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 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's use of securities
lending presents the risk of default by the borrower, which may also 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. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 7 for more information on Lipper Inc.
3. See footnote on page 7 for more information on the Russell Midcap(R) Value
Index.
4. See footnote on page 7 for more information on the Russell Midcap(R) Index.
10 MainStay Mid Cap Core Fund
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE FUND'S BEST ABSOLUTE
PERFORMERS AND WHICH STOCKS WERE THE WEAKEST?
The Fund's strongest-absolute performers during the reporting period were
Chesapeake Energy, Cliffs Natural Resources and CSX. Chesapeake Energy and
Cliffs Natural Resources benefited from rising commodity prices in the first
half of the reporting period. CSX benefited from rising demand for coal.
The Fund's weakest-absolute performers were Genworth Financial, XL Capital and
Hospitality Properties. Genworth Financial and XL Capital are insurance
companies whose earnings have been adversely affected by investment losses tied
to the mortgage crisis. Hospitality Properties has been negatively affected by
the slowdown in hotel occupancy.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund looks for stocks with attractive relative valuations, strong operating
results and positive price trends. Among the stocks that fit the Fund's purchase
criteria during the reporting period were PG&E and Southwest Airlines. Earnings
at both companies held up well despite the difficult economic environment.
We've sold stocks that have been adversely affected by the continued turmoil in
the economy. Since auto-related stocks have been particularly hard hit, we sold
Ford Motor and BorgWarner.
WERE THERE ANY NOTABLE CHANGES IN THE FUND'S WEIGHTINGS 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 increased in the information technology
and health care sectors. In both cases, part of the change reflected higher
sector weightings in the Fund's new benchmark, the Russell Midcap(R) Index,
compared to the Fund's former benchmark, the Russell Midcap(R) Value Index. In
addition, information technology stocks are trading at what we believe to be
extremely low valuations, indicating that the market is anticipating a much more
severe recession than our model expects.
During the reporting period, the Fund's weightings decreased in financials and
utilities. Once again, the change partly reflected the lower sector weightings
in the Fund's new primary benchmark.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was underweight relative to its new benchmark,
the Russell Midcap(R) Index, in financials and utilities. Many financial
companies continued to be affected by fallout from the mortgage crisis. Although
utilities have traditionally performed relatively well during difficult economic
periods, we believe that many utility stocks have become relatively expensive.
On the same date, the Fund's largest-overweight positions relative to the
Russell Midcap(R) Index were information technology and consumer discretionary.
As mentioned earlier, information technology stocks traded at extremely low
valuations and recently performed moderately well relative to the market.
Likewise, consumer discretionary stocks traded at levels that, in our opinion,
reflected the expectation of a much worse recession than our model has
anticipated.
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.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 97.8%+
- ----------------------------------------------------------
AEROSPACE & DEFENSE 0.4%
Goodrich Corp. 1,108 $ 40,509
L-3 Communications Holdings,
Inc. 1,119 90,829
Precision Castparts Corp. 1,810 117,306
-------------
248,644
-------------
AIRLINES 0.9%
V Southwest Airlines Co. 45,670 537,993
-------------
AUTO COMPONENTS 0.3%
Autoliv, Inc. 2,694 57,544
BorgWarner, Inc. 3,827 85,993
TRW Automotive Holdings Corp.
(a) 3,642 23,017
-------------
166,554
-------------
BEVERAGES 0.5%
Constellation Brands, Inc.
Class A (a) 3,233 40,542
Dr. Pepper Snapple Group, Inc.
(a) 3,399 77,837
Pepsi Bottling Group, Inc.
(The) 6,848 158,326
-------------
276,705
-------------
BIOTECHNOLOGY 0.4%
Cephalon, Inc. (a) 3,106 222,762
ImClone Systems, Inc. (a) 308 21,178
-------------
243,940
-------------
BUILDING PRODUCTS 0.5%
Armstrong World Industries,
Inc. 2,814 55,239
Lennox International, Inc. 6,483 193,323
Owens Corning, Inc. (a) 5,075 79,830
-------------
328,392
-------------
CAPITAL MARKETS 2.6%
Ameriprise Financial, Inc. 13,746 296,913
Eaton Vance Corp. 1,664 36,608
Federated Investors, Inc.
Class B 4,038 97,720
GLG Partners, Inc. 870 2,784
Invesco, Ltd. 27,467 409,533
Investment Technology Group,
Inc. (a) 837 17,083
Northern Trust Corp. 2,236 125,909
Raymond James Financial, Inc. 8,314 193,633
TD Ameritrade Holding Corp.
(a) 28,847 383,377
-------------
1,563,560
-------------
CHEMICALS 3.0%
Airgas, Inc. 9,729 373,204
Ashland, Inc. 8,753 197,730
Celanese Corp. Class A 2,066 28,635
CF Industries Holdings, Inc. 5,005 321,271
Eastman Chemical Co. 2,835 114,506
FMC Corp. 4,082 177,730
Rohm & Haas Co. 3,983 280,204
RPM, Inc. 88 1,250
Terra Industries, Inc. 11,902 261,725
Valspar Corp. 1,792 36,646
-------------
1,792,901
-------------
COMMERCIAL BANKS 0.6%
Bancorpsouth, Inc. 1,529 37,109
Bank of Hawaii Corp. 1,312 66,532
Cullen/Frost Bankers, Inc. 942 52,724
First Citizens BancShares,
Inc. Class A 295 45,111
Fulton Financial Corp. 13,841 145,330
-------------
346,806
-------------
COMMERCIAL SERVICES & SUPPLIES 1.0%
Allied Waste Industries, Inc.
(a) 26,394 275,026
Brink's Co. (The) 1,470 71,280
R.R. Donnelley & Sons Co. 13,840 229,329
Republic Services, Inc. 462 10,949
-------------
586,584
-------------
COMMUNICATIONS EQUIPMENT 0.6%
Brocade Communications
Systems, Inc. (a) 25,041 94,405
Ciena Corp. (a) 691 6,640
F5 Networks, Inc. (a) 5,442 135,070
Tellabs, Inc. (a) 23,233 98,508
-------------
334,623
-------------
COMPUTERS & PERIPHERALS 2.2%
Diebold, Inc. 2,354 69,961
Lexmark International, Inc.
Class A (a) 11,184 288,883
NetApp, Inc. (a) 28,196 381,492
QLogic Corp. (a) 7,089 85,210
Seagate Technology 15,628 105,801
Western Digital Corp. (a) 22,275 367,537
-------------
1,298,884
-------------
CONSTRUCTION & ENGINEERING 1.0%
Fluor Corp. 10,491 418,906
Foster Wheeler, Ltd. (a) 1,757 48,142
KBR, Inc. 2,776 41,196
Shaw Group, Inc. (The) (a) 5,431 97,160
-------------
605,404
-------------
CONSUMER FINANCE 0.4%
Discover Financial Services 20,039 245,478
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
12 MainStay Mid Cap Core 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 0.4%
Pactiv Corp. (a) 2,327 $ 54,824
Sonoco Products Co. 6,608 166,390
-------------
221,214
-------------
DIVERSIFIED CONSUMER SERVICES 0.6%
Apollo Group, Inc. Class A (a) 1,814 126,091
Career Education Corp. (a) 5,956 94,165
DeVry, Inc. 759 43,028
H&R Block, Inc. 2,167 42,733
ITT Educational Services, Inc.
(a) 342 29,976
-------------
335,993
-------------
DIVERSIFIED FINANCIAL SERVICES 0.1%
Moody's Corp. 2,567 65,715
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.2%
CenturyTel, Inc. 2,486 62,423
Frontier Communications Corp. 5,747 43,735
-------------
106,158
-------------
ELECTRIC UTILITIES 1.3%
V Edison International 15,148 539,117
Pinnacle West Capital Corp. 770 24,371
Progress Energy, Inc. 5,035 198,228
-------------
761,716
-------------
ELECTRICAL EQUIPMENT 0.6%
Cooper Industries, Ltd. Class
A 7,959 246,331
Hubbel, Inc. Class B 3,803 136,414
-------------
382,745
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 1.7%
Agilent Technologies, Inc. (a) 14,813 328,701
Amphenol Corp. Class A 3,411 97,725
Arrow Electronics, Inc. (a) 6,503 113,477
AVX Corp. 962 8,677
Ingram Micro, Inc. Class A (a) 2,976 39,670
Jabil Circuit, Inc. 28,849 242,620
Molex, Inc. 2,362 34,037
National Instruments Corp. 2,066 52,476
Vishay Intertechnology, Inc.
(a) 19,116 82,390
-------------
999,773
-------------
ENERGY EQUIPMENT & SERVICES 4.1%
BJ Services Co. 2,948 37,882
Dresser-Rand Group, Inc. (a) 2,733 61,219
ENSCO International, Inc. 6,944 263,941
FMC Technologies, Inc. (a) 2,571 89,959
Helmerich & Payne, Inc. 8,124 278,735
Key Energy Services, Inc. (a) 6,745 41,819
Nabors Industries, Ltd. (a) 7,858 112,998
Noble Corp. 13,952 449,394
Oil States International, Inc.
(a) 3,557 82,273
Patterson-UTI Energy, Inc. 20,009 265,519
Pride International, Inc. (a) 2,011 37,787
SEACOR Holdings, Inc. (a) 1,156 77,649
Superior Energy Services, Inc.
(a) 4,377 93,318
Tetra Technologies, Inc. (a) 2,719 18,924
Tidewater, Inc. 6,349 276,880
Unit Corp.(a) 6,567 246,525
-------------
2,434,822
-------------
FOOD & STAPLES RETAILING 1.1%
BJ's Wholesale Club, Inc. (a) 7,256 255,411
Safeway, Inc. 19,902 423,316
-------------
678,727
-------------
FOOD PRODUCTS 0.8%
Campbell Soup Co. 1,682 63,832
Corn Products International,
Inc. 10,365 252,077
H.J. Heinz Co. 1,344 58,894
Hershey Co. (The) 1,514 56,381
J.M. Smucker Co. (The) 709 31,593
Tyson Foods, Inc. Class A 203 1,774
-------------
464,551
-------------
GAS UTILITIES 0.2%
National Fuel Gas Co. 1,305 47,228
UGI Corp. 3,404 81,253
-------------
128,481
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 1.5%
Edwards Lifesciences Corp. (a) 6,451 340,871
Hill-Rom Holdings, Inc. 6,461 147,052
Kinetic Concepts, Inc. (a) 2,006 48,565
Teleflex, Inc. 2,631 139,417
Varian Medical Systems, Inc.
(a) 4,510 205,250
-------------
881,155
-------------
HEALTH CARE PROVIDERS & SERVICES 3.8%
CIGNA Corp. 10,893 177,556
DaVita, Inc. (a) 3,084 175,017
Laboratory Corp. of America
Holdings (a) 6,812 418,870
LifePoint Hospitals, Inc. (a) 4,578 109,735
Lincare Holdings, Inc. (a) 8,827 232,591
Omnicare, Inc. 14,651 403,928
Quest Diagnostics, Inc. 6,654 311,407
Tenet Healthcare Corp. (a) 17,164 75,178
Universal Health Services,
Inc. Class B 6,555 275,572
WellCare Health Plans, Inc.
(a) 3,793 91,677
-------------
2,271,531
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HEALTH CARE TECHNOLOGY 0.1%
Cerner Corp. (a) 1,207 $ 44,937
-------------
HOTELS, RESTAURANTS & LEISURE 0.9%
Brinker International, Inc. 683 6,352
Darden Restaurants, Inc. 12,869 285,306
International Speedway Corp.
Class A 584 18,332
Interval Leisure Group, Inc.
(a) 4,861 35,291
Panera Bread Co. Class A (a) 3,682 166,132
Scientific Games Corp. (a) 2,356 42,408
Yum! Brands, Inc. 46 1,334
-------------
555,155
-------------
HOUSEHOLD DURABLES 3.7%
Centex Corp. 1,578 19,331
D.R. Horton, Inc. 25,402 187,467
Fortune Brands, Inc. 614 23,418
Harman International
Industries, Inc. 1,106 20,317
Jarden Corp. (a) 1,217 21,663
KB Home 4,040 67,428
Leggett & Platt, Inc. 16,226 281,683
Lennar Corp. Class A 12,721 98,461
M.D.C. Holdings, Inc. 4,321 145,315
NVR, Inc. (a) 573 280,890
Pulte Homes, Inc. 29,332 326,759
Snap-on, Inc. 4,137 152,862
Stanley Works (The) 5,506 180,266
Toll Brothers, Inc. (a) 17,903 413,917
-------------
2,219,777
-------------
HOUSEHOLD PRODUCTS 0.7%
Church & Dwight Co., Inc. 5,704 337,049
Clorox Co. (The) 1,063 64,641
-------------
401,690
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.1%
AES Corp. (The) (a) 5,668 45,174
Calpine Corp.(a) 9,363 109,547
Constellation Energy Group,
Inc. 911 22,055
Mirant Corp.(a) 7,800 136,656
NRG Energy, Inc. (a) 14,107 327,988
Reliant Energy, Inc. (a) 9,116 47,859
-------------
689,279
-------------
INDUSTRIAL CONGLOMERATES 0.1%
McDermott International, Inc.
(a) 4,213 72,169
-------------
INSURANCE 8.6%
Alleghany Corp. (a) 20 5,640
Allied World Assurance
Holdings, Ltd. 6,789 217,723
American Financial Group,
Inc. 10,934 248,530
Aon Corp. 7,601 321,522
Arch Capital Group, Ltd. (a) 6,498 453,236
Arthur J. Gallagher & Co. 2,893 70,473
Assurant, Inc. 150 3,822
V Axis Capital Holdings,
Ltd. 17,172 489,059
Brown & Brown, Inc. 6,049 124,125
Cincinnati Financial Corp. 6,815 177,122
CNA Financial Corp. 3,841 59,766
Conseco, Inc. (a) 13,575 25,250
Endurance Specialty Holdings,
Ltd. 6,198 187,428
Everest Re Group, Ltd. 1,089 81,348
Genworth Financial, Inc. Class
A 15,686 75,920
HCC Insurance Holdings, Inc. 10,307 227,372
Marsh & McLennan Cos., Inc. 223 6,538
Nationwide Financial Services,
Inc. Class A 1,924 91,024
Old Republic International
Corp. 23,507 216,499
Philadelphia Consolidated
Holding Corp. (a) 3,655 213,781
Principal Financial Group,
Inc. 10,407 197,629
Protective Life Corp. 4,648 38,811
Reinsurance Group of America,
Inc. 4,275 159,629
RenaissanceRe Holdings, Ltd. 8,750 401,625
StanCorp Financial Group,
Inc. 903 30,774
Torchmark Corp. 1,184 49,456
Transatlantic Holdings, Inc. 3,750 160,688
Unum Group 18,089 284,902
V W.R. Berkley Corp. 19,188 504,069
-------------
5,123,761
-------------
INTERNET & CATALOG RETAIL 0.2%
HSN, Inc. (a) 2,485 15,283
Priceline.com, Inc. (a) 1,318 69,366
Ticketmaster (a) 4,345 42,060
-------------
126,709
-------------
INTERNET SOFTWARE & SERVICES 0.8%
HLTH Corp. (a) 3,284 27,224
IAC/InterActiveCorp (a) 12,493 209,383
Sohu.com, Inc. (a) 3,936 216,244
WebMD Health Corp. (a) 64 1,430
-------------
454,281
-------------
IT SERVICES 4.5%
Affiliated Computer Services,
Inc. Class A (a) 7,192 294,872
Alliance Data Systems Corp.
(a) 7,223 362,306
Broadridge Financial Solutions
LLC 19,459 235,454
Computer Sciences Corp. (a) 13,195 397,961
Fiserv, Inc. (a) 12,565 419,168
Global Payments, Inc. 6,612 267,852
Hewitt Associates, Inc. Class
A (a) 1,800 50,202
Lender Processing Services,
Inc. 9,567 220,711
Metavante Technologies, Inc.
(a) 647 10,850
NeuStar, Inc. Class A (a) 1,455 28,664
</Table>
14 MainStay Mid Cap Core 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)
IT SERVICES (CONTINUED)
Paychex, Inc. 9,546 $ 272,443
SAIC, Inc. (a) 7,441 137,435
-------------
2,697,918
-------------
LEISURE EQUIPMENT & PRODUCTS 1.1%
Eastman Kodak Co. 24,752 227,223
Hasbro, Inc. 14,398 418,550
-------------
645,773
-------------
LIFE SCIENCES TOOLS & SERVICES 0.9%
V Applied Biosystems, Inc. 16,813 518,345
PerkinElmer, Inc. 1,074 19,267
-------------
537,612
-------------
MACHINERY 3.8%
AGCO Corp. (a) 6,153 193,942
Bucyrus International, Inc. 3,484 84,069
Crane Co. 1,956 32,020
Cummins, Inc. 8,415 217,528
Dover Corp. 13,916 442,111
Flowserve Corp. 1,890 107,579
Gardner Denver, Inc. (a) 5,679 145,496
IDEX Corp. 1,474 34,167
ITT Corp. 2,780 123,710
John Bean Technologies Corp. 2,959 24,796
Joy Global, Inc. 4,789 138,785
Lincoln Electric Holdings,
Inc. 2,232 96,311
Parker Hannifin Corp. 11,032 427,711
Pentair, Inc. 1,663 45,965
SPX Corp. 1,361 52,725
Toro Co. (The) 1,329 44,708
Trinity Industries, Inc. 2,928 49,425
Valmont Industries, Inc. 11 603
-------------
2,261,651
-------------
MARINE 0.1%
Kirby Corp. (a) 955 32,776
-------------
MEDIA 2.4%
Dish Network Corp. Class A (a) 21,206 333,782
DreamWorks Animation SKG, Inc.
(a) 9,625 270,462
EW Scripps Co. Class A 1,426 6,631
Interpublic Group of Cos.,
Inc. (The) (a) 53,224 276,233
John Wiley & Sons, Inc. Class
A 1,249 43,440
Liberty Media Corp.
Entertainment Class A (a) 24,826 399,699
McGraw-Hill Cos., Inc. (The) 1,840 49,386
Warner Music Group Corp. 2,045 8,466
Washington Post Co. Class B 110 46,948
-------------
1,435,047
-------------
METALS & MINING 0.5%
AK Steel Holding Corp. 1,530 21,298
Century Aluminum Co. (a) 1,852 23,280
Cliffs Natural Resources,
Inc. 2,616 70,606
Reliance Steel & Aluminum Co. 6,794 170,122
Schnitzer Steel Industries,
Inc. Class A 406 10,933
Steel Dynamics, Inc. 2,410 28,727
-------------
324,966
-------------
MULTI-UTILITIES 2.4%
CenterPoint Energy, Inc. 5,920 68,198
Consolidated Edison, Inc. 151 6,541
DTE Energy Corp. 8,668 305,981
MDU Resources Group, Inc. 7,316 133,224
NSTAR 1,555 51,393
V PG&E Corp. 18,888 692,623
Sempra Energy 1,251 53,280
TECO Energy, Inc. 10,822 124,886
-------------
1,436,126
-------------
MULTILINE RETAIL 2.0%
Big Lots, Inc. (a) 11,331 276,816
Dollar Tree, Inc. (a) 12,074 459,054
Family Dollar Stores, Inc. 13,291 357,661
J.C. Penney Co., Inc. 4,511 107,903
-------------
1,201,434
-------------
OIL, GAS & CONSUMABLE FUELS 6.3%
Alpha Natural Resources, Inc.
(a) 4,792 171,410
Arch Coal, Inc. 6,036 129,231
Cimarex Energy Co. 8,770 354,834
CONSOL Energy, Inc. 3,191 100,165
Continental Resources, Inc.
(a) 2,011 65,136
Encore Acquisition Co. (a) 7,408 230,759
Forest Oil Corp. (a) 6,325 184,753
Foundation Coal Holdings,
Inc. 4,093 84,971
Frontline, Ltd. 6,757 214,873
Mariner Energy, Inc. (a) 9,067 130,474
Massey Energy Co. 9,511 219,609
Murphy Oil Corp. 6,401 324,147
Newfield Exploration Co. (a) 57 1,310
Noble Energy, Inc. 6,347 328,901
PetroHawk Energy Corp. (a) 3,345 63,388
Pioneer Natural Resources Co. 7,861 218,772
Plains Exploration &
Production Co. (a) 1,196 33,727
Southwestern Energy Co. (a) 7,838 279,190
St. Mary Land & Exploration
Co. 7,459 185,654
Sunoco, Inc. 3,413 104,096
W&T Offshore, Inc. 4,228 81,051
Walter Industries, Inc. 1,621 62,814
Whiting Petroleum Corp. (a) 3,727 193,767
-------------
3,763,032
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
PAPER & FOREST PRODUCTS 0.6%
International Paper Co. 7,629 $ 131,371
MeadWestvaco Corp. 15,765 221,183
-------------
352,554
-------------
PERSONAL PRODUCTS 0.5%
Avon Products, Inc. 48 1,192
Estee Lauder Cos., Inc. (The)
Class A 2,642 95,217
Herbalife, Ltd. 3,572 87,264
NBTY, Inc. (a) 5,748 134,331
-------------
318,004
-------------
PHARMACEUTICALS 2.8%
Allergan, Inc. 14 555
Barr Pharmaceuticals, Inc. (a) 3,924 252,156
Endo Pharmaceuticals Holdings,
Inc. (a) 16,741 309,709
V Forest Laboratories, Inc.
(a) 20,304 471,662
King Pharmaceuticals, Inc. (a) 34,334 301,796
Sepracor, Inc. (a) 1,376 18,328
Watson Pharmaceuticals, Inc.
(a) 12,623 330,344
-------------
1,684,550
-------------
PROFESSIONAL SERVICES 1.1%
Dun & Bradstreet Corp. 464 34,192
Manpower, Inc. 9,337 290,661
Monster Worldwide, Inc. (a) 5,806 82,677
Robert Half International,
Inc. 14,458 272,823
-------------
680,353
-------------
REAL ESTATE INVESTMENT TRUSTS 3.1%
Camden Property Trust 1,007 33,946
CapitalSource, Inc. 16,419 121,501
CBL & Associates Properties,
Inc. 1,248 11,519
Digital Realty Trust, Inc. 891 29,831
Equity Residential 4,523 157,988
Health Care, Inc. 1,715 76,335
Hospitality Properties Trust 1,953 19,823
Host Hotels & Resorts, Inc. 40,163 415,285
Liberty Property Trust 7,922 188,940
Mack-Cali Realty Corp. 4,753 107,988
Nationwide Health Properties,
Inc. 70 2,089
Plum Creek Timber Co., Inc. 5,691 212,160
ProLogis 1,819 25,466
Public Storage 3,862 314,753
Rayonier, Inc. 17 562
Taubman Centers, Inc. 3,816 126,768
-------------
1,844,954
-------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.0%++
Jones Lang LaSalle, Inc. 575 18,929
-------------
ROAD & RAIL 1.4%
Con-Way, Inc. 1,631 55,519
J.B. Hunt Transport Services,
Inc. 10,736 305,225
Kansas City Southern (a) 6,905 213,157
Ryder System, Inc. 6,773 268,346
-------------
842,247
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 5.6%
Altera Corp. 23,666 410,605
Analog Devices, Inc. 13,222 282,422
Broadcom Corp. Class A (a) 20,859 356,272
Integrated Device Technology,
Inc. (a) 23,850 151,686
KLA-Tencor Corp. 15,809 367,559
Lam Research Corp. (a) 16,112 360,264
Linear Technology Corp. 78 1,769
LSI Corp. (a) 61,895 238,296
Marvell Technology Group, Ltd.
(a) 14,936 103,955
Microchip Technology, Inc. 111 2,734
National Semiconductor Corp. 27,870 367,048
Novellus Systems, Inc. (a) 13,910 219,778
ON Semiconductor Corp. (a) 33,130 169,294
Teradyne, Inc. (a) 6,254 31,895
Xilinx, Inc. 16,259 299,491
-------------
3,363,068
-------------
SOFTWARE 2.8%
Activision Blizzard, Inc. (a) 226 2,816
Autodesk, Inc. (a) 15,412 328,430
BMC Software, Inc. (a) 17,553 453,218
CA, Inc. 24,541 436,830
Compuware Corp. (a) 36,375 232,072
Salesforce.com, Inc. (a) 49 1,517
Synopsys, Inc. (a) 11,971 218,830
-------------
1,673,713
-------------
SPECIALTY RETAIL 5.9%
Abercrombie & Fitch Co. Class
A 4,215 122,066
Advance Auto Parts, Inc. 10,952 341,703
American Eagle Outfitters,
Inc. 4,495 49,984
AnnTaylor Stores Corp. (a) 8,270 103,954
AutoZone, Inc. (a) 2,354 299,641
Barnes & Noble, Inc. 3,915 73,915
Foot Locker, Inc. 21,286 311,201
Gap, Inc. (The) 35,635 461,117
Limited Brands, Inc. 9,037 108,263
PetSmart, Inc. 1,625 31,996
RadioShack Corp. 18,145 229,716
V Ross Stores, Inc. 14,420 471,390
</Table>
16 MainStay Mid Cap Core Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
SPECIALTY RETAIL (CONTINUED)
V Sherwin-Williams Co. (The) 9,856 $ 560,905
TJX Cos., Inc. 14,754 394,817
-------------
3,560,668
-------------
TEXTILES, APPAREL & LUXURY GOODS 1.5%
Coach, Inc. (a) 18,493 380,956
Hanesbrands, Inc. (a) 68 1,188
Jones Apparel Group, Inc. 7,313 81,247
Phillips-Van Heusen Corp. 4,462 109,364
Polo Ralph Lauren Corp. 7,408 349,435
-------------
922,190
-------------
THRIFTS & MORTGAGE FINANCE 0.0%++
Tree.com, Inc. (a) 654 1,772
-------------
TOBACCO 0.5%
Lorillard, Inc. 2,795 184,079
UST, Inc. 2,109 142,547
-------------
326,626
-------------
TRADING COMPANIES & DISTRIBUTORS 0.1%
GATX Corp. 860 24,553
WESCO International, Inc. (a) 1,548 30,774
-------------
55,327
-------------
WIRELESS TELECOMMUNICATION SERVICES 0.9%
Leap Wireless International,
Inc. (a) 953 26,722
NII Holdings, Inc. (a) 10,746 276,817
Telephone and Data Systems,
Inc. 8,196 220,063
-------------
523,602
-------------
Total Common Stocks
(Cost $74,541,482) 58,501,699
-------------
EXCHANGE TRADED FUND 2.2% (B)
- ----------------------------------------------------------
V S&P MidCap 400
Index--MidCap SPDR Trust
Series 1 12,464 1,288,778
-------------
Total Exchange Traded Fund
(Cost $1,284,637) 1,288,778
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 0.1%
- ----------------------------------------------------------
REPURCHASE AGREEMENT 0.1%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity $57,149
(Collateralized by a Federal
Home Loan Bank Security with
a rate of 3.625% and a
maturity date of 7/1/11,
with a Principal Amount of
$60,000 and a
Market Value of $60,974) $57,148 $ 57,148
-------------
Total Short-Term Investment
(Cost $57,148) 57,148
-------------
Total Investments
(Cost $75,883,267) (c) 100.1% 59,847,625
Liabilities in Excess of
Cash and Other Assets (0.1) (51,483)
----- ------------
Net Assets 100.0% $ 59,796,142
===== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Non-income producing security.
(b) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(c) At October 31, 2008, cost is $77,185,537
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ --
Gross unrealized depreciation (17,337,912)
------------
Net unrealized depreciation $(17,337,912)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $75,883,267) $ 59,847,625
Receivables:
Investment securities sold 117,360
Dividends and interest 38,861
Fund shares sold 14,028
Manager (See Note 3) 6,237
Other assets 36,380
------------
Total assets 60,060,491
------------
LIABILITIES:
Payables:
Transfer agent (See Note 3) 73,957
Investment securities purchased 52,153
Shareholder communication 51,629
Professional fees 27,518
NYLIFE Distributors (See Note 3) 23,815
Fund shares redeemed 19,708
Custodian 9,828
Trustees 247
Accrued expenses 5,251
Dividend payable 243
------------
Total liabilities 264,349
------------
Net assets $ 59,796,142
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) 1 billion shares
authorized $ 39,531
Additional paid-in capital 96,939,301
------------
96,978,832
Accumulated undistributed net
investment income 618,105
Accumulated net realized loss on
investments and futures
transactions (21,765,153)
Net unrealized depreciation on
investments (16,035,642)
------------
Net assets $ 59,796,142
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 10,229,958
============
Shares of beneficial interest
outstanding 670,194
============
Net asset value per share
outstanding $ 15.26
Maximum sales charge (5.50% of
offering price) 0.89
------------
Maximum offering price per share
outstanding $ 16.15
============
CLASS A
Net assets applicable to
outstanding shares $ 20,800,679
============
Shares of beneficial interest
outstanding 1,362,504
============
Net asset value per share
outstanding $ 15.27
Maximum sales charge (5.50% of
offering price) 0.89
------------
Maximum offering price per share
outstanding $ 16.16
============
CLASS B
Net assets applicable to
outstanding shares $ 9,610,403
============
Shares of beneficial interest
outstanding 650,570
============
Net asset value and offering price
per share outstanding $ 14.77
============
CLASS C
Net assets applicable to
outstanding shares $ 10,170,165
============
Shares of beneficial interest
outstanding 689,113
============
Net asset value and offering price
per share outstanding $ 14.76
============
CLASS I
Net assets applicable to
outstanding shares $ 8,925,812
============
Shares of beneficial interest
outstanding 576,852
============
Net asset value and offering price
per share outstanding $ 15.47
============
CLASS R3
Net assets applicable to
outstanding shares $ 59,125
============
Shares of beneficial interest
outstanding 3,874
============
Net asset value and offering price
per share outstanding $ 15.26
============
</Table>
18 MainStay Mid Cap Core 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, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 2,308,696
Income from securities
loaned--net 87,476
Interest 53,487
------------
Total income 2,449,659
------------
EXPENSES:
Manager (See Note 3) 896,372
Transfer agent--Investor Class
(See Note 3) 48,443
Transfer agent--Class A (See Note
3) 197,982
Transfer agent--Class B and C
(See Note 3) 183,752
Transfer agent--Classes I and R3
(See Note 3) 40,229
Distribution--Class B (See Note
3) 119,429
Distribution--Class C (See Note
3) 130,594
Distribution--Class R3 (See Note
3) 194
Distribution/Service--Investor
Class (See Note 3) 21,841
Distribution/Service--Class A
(See Note 3) 106,915
Service--Class B (See Note 3) 39,810
Service--Class C (See Note 3) 43,531
Distribution/Service--Class R3
(See Note 3) 194
Shareholder communication 93,072
Registration 69,805
Professional fees 42,090
Custodian 17,779
Trustees 4,035
Shareholder service--Class R3
(See Note 3) 78
Miscellaneous 13,902
------------
Total expenses before waiver 2,070,047
Expense waiver from Manager (See
Note 3) (491,292)
------------
Net expenses 1,578,755
------------
Net investment income 870,904
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on:
Security transactions (21,174,226)
Futures transactions (589,251)
------------
Net realized loss on investments
and futures transactions (21,763,477)
------------
Net change in unrealized
appreciation (depreciation) on:
Security transactions (22,513,800)
Futures contracts 3,028
------------
Net change in unrealized
appreciation on investments and
futures contracts (22,510,772)
------------
Net realized and unrealized loss on
investments and futures
transactions (44,274,249)
------------
Net decrease in net assets
resulting from operations $(43,403,345)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 870,904 $ 991,973
Net realized gain (loss) on
investments and futures
transactions (21,763,477) 16,611,850
Net change in unrealized
appreciation on investments
and futures contracts (22,510,772) (7,642,588)
---------------------------
Net increase (decrease) in
net assets resulting from
operations (43,403,345) 9,961,235
---------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (577,459) (258,589)
Class B (6,705) --
Class C (14,000) --
Class I (225,102) (124,722)
Class R3 (446) (5)
---------------------------
(823,712) (383,316)
---------------------------
From net realized gain on investments:
Class A (8,414,430) (2,138,909)
Class B (2,653,403) (729,507)
Class C (3,030,218) (1,039,189)
Class I (2,363,902) (793,862)
Class R3 (10,211) (339)
---------------------------
(16,472,164) (4,701,806)
---------------------------
Total dividends and
distributions to
shareholders (17,295,876) (5,085,122)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 17,666,364 34,729,708
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 14,612,797 4,502,170
Cost of shares redeemed (47,063,628) (50,467,394)
---------------------------
Decrease in net assets
derived from capital
share transactions (14,784,467) (11,235,516)
---------------------------
Net decrease in net
assets (75,483,688) (6,359,403)
NET ASSETS:
Beginning of year 135,279,830 141,639,233
---------------------------
End of year $ 59,796,142 $135,279,830
===========================
Accumulated undistributed net
investment income at end of
year $ 618,105 $ 623,655
===========================
</Table>
20 MainStay Mid Cap Core 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
mainstayinvestments.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- -------------------------------------------------------
FEBRUARY 28, JANUARY 2,
2008** 2004**
THROUGH THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31, OCTOBER 31,
-------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 22.46 $ 28.93 $ 27.91 $ 26.10 $ 23.45 $21.93
------- ------- ------- ------- ------- ------
Net investment income
(loss) 0.15 (a) 0.25 (a) 0.26 (a) 0.12 0.06 (0.01)
Net realized and
unrealized gain (loss)
on investments (7.35) (10.11) 1.81 3.12 3.34 1.53
------- ------- ------- ------- ------- ------
Total from investment
operations (7.20) (9.86) 2.07 3.24 3.40 1.52
------- ------- ------- ------- ------- ------
Less dividends and
distributions:
From net investment
income -- (0.22) (0.11) (0.08) (0.04) --
From net realized gain
on investments -- (3.58) (0.94) (1.35) (0.71) --
------- ------- ------- ------- ------- ------
Total dividends and
distributions -- (3.80) (1.05) (1.43) (0.75) --
------- ------- ------- ------- ------- ------
Net asset value at end of
period $ 15.26 $ 15.27 $ 28.93 $ 27.91 $ 26.10 $23.45
======= ======= ======= ======= ======= ======
Total investment return
(b)(d) (32.06%)(c) (39.03%) 7.56% 12.89% 14.59% 6.93% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 1.03% ++ 1.10% 0.89% 0.47% 0.32% (0.21%)++
Net expenses 1.45% ++ 1.35% 1.35% 1.35% 1.50% 1.53% ++#
Expenses (before
waiver/reimbursement) 2.03% ++ 1.83% 1.65% 1.68% 1.78% 2.13% ++#
Portfolio turnover rate 203% 203% 150% 94% 153% 43%
Net assets at end of
period (in 000's) $10,230 $20,801 $69,082 $64,829 $42,239 $6,554
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 28.09 $ 27.21 $ 25.59 $ 23.14 $20.86
------- ------- ------- ------- ------
Net investment income
(loss) 0.06 (a) 0.04 (a) (0.05) (0.08) (0.07)
Net realized and
unrealized gain (loss)
on investments (9.80) 1.78 3.02 3.25 2.50
------- ------- ------- ------- ------
Total from investment
operations (9.74) 1.82 2.97 3.17 2.43
------- ------- ------- ------- ------
Less dividends and
distributions:
From net investment
income (0.01) -- -- (0.01) --
From net realized gain
on investments (3.58) (0.94) (1.35) (0.71) (0.15)
------- ------- ------- ------- ------
Total dividends and
distributions (3.59) (0.94) (1.35) (0.72) (0.15)
------- ------- ------- ------- ------
Net asset value at end of
period $ 14.76 $ 28.09 $ 27.21 $ 25.59 $23.14
======= ======= ======= ======= ======
Total investment return
(b)(d) (39.52%) 6.72% 12.09% 13.76% 11.71%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.29% 0.15% (0.26%) (0.43%) (0.96%)
Net expenses 2.15% 2.10% 2.10% 2.25% 2.28% #
Expenses (before
waiver/reimbursement) 2.69% 2.39% 2.43% 2.53% 2.88% #
Portfolio turnover rate 203% 150% 94% 153% 43%
Net assets at end of
period (in 000's) $10,170 $24,485 $31,445 $22,687 $4,951
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
# Includes transfer agent fees paid indirectly which amounted to 0.02% of
average net assets for the period ended October 31, 2004.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestments of dividends and distributions. Class I and Class R3 shares are
not subject to sales charges.
(c) Total return is not annualized.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
22 MainStay Mid Cap Core 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 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------------------
2008 2007 2006 2005 2004
$28.10 $ 27.23 $ 25.60 $ 23.14 $21.79
-- --- ------- ------- ------- ------
0.06 (a) 0.04 (a) (0.08) (0.10) (0.07)
(9.80) 1.77 3.06 3.28 1.42
-- --- ------- ------- ------- ------
(9.74) 1.81 2.98 3.18 1.35
-- --- ------- ------- ------- ------
(0.01) -- -- (0.01) --
(3.58) (0.94) (1.35) (0.71) --
-- --- ------- ------- ------- ------
(3.59) (0.94) (1.35) (0.72) --
-- --- ------- ------- ------- ------
$14.77 $ 28.10 $ 27.23 $ 25.60 $23.14
== === ======= ======= ======= ======
(39.-
54%) 6.76% 12.09% 13.81% 6.20% (c)
0.30% 0.15% (0.18%) (0.43%) (0.96%)++
2.15% 2.10% 2.10% 2.25% 2.28% ++#
2.69% 2.40% 2.43% 2.53% 2.88% ++#
203% 150% 94% 153% 43%
$9,610 $21,376 $21,047 $25,068 $5,756
</Table>
<Table>
<Caption>
CLASS I CLASS R3
-------------------------------------------------- --------------------------------
APRIL 28,
2006**
YEAR ENDED THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31,
--------------------------------------------------------------------------------------
2008 2007 2006 2005 2004 2008 2007 2006
$29.28 $ 28.18 $ 26.34 $ 23.57 $ 21.01 $ 28.91 $27.87 $27.81
-- --- ------- ------- ------- ------- ------- ------ ------
0.32 (a) 0.35 (a) 0.24 0.12 0.05 0.18 (a) 0.15 (a) (0.00) ++
(10.-
25) 1.83 3.11 3.42 2.66 (10.11) 1.84 0.06
-- --- ------- ------- ------- ------- ------- ------ ------
(9.93) 2.18 3.35 3.54 2.71 (9.93) 1.99 0.06
-- --- ------- ------- ------- ------- ------- ------ ------
(0.30) (0.14) (0.16) (0.06) -- (0.14) (0.01) --
(3.58) (0.94) (1.35) (0.71) (0.15) (3.58) (0.94) --
-- --- ------- ------- ------- ------- ------- ------ ------
(3.88) (1.08) (1.51) (0.77) (0.15) (3.72) (0.95) --
-- --- ------- ------- ------- ------- ------- ------ ------
$15.47 $ 29.28 $ 28.18 $ 26.34 $ 23.57 $ 15.26 $28.91 $27.87
== === ======= ======= ======= ======= ======= ====== ======
(38.-
86%) 7.87% 13.24% 15.11% 12.97% (39.20%) 7.24% 0.22% (c)
1.41% 1.20% 0.81% 0.78% 0.26% 0.83% 0.50% (0.02%)++
1.04% 1.04% 1.04% 1.04% 1.06%# 1.64% 1.64% 1.64% ++
1.41% 1.17% 1.16% 1.27% 1.66%# 2.03% 1.77% 1.77% ++
203% 150% 94% 153% 43% 203% 150% 94%
$8,926 $20,256 $24,309 $23,379 $18,508 $ 59 $ 80 $ 10
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
23
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
Eclipse Funds (the "Trust") was organized on July 30, 1986 as a Massachusetts
business trust. The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company,
and is comprised of three funds (collectively referred to as the "Funds"). These
financial statements and notes relate only to the MainStay Mid Cap Core Fund
(the "Fund"). Effective September 29, 2008, the Fund changed its name from
MainStay Mid Cap Opportunity Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares. Class I shares commenced on
December 27, 1994. Class C shares commenced on December 30, 2002. Class A shares
and Class B shares commenced on January 2, 2004. Class R3 shares commenced on
April 28, 2006. Investor Class shares commenced on February 28, 2008. Investor
Class and 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 Investor Class and 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 and Class R3 shares are not subject to a sales charge. Depending
upon eligibility, Class B shares convert to either Investor Class or Class A
shares eight years after the date they were purchased. Additionally, depending
upon eligibility, Investor Class shares may convert to Class A shares and Class
A shares may convert to Investor Class shares. The six classes of shares have
the same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and bear the same conditions except that Class B
and Class C shares are subject to higher distribution fee rates than Investor
Class, Class A and Class R3 shares under a distribution plan pursuant to Rule
12b-1 under the 1940 Act. Class I and Class R3 shares are not subject to a
distribution or service fee. Class R3 shares are authorized to pay to the
Manager, as defined in Note 3(A), its affiliates, or third-party service
providers, as compensation for services rendered to shareholders of Class R3
shares, a shareholder service fee.
Effective September 29, 2008, the Fund changed its investment objective. 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"). Securities that are 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. Futures
contracts are valued at the last posted settlement price on the market where
such futures are primarily traded. Investments in other mutual funds are valued
at their net asset values as of the close of the New York Stock Exchange on the
date of valuation.
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 which mature in 60 days or less are valued at 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 the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's 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: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) 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 Manager, as defined in Note 3(A), reflect the
security's market value; and (vi) 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, 2008, 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. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB
24 Mainstay Mid Cap Core Fund
Statement No. 109 (the "Interpretation"). The Interpretation established for all
entities, including pass-through entities such as the Fund, a minimum threshold
for financial statement recognition of the benefit of positions taken in filing
tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. The Interpretation
became effective for the Fund's 2008 fiscal year, and was applied to all open
tax years as of the date of effectiveness. The Manager, as defined in Note 3(A),
determined that the adoption of the Interpretation did not have an impact on the
Fund's financial statements upon adoption. The Manager continually reviews the
Fund's tax positions and such conclusions under the Interpretation based on
factors, including, but not limited to, ongoing analyses of tax laws and
regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(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 pro rata 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 fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata 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 amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such 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 objectives. The Fund's investment in futures contracts and other
derivatives may increase the volatility of the Fund's net asset value and may
result in a loss to the Fund.
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
engage in securities lending, subject
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to the limitations set forth in the Investment Company Act of 1940. In the event
the Fund does engage in securities lending, the Fund will lend through its
custodian, State Street Bank and Trust Company. State Street manages the Fund's
cash collateral in accordance with the Lending Agreement between the Fund and
State Street, and indemnifies the Fund's portfolio against counterparty risk.
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 may also record realized gain or loss on securities deemed
sold due to borrower's inability to return securities on loan. 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.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, 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
York Life Insurance Company ("New York Life"), serves as the Fund's Manager,
pursuant to an Amended and Restated Management Agreement ("Management
Agreement"). 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 NYLIM directly, without a subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of 0.85% of the Fund's
average daily net assets. Between May 1, 2008 and September 29, 2008, the Fund
paid the Manager a monthly fee for services performed and facilities furnished
as follows: 0.90% on assets up to $1 billion and 0.85% on assets in excess of $1
billion. Prior to May 1, 2008, the Fund was contraually obligated to pay the
Manager a monthly fee for services performed and facilities furnished at an
annual rate of 0.90% of the average daily net assets of the Fund.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.45%; Class A, 1.35%; Class B,
2.20%; Class C, 2.20%; Class I, 1.04%; Class R3, 1.64%. This expense limitation
may be modified or terminated only with the approval of the Board of Trustees.
NYLIM may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $896,372 and waived its fees in the amount of $491,292.
As of October 31, 2008, 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,
2009 2010 2011 TOTAL
$398,710 $392,067 $491,292 $1,282,069
- -----------------------------------------------
</Table>
26 Mainstay Mid Cap Core Fund
The Fund had $156,672 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between May 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to reimburse the expenses of the appropriate
class of the Funds so that the class' total ordinary operating expenses did not
exceed the following percentages of average daily net assets for each class:
Class A, 1.35%; Class B, 2.10%; Class C, 2.10%; Class I, 1.04%; and Class R3,
1.64%.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, 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, State Street Bank and Trust Company 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 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 Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and 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 distribution 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 distribution 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
and 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.
In accordance with the Shareholder Services Plan for the Class R3 shares, the
Manager has agreed to provide, through its affiliates or independent third
parties, various shareholder and administrative support services to shareholders
of the Class R3 shares. For its services, the Manager is entitled to a
Shareholder Service Fee accrued daily and paid monthly at an annual rate of
0.10% of the average daily net assets attributable to the Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were $5,782
and $9,632, respectively, for the year ended October 31, 2008. 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, $38,103 and $1,523,
respectively, for the year ended October 31, 2008.
(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, 2008 amounted
to $470,406.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 907 0.0%++
- -------------------------------------------------
Class B 874 0.0++
- -------------------------------------------------
Class C 1,209 0.0++
- -------------------------------------------------
Class R3 6,534 11.1
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the 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, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $6,090.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$618,105 $(20,462,883) $-- $(17,337,912) $(37,182,690)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals and real estate investment trust basis
adjustments.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ADDITIONAL
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
$(52,742) $52,743 $(1)
</Table>
The reclassifications for the Fund are primarily due to real estate investment
trust distributions and distribution redesignations.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $20,462,883 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
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $20,463
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $ 3,838,175 $2,211,645
Long-Term Capital Gains 13,457,701 2,873,477
---------------------------------------------------
$17,295,876 $5,085,122
---------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
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. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. 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
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $199,302 and $230,897, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31, 2008
(a):
Shares sold 183,888 $ 4,122,890
Shares redeemed (131,216) (2,750,502)
-----------------------
Net increase in shares
outstanding before
conversion 52,672 1,372,388
Shares converted into
Investor Class
(See Note 1) 668,186 14,248,778
Shares converted from
Investor Class (See Note 1) (50,664) (1,040,612)
-----------------------
Net increase 670,194 $14,580,554
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
28 Mainstay Mid Cap Core Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 351,608 $ 8,092,413
Shares issued to
shareholders in
reinvestment of dividends
and distributions 293,427 7,225,656
Shares redeemed (1,108,700) (24,674,277)
-------------------------
Net decrease in shares
outstanding before
conversion (463,665) (9,356,208)
Shares converted into Class
A
(See Note 1) 85,731 1,835,996
Shares converted from Class
A
(See Note 1) (647,209) (13,787,429)
-------------------------
Net decrease (1,025,143) $(21,307,641)
=========================
Year ended October 31, 2007:
Shares sold 743,236 $ 21,740,996
Shares issued to
shareholders in
reinvestment of dividends
and distributions 72,815 2,060,305
Shares redeemed (816,684) (23,698,531)
-------------------------
Net increase (decrease) in
shares outstanding before
conversion (633) 102,770
Shares converted from Class
B (See Note 1) 65,176 1,908,866
-------------------------
Net increase 64,543 $ 2,011,636
=========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 90,960 $ 1,958,957
Shares issued to shareholders
in reinvestment of
dividends and distributions 107,820 2,570,293
Shares redeemed (251,248) (5,433,052)
-----------------------
Net decrease in shares
outstanding before
conversion (52,468) (903,802)
Shares converted from Class B
(See Note 1) (57,582) (1,256,733)
-----------------------
Net decrease (110,050) $(2,160,535)
=======================
Year ended October 31, 2007:
Shares sold 198,682 $ 5,673,916
Shares issued to shareholders
in reinvestment of
dividends and distributions 25,718 709,281
Shares redeemed (169,968) (4,801,570)
-----------------------
Net increase in shares
outstanding before
conversion 54,432 1,581,627
Shares reacquired upon
conversion into Class A
(See Note 1) (66,853) (1,908,866)
-----------------------
Net decrease (12,421) $ (327,239)
=======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 91,354 $ 2,020,160
Shares issued to shareholders
in reinvestment of
dividends and distributions 96,606 2,300,948
Shares redeemed (370,589) (8,027,996)
-----------------------
Net decrease (182,629) $ (3,706,888)
=======================
Year ended October 31, 2007:
Shares sold 147,937 $ 4,205,606
Shares issued to shareholders
in reinvestment of
dividends and distributions 30,628 844,105
Shares redeemed (462,284) (13,072,120)
-----------------------
Net decrease (283,719) $ (8,022,409)
=======================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 66,248 $ 1,450,090
Shares issued to
shareholders in
reinvestment of dividends
and distributions 100,402 2,505,243
Shares redeemed (281,591) (6,169,633)
---------------------------
Net decrease (114,941) $(2,214,300)
===========================
Year ended October 31, 2007:
Shares sold 102,800 $ 3,010,618
Shares issued to
shareholders in
reinvestment of dividends
and distributions 31,068 888,135
Shares redeemed (304,844) (8,864,161)
---------------------------
Net decrease (170,976) $(4,965,408)
===========================
</Table>
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 1,042 $ 21,854
Shares issued to
shareholders in
reinvestment of dividends
and distributions 434 10,657
Shares redeemed (376) (8,168)
---------------------------
Net increase 1,100 $ 24,343
===========================
Year ended October 31, 2007:
Shares sold 3,429 $ 98,572
Shares issued to
shareholders in
reinvestment of dividends
and distributions 12 344
Shares redeemed (1,027) (31,012)
---------------------------
Net increase 2,414 $ 67,904
===========================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, 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
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and 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, 2008, Management does not
believe the adoption of SFAS No. 157, effective for the Fund for the fiscal year
beginning November 1, 2008, will impact the amounts reported in the Fund's
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.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 10--SUBSEQUENT EVENT:
As of January 1, 2009, the portfolio managers who manage the day-to-day
investment operations of the Fund will transition from a division within NYLIM,
currently referred to as NYLIM Equity Investors or Equity Investors Group, into
a wholly-owned subsidiary of NYLIM Holdings LLC. The new legal entity will be
named Madison Square Investors LLC ("MSI"). The creation of MSI is not expected
to impact the portfolio management team or investment strategy of the Fund. The
Fund's Board of Trustees (the "Board") approved the appointment of MSI as a
subadvisor to the Fund at a meeting on September 25, 2008. The Board also
approved a new Subadvisory Agreement between NYLIM and MSI. There will be no
change in the management fees paid by the Fund as a result of this transition.
30 Mainstay Mid Cap Core Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Eclipse Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Core Fund (formerly
MainStay Mid Cap Opportunity Fund) ("the Fund"), one of the funds constituting
Eclipse Funds, as of October 31, 2008, 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 the financial highlights for each
of the years in the five-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.
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, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedure where replies from
brokers were not received. 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 Core Fund of Eclipse Funds as of October 31, 2008, 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 the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 31
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the Mid Cap Core Fund (the "Fund"), which was comprised solely of
Independent Trustees, unanimously approved the Management Agreement (the
"Agreement") for the Fund for one year.
In reaching its decision to approve the Agreement, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund, prepared by the Investment Consulting Group at New York
Life Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management fee and
ordinary operating expenses. The Board also requested and received information
on the profitability of the Fund to NYLIM and its affiliates, discussed in
greater detail below, and responses to a comprehensive list of questions
encompassing a variety of topics prepared on behalf of the Board by independent
legal counsel to the Board. In addition, the Board considered information
provided to it by NYLIM and independent legal counsel concerning the Agreement,
which was amended and restated to more completely reflect the services provided
to the Fund, but did not result in a material amendment to the Fund's prior
contractual arrangements.
In determining to approve the Agreement for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM as adviser to the
Fund; (ii) the investment performance of the Fund; (iii) the cost of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreement was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreement were based also
on the Board's consideration of the Agreement in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreement is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM
In considering the approval of the Agreement, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds and serves a variety of other investment
advisory clients, including other pooled investment vehicles. The Board
considered NYLIM's performance in fulfilling its responsibilities for overseeing
the Fund's legal and compliance environment, and for implementing Board
directives as they relate to the Fund. The Board considered the scope and
quality of NYLIM's services provided to the Fund's shareholders (including
services provided through its affiliate, NYLIM Service Company LLC), such as the
more extensive servicing needs of New York Life agents and reputation as a high-
quality provider of shareholder services, which has been recognized by
independent third-parties on numerous occasions. The Board noted the role that
the MainStay Family of Funds historically has played in serving the investment
needs of New York Life Insurance Company policyholders, who
32 Mainstay Mid Cap Core Fund
often maintain smaller account balances than other retail investors. The Board
acknowledged that it had approved NYLIM's recommendation to create a new
"Investor Class" of shares designed principally to address the higher
shareholder-servicing costs typically associated with smaller shareholder
accounts. The Board considered the experience of senior personnel at NYLIM
providing management and administrative services to the Fund, as well as NYLIM's
reputation and financial condition. The Board also reviewed NYLIM's willingness
to invest in personnel designed to benefit the Fund, including enhancements to
investment teams at NYLIM's Equity Investors Group. In addition, the Board noted
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. The Board further considered NYLIM's track record and
experience in providing investment advisory services to the Fund. In this
regard, the Board considered the experience of the Fund's portfolio management
team, the number of accounts managed by the portfolio managers and NYLIM's
method for compensating portfolio managers. In addition, the Board considered
the benefits to shareholders of being part of the MainStay Family of Funds,
including the privilege of exchanging investments between the same class of
shares without the imposition of a sales charge, as described more fully in the
Fund's prospectus. Based on these considerations, the Board concluded, within
the context of its overall determinations regarding the Agreement, that the Fund
is likely to continue to benefit from the nature, extent and quality of these
services as a result of NYLIM's experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM concerning Fund investment
performance, as well as discussions between the Fund's portfolio managers and
the Board that occurred at meetings from time to time throughout the year and in
previous years. The Board considered specific actions that NYLIM had taken, or
had agreed with the Board to take, to improve investment performance, and any
results of those actions. In considering the Fund's investment performance, the
Board focused principally on the Fund's long-term performance track record, as
opposed to the Fund's short-term investment performance.
As part of its evaluation of the Fund's investment performance, the Board
discussed with NYLIM reasons for the Fund's more recent underperformance
relative to its benchmark and peer group, and NYLIM's plans for seeking to
improve the Fund's future investment performance including evaluating the Funds
investment process. The Board noted that over the past two years NYLIM had
engaged a new portfolio management team to manage the Fund, and the Board
concluded it was appropriate to allow the new portfolio management team
sufficient time to improve the Fund's relative investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that NYLIM is taking appropriate
and reasonable actions to address the Board's concerns about the Fund's
investment performance. The Fund discloses more information about its
performance in the Manager Discussions and Financial Highlights sections of this
Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreement and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund. The Board acknowledged that NYLIM must be in a position to pay
and retain experienced professional personnel to provide services to the Fund,
and that NYLIM's ability to maintain a strong financial position is important in
order for NYLIM to continue to provide high-quality ongoing services to the Fund
and its shareholders. The Board noted, for example, increased costs borne by
NYLIM and its affiliates due to new and ongoing regulatory and compliance
requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be
mainstayinvestments.com 33
impacted by numerous factors, including the structure of a fund manager's
organization, the types of funds it manages, and the manager's capital structure
and costs of capital. While recognizing the difficulty in evaluating a manager's
profitability with respect to the Fund, and noting that other profitability
methodologies may also be reasonable, the Board concluded that the profitability
methodology presented by NYLIM to the Board with respect to the Fund was
reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM from legally permitted "soft-dollar" arrangements
by which brokers provide research and other services to NYLIM in exchange for
commissions paid by the Fund with respect to trades on the Fund's portfolio
securities. The Board also considered that, in addition to fees earned by NYLIM
for managing the Fund, NYLIM affiliates also earn revenues from serving the Fund
in various other capacities, including as transfer agent and distributor. The
information provided to the Board indicated that the profitability to NYLIM and
its affiliates arising directly from these other arrangements was not excessive.
The Board noted that, although it assessed the overall profitability of the Fund
to NYLIM and its affiliates as part of the annual contract review process, when
considering the reasonableness of the fees to be paid to NYLIM and its
affiliates under the Agreement, the Board considered the profitability of
NYLIM's relationship with the Fund on a pre-tax basis, and without regard to
distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreement, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through contractual breakpoints, expense
waivers and reimbursements. While recognizing that any precise determination of
future economies of scale is necessarily refutable, the Board considered the
extent to which NYLIM may realize a larger profit margin as the Fund's assets
grow over time. The Board also observed that NYLIM subsidizes many of the Fund's
overall expenses through the operation of contractual and voluntary expense
limitations that may be lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT FEE AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fee to be paid under the Agreement
and the Fund's total ordinary operating expenses.
The Board considered information provided by NYLIM on the fees that NYLIM
charges to other investment advisory clients, including institutional separate
accounts and other funds with similar investment objectives as the Fund. In this
regard, the Board took into account the relative scope of services provided to
the Fund as opposed to NYLIM's other investment advisory clients. The Board also
considered comparative data provided by Strategic Insight on the fees and
expense ratios charged by similar mutual funds managed by other investment
advisers. This comparative information assisted the Board in evaluating the
reasonableness of the Fund's management fee when compared to similar fees
charged by NYLIM to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management fee and total ordinary
operating expenses, the Board took note of any fee and expense arrangements that
had been negotiated by the Board with NYLIM in recent years and observed that
NYLIM has subsidized the total ordinary operating expenses of the Fund and Fund
share classes through the imposition of expense limitation arrangements that may
be modified only with the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
fee and total ordinary operating expenses were within a range that is
competitive and, within the context of the Board's overall conclusions regarding
the Agreement, supports the conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreement for one year.
34 Mainstay Mid Cap Core Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advised shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) 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 $13,457,701.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$1,309,809 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008
should be multiplied by 0.5% for qualified interest income and 50.5% for the
corporate dividends received deduction.
In January 2009, 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 2008. 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, 2008.
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 mainstayinvestments.com; and (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 by calling 800-MAINSTAY (624-6782);
visiting the Funds' website at mainstayinvestments.com; or on the SEC's website
at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
Each 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 Funds' Form N-Q
is available without charge, on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (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).
mainstayinvestments.com 35
TRUSTEES AND OFFICERS
The Trustees oversee the Fund and the Manager. Each Trustee serves until his or
her successor is elected and qualified or until his or her resignation, death or
removal. The Retirement Policy provides that a Trustee shall tender his or her
resignation upon reaching age 72. A Trustee reaching the age of 72 may continue
for additional one-year periods with the approval of the Board's Nominating and
Governance Committee, except that no Trustee shall serve on the Board past his
or her 75th birthday. Officers serve a term of one year and are elected annually
by the Trustees. The business address of each Trustee and officer listed below
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 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Director, Eclipse Funds
KIM Trustee since Managers and President and Inc. since September 2008,
9/24/60 September Chief Executive Officer (22 funds); Trustee, The
2008 (since April 2008) of New MainStay Funds since
York Life Investment September 2008 (21 funds);
Management LLC and New York Director, ICAP Funds, Inc.,
Life Investment Management since September 2008 (4
Holdings LLC; Member of the funds); Director, MainStay
Board of Managers, MacKay VP Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
36 Mainstay Mid Cap Core Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITIONS(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman Management Advisors LLC Director since 1990,
8/12/51 since 2005 (since 1990) Eclipse Funds Inc. (22
and Trustee funds); Chairman and
since 2000 Trustee, The MainStay Funds
since 2007 (21 funds);
Chairman and Director, ICAP
Funds, Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc., since
1991 (68 portfolios)
- ---------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Director, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); Inc. since 2007 (22 funds);
3/27/51 Audit Partner, Arthur Andersen Trustee, The MainStay Funds
Committee LLP (1989 to 2002); since 2006 (21 funds);
Financial Consultant to the Audit and Director, ICAP Funds, Inc.,
Expert since Compliance Committee (2004 since 2007 (4 funds);
2007 to 2006) Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, State Farm
Associates Funds Trusts
since 2005 (4 portfolios);
Trustee, State Farm Mutual
Fund Trust since 2005 (16
portfolios); Trustee, State
Farm Variable Product Trust
since 2005 (9 portfolios)
- ---------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Director, Eclipse Funds
MEENAN Trustee since President and Chief Inc. since 2002 (22 funds);
12/5/41 2002 Executive Officer, Babson- Trustee, The MainStay Funds
United, Inc. (financial since 2007 (21 funds);
services firm) (2000 to Director, ICAP Funds, Inc.,
2004); Independent since 2006 (4 funds);
Consultant (1999 to 2000); Director, MainStay VP
Head of Global Funds, Series Fund, Inc., since
Citicorp (1995 to 1999) 2007 (23 portfolios)
- ---------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Director, Eclipse Funds
H. Trustee since Capital Management; Inc. since 2007 (22 funds);
NOLAN, 2007 President--Shields/ Trustee, The MainStay Funds
JR. Alliance, Alliance Capital since 2007 (21 funds);
11/16/46 Management (1994 to 2004) Director, ICAP Funds, Inc.,
since 2007 (4 funds);
Director, MainStay VP
Series Fund, Inc., since
2006 (23 portfolios)
- ---------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Director, Eclipse Funds
S. Trustee since Chief Executive Officer Inc. since 2007 (22 funds);
TRUTANIC 2007 (1990 to 1999 and since Trustee, The MainStay Funds
2/13/52 2004), Somerset & Company since 1994 (21 funds);
(financial advisory firm); Director, ICAP Funds, Inc.,
Managing Director and since 2007 (4 funds);
Advisor, The Carlyle Group Director, MainStay VP
(private investment firm) Series Fund, Inc., since
(2002 to 2004); Senior 2007 (23 portfolios)
Managing Director, Partner
and Member of the Board,
Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- ---------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
TERM OF
OFFICE,
POSITIONS(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Director, Eclipse Funds
WEIL Trustee and Accounting, Graduate School Inc. since 2007 (22 funds);
5/22/40 Audit of Business, University of Trustee, The MainStay Funds
Committee Chicago; President, Roman since 2007 (21 funds);
Financial L. Weil Associates, Inc. Director, ICAP Funds, Inc.,
Expert since (consulting firm); Board since 2007 (4 funds);
2007 Member and Chairman of the Director, MainStay VP
Board, Ygomi LLC Series Fund, Inc., since
(information and 1994 (23 portfolios)
communications company)
- ---------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Director, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. Inc. since 2007 (22 funds);
10/22/41 2007 (1971 to 1995) Trustee, The MainStay Funds
since 2007 (21 funds);
Director, ICAP Funds, Inc.,
since 2007 (4 funds);
Director, MainStay VP
Series Fund, Inc., since
1997 (23 portfolios);
Trustee, Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- ---------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST AND
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds Inc., The MainStay
2007 Funds, MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since 2007); Vice President, Prudential
Investments (2000 to 2007); Assistant Treasurer,
JennisonDryden Family of Funds, Target Portfolio
Trust, The Prudential Series Fund and American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior
2/22/59 Managing Director and Chief Marketing Officer, New
York Life Investment Management LLC (since 2005);
Chairman of the Board, NYLIM Service Company (since
January 2008); Managing Director--Retail Marketing,
New York Life Investment Management LLC (2003 to
2005); President, Eclipse Funds Inc., The MainStay
Funds, MainStay VP Series Fund, Inc., and ICAP Funds,
Inc. (since 2007); Managing Director, UBS Global
Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds
Inc., The MainStay Funds and MainStay VP Series Fund,
Inc. (since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
38 Mainstay Mid Cap Core Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST AND
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and
12/16/65 Chief Chief Compliance Officer (since 2006) and Managing
Compliance Director and Chief Compliance Officer (2003 to 2006),
Officer since New York Life Investment Management LLC and New York
2006 Life Investment Management Holdings LLC; Senior
Managing Director, Compliance (since 2006) and
Managing Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds Inc., The MainStay
Funds, MainStay VP Series Fund, Inc., and ICAP Funds,
Inc. (since 2006); Vice President--Compliance,
Eclipse Funds Inc., The MainStay Funds and MainStay
VP Series Fund, Inc. (2004 to 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)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January
2008); Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds Inc., The MainStay Funds
and MainStay VP Series Fund, Inc. (since 2004) and
ICAP Funds, Inc. (since 2006); Chief Legal
Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company
of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH 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 MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
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 INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION 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 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL 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
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (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. 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
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
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.
mainstayinvestments.com Eclipse Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04847
NYLIM-AO14614 (RECYCLE LOGO) MS308-08 MSMCC11-12/08
A5
(MAINSTAY LOGO)
MAINSTAY
SMALL CAP OPPORTUNITY FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY LOGO)
MAINSTAY
SMALL CAP OPPORTUNITY FUND
MainStay Funds
Annual Report
October 31, 2008
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 29
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT 30
- ---------------------------------------------
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
INVESTMENT AND PERFORMANCE COMPARISON(1)
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, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
With sales charges (41.56%)(2.08%) 3.60%
Excluding sales charges (38.16) (0.96) 4.19
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES(3)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
With sales charges (41.51%)(2.06%) 3.61%
Excluding sales charges (38.10) (0.94) 4.20
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES(3)--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 (41.26%)(1.98%) 3.37%
Excluding sales charges (38.56) (1.72) 3.37
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1 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 maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment. (Effective
September 15, 2008, Class A shares have a $15,000 minimum initial investment
with no minimum subsequent purchase amount for investors that, in the
aggregate, have assets of $100,000 or more invested in any share classes of
any of the MainStay Funds.) Investor Class shares and Class A shares are sold
with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of 0.25%.
Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, 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
1.00%, 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 or individual 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 FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(4)--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 (39.14%) (1.73%) 3.39%
Excluding sales charges (38.60) (1.73) 3.39
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
(37.81%) (0.52%) 4.55%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ------------------------------------------------------------------------
Russell 2000(R) Value Index(5) (30.54%) 3.05% 7.40%
Average Lipper small-cap value fund(6) (34.10) 1.92 6.91
</Table>
The Manager may recoup the amount of certain management fee waivers or
expense reimbursements from the Fund pursuant to the contract 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.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in expenses and fees. Unadjusted, the
performance shown for Investor Class shares might have been lower.
3. Performance figures for Class A and B shares, first offered on January 1,
2004, include the historical performance of Class I shares through December
31, 2003, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class A and Class B shares might have
been lower.
4. Performance figures for Class C shares, first offered on January 1, 2004,
include the historical performance of L Class shares (which were redesignated
as Class C shares on January 1, 2004) from December 30, 2002, through
December 31, 2003, and the historical performance of Class I shares through
December 29, 2002, adjusted for differences in certain contractual expenses
and fees. Unadjusted, the performance shown for Class C shares might have
been lower.
5. 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.
6. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Small Cap Opportunity Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP OPPORTUNITY FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
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, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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, 2008, to October 31, 2008.
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, 2008. 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.
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 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $743.20 $ 7.71 $1,016.30 $ 8.92
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $744.50 $ 6.80 $1,017.30 $ 7.86
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $741.60 $10.42 $1,013.20 $12.04
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $741.00 $10.46 $1,013.10 $12.09
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $745.50 $ 5.27 $1,019.10 $ 6.09
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.76% for Investor Class, 1.55% for Class A, 2.38% for Class B, 2.39% for
Class C and 1.20% for Class I) multiplied by the average account value over
the period, divided by 366 and multiplied by 184 (to reflect the one-half
year period). The table above represents actual expenses incurred during the
one-half year period and does not take into account the Fund's written
expense limitation agreement.
mainstayinvestments.com 7
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Commercial Banks 16.5%
Real Estate Investment Trusts 7.9
Insurance 7.3
Specialty Retail 4.6
Health Care Providers & Services 4.3
Gas Utilities 3.9
Thrifts & Mortgage Finance 3.4
Machinery 3.2
Textiles, Apparel & Luxury Goods 2.8
Chemicals 2.7
IT Services 2.7
Electronic Equipment & Instruments 2.6
Commercial Services & Supplies 2.4
Food Products 2.1
Capital Markets 2.0
Communications Equipment 1.9
Construction & Engineering 1.8
Oil, Gas & Consumable Fuels 1.7
Airlines 1.6
Electric Utilities 1.6
Metals & Mining 1.5
Trading Companies & Distributors 1.5
Household Durables 1.4
Diversified Telecommunication
Services 1.3
Consumer Finance 1.2
Food & Staples Retailing 1.1
Health Care Equipment & Supplies 1.0
Internet Software & Services 1.0
Diversified Consumer Services 0.9
Hotels, Restaurants & Leisure 0.9%
Professional Services 0.9
Building Products 0.8
Computers & Peripherals 0.8
Energy Equipment & Services 0.8
Wireless Telecommunication Services 0.8
Paper & Forest Products 0.6
Aerospace & Defense 0.5
Electrical Equipment 0.5
Auto Components 0.4
Health Care Technology 0.4
Semiconductors & Semiconductor
Equipment 0.4
Diversified Financial Services 0.3
Leisure Equipment & Products 0.3
Life Sciences Tools & Services 0.3
Multi-Utilities 0.3
Software 0.3
Tobacco 0.3
Marine 0.2
Air Freight & Logistics 0.1
Biotechnology 0.1
Multiline Retail 0.1
Personal Products 0.1
Pharmaceuticals 0.1
Media 0.0++
Real Estate Management & Development 0.0++
Short-Term Investments 2.0
Futures Contracts 0.3
Liabilities in Excess of Cash and
Other Assets (0.5)
-----
100.0%
=====
</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, 2008 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. FirstMerit Corp.
2. WGL Holdings, Inc.
3. Aspen Insurance Holdings, Ltd.
4. Community Bank System, Inc.
5. Platinum Underwriters Holdings, Ltd.
6. First Bancorp Puerto Rico
7. IPC Holdings, Ltd.
8. Portland General Electric Co.
9. Fresh Del Monte Produce, Inc.
10. OMEGA Healthcare Investors, Inc.
</Table>
8 MainStay Small Cap Opportunity Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER TONY H. ELAVIA OF NEW YORK LIFE
INVESTMENT MANAGEMENT LLC, THE FUND'S MANAGER.
HOW DID MAINSTAY SMALL CAP OPPORTUNITY FUND PERFORM RELATIVE TO ITS PEERS AND
ITS BENCHMARK FOR THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Small Cap Opportunity Fund returned
- -38.16% for Investor Class shares,(1) -38.10% for Class A shares, -38.56% for
Class B shares and -38.60% for Class C shares for the 12 months ended October
31, 2008. Over the same period, Class I shares returned -37.81%. All share
classes underperformed the -34.10% return
of the average Lipper(2) small-cap value fund and the -30.54% return of the
Russell 2000(R) Value Index(3) for the 12 months ended October 31, 2008. The
Russell 2000(R) Value Index is the Fund's broad-based securities-market index.
See pages 5 and 6 for Fund returns with sales charges.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND'S PORTFOLIO MANAGEMENT DURING THE
REPORTING PERIOD?
On September 29, 2008, the Fund's former portfolio managers were replaced and
Tony Elavia was appointed as the Fund's portfolio manager. Mr. Elavia is a
Senior Managing Director at New York Life Investment Management LLC (NYLIM) and
Chief Investment Officer of NYLIM's Equity Investors Group.
WHAT FACTORS WERE RESPONSIBLE FOR THE FUND'S RELATIVE PERFORMANCE DURING THE
REPORTING PERIOD?
The Fund's weak performance relative to the Russell 2000(R) Value Index was
primarily due to stock selection in the materials, financials and industrials
sectors.
WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S PERFORMANCE DURING
THE REPORTING PERIOD AND WHICH SECTORS WERE THE WEAKEST?
All sectors of the Russell 2000(R) Value Index produced negative returns on an
absolute basis during the reporting period. Even in a broadly declining market,
however, some sectors and securities performed better than others. For the 12
months ended October 31, 2008, consumer discretionary, information technology
and telecommunication services made the strongest sector contributions to the
Fund's performance in relation to the Russell 2000(R) Value Index. Financials,
industrials and materials detracted the most from the Fund's performance
relative to the benchmark.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE FUND'S STRONGEST CONTRIBUTORS
TO ABSOLUTE PERFORMANCE AND WHICH STOCKS WERE THE WEAKEST?
The three strongest individual contributors to the Fund's performance during the
reporting period were Alpha Natural Resources, a leading coal producer; Penn
Virginia, an independent natural gas and oil company; and Tractor Supply, a
speciality retailer. All had positive absolute returns for the reporting period.
The weakest individual contributors to performance were Technitrol, a worldwide
producer of electric components; MCG Capital, an equity firm; and Lear, an auto
company. The underperformance of Technitrol and Lear was particularly
disappointing, because the stocks' respective sectors, information technology
and consumer discretionary, held up better than several other sectors during the
reporting period.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund seeks stocks that have attractive relative valuations and exhibit
strong price trends. Among the stocks that fit the Fund's purchase criteria
during the reporting period were food products company Chiquita Brands
International and commercial services and supplies company Deluxe. Among the
stocks the Fund sold because of unattractive valuations and deteriorating price
trends were Hancock Holding, which is a bank holding company, and Hovnanian
Enterprises, a national home builder.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Stocks of small-
capitalization companies may be subject to greater 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 that they
may even go down in value. The Fund's use of securities lending presents the
risk of default by the borrower, which 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. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the perfor-mance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Russell 2000(R) Value
Index.
mainstayinvestments.com 9
WERE THERE ANY NOTABLE CHANGES IN THE FUND'S WEIGHTINGS 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 weighting relative to the Russell 2000(R) Value
Index substantially decreased in the information technology sector. The Fund's
weightings in industrials and utilities decreased modestly. Over the same
period, the Fund's weightings on an absolute basis and relative to the Index
increased in financials and consumer discretionary. The Fund also slightly
increased its weighting relative to the Index in materials.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Russell 2000(R)
Value Index in the financials and health care sectors. As of the same date, the
Fund was underweight in information technology and 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.
10 MainStay Small Cap Opportunity Fund
PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 98.2%+
- --------------------------------------------------------------
AEROSPACE & DEFENSE 0.5%
Ceradyne, Inc. (a) 36,116 $ 848,726
Triumph Group, Inc. 5,567 244,169
-------------
1,092,895
-------------
AIR FREIGHT & LOGISTICS 0.1%
Pacer International, Inc. 19,416 219,207
-------------
AIRLINES 1.6%
Alaska Air Group, Inc. (a) 33,441 825,993
Republic Airways Holdings,
Inc. (a) 68,293 1,020,980
SkyWest, Inc. 110,838 1,708,014
-------------
3,554,987
-------------
AUTO COMPONENTS 0.4%
ATC Technology Corp. (a) 20,278 444,697
Lear Corp. (a) 178,424 358,632
-------------
803,329
-------------
BIOTECHNOLOGY 0.1%
Emergent Biosolutions, Inc.
(a) 15,050 271,051
-------------
BUILDING PRODUCTS 0.8%
Ameron International Corp. 226 10,622
Apogee Enterprises, Inc. 100,098 986,966
China Architectural
Engineering, Inc. (a) 7,343 28,931
Gibraltar Industries, Inc. 11,306 149,805
Insteel Industries, Inc. 23,657 242,721
NCI Building Systems, Inc.
(a) 2,273 42,301
Quanex Building Products
Corp. 31,803 291,315
-------------
1,752,661
-------------
CAPITAL MARKETS 2.0%
BGC Partners, Inc. Class A 142,878 584,371
Capital Southwest Corp. 4,353 444,006
FCStone Group, Inc. (a) 28,500 169,575
Hercules Technology Growth
Capital, Inc. 133,590 1,159,561
International Assets Holding
Corp. (a) 3,674 59,298
Knight Capital Group, Inc.
Class A (a) 29,974 433,424
Kohlberg Capital Corp. 198,282 1,108,397
LaBranche & Co., Inc. (a) 3,657 22,783
MCG Capital Corp. 511,681 419,579
Penson Worldwide, Inc. (a) 4,729 33,765
-------------
4,434,759
-------------
CHEMICALS 2.7%
C.F. Industries Holdings,
Inc. 3,059 196,357
Innophos Holdings, Inc. 11,987 320,652
Koppers Holdings, Inc. 51,180 1,217,572
NewMarket Corp. 26,284 990,644
Olin Corp. 38,547 700,014
OM Group, Inc. (a) 70,873 1,512,430
Schulman A, Inc. 2,058 36,859
Stepan Co. 4,110 147,261
Terra Industries, Inc. 42,177 927,472
-------------
6,049,261
-------------
COMMERCIAL BANKS 16.5%
1st Source Corp. 15,195 326,085
Arrow Financial Corp. 11,642 302,576
Banco Latinoamericano de
Exportaciones S.A. 29,252 310,949
Boston Private Financial
Holdings, Inc. 16,548 146,284
City Bank Lynnwood 73,598 758,059
City Holding Co. 46,058 1,927,067
Columbia Banking System,
Inc. 23,959 381,427
V Community Bank System,
Inc. 103,800 2,589,810
Community Trust Bancorp,
Inc. 7,933 264,804
CVB Financial Corp. 40,562 513,515
Farmers Capital Bank Corp. 1,205 23,835
First Bancorp North Carolina 20,288 355,040
V First Bancorp Puerto Rico 249,405 2,548,919
First Commonwealth Financial
Corp. 58,698 649,200
First Community Bancshares,
Inc. 19,836 620,867
First Financial Bancorp 21,241 285,691
First Financial Bankshares,
Inc. 16,287 882,593
First Financial Corp., IN 11,711 495,141
First Merchants Corp. 64,967 1,429,924
First Midwest Bancorp Inc. 50,230 1,115,608
V FirstMerit Corp. 120,862 2,818,502
Heartland Financial USA,
Inc. 1,945 46,194
Integra Bank Corp. 5,300 31,959
Investors Bancorp, Inc. (a) 46,042 661,163
Lakeland Bancorp, Inc. 80,667 888,950
Lakeland Financial Corp. 31,748 712,743
MainSource Financial Group,
Inc. 18,065 322,641
National Penn Bancshares,
Inc. 112,612 1,907,647
NBT Bancorp, Inc. 26,695 744,257
Old National Bancorp 36,745 695,950
Old Second Bancorp, Inc. 10,238 138,213
Oriental Financial Group,
Inc. 132,720 2,155,373
Pacific Capital Bancorp 78,355 1,538,892
Renasant Corp. 18,654 390,988
Republic Bancorp Inc. Class A 2,108 48,526
Sandy Spring Bancorp, Inc. 9,041 194,110
Santander BanCorp 17,043 161,738
Simmons First National Corp.
Class A 18,322 568,348
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008,
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. mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
Southside Bancshares, Inc. 79,786 $ 1,922,045
Sterling Bancorp 1,100 17,248
Susquehanna Bancshares, Inc. 55,217 855,311
UMB Financial Corp. 36,152 1,638,770
Umpqua Holdings Corp. 48,642 827,887
W Holding Co., Inc. 571,790 371,663
West BanCorp., Inc. 723 9,037
Westamerica Bancorp. 14,811 847,930
-------------
36,443,479
-------------
COMMERCIAL SERVICES & SUPPLIES 2.4%
ABM Industries, Inc. 99,598 1,626,435
ACCO Brands Corp. (a) 23,029 64,942
Bowne & Co., Inc. 84,862 661,075
Cenveo, Inc. (a) 1,566 7,564
Consolidated Graphics, Inc.
(a) 9,827 127,849
Deluxe Corp. 108,750 1,322,400
EnergySolutions, Inc. 115,215 519,620
IKON Office Solutions, Inc. 5,010 86,322
Knoll, Inc. 2,501 36,165
Standard Parking Corp. (a) 18,797 393,985
Viad Corp. 15,017 328,121
-------------
5,174,478
-------------
COMMUNICATIONS EQUIPMENT 1.9%
3Com Corp. (a) 154,194 420,950
Adtran, Inc. 14,601 221,935
Arris Group, Inc. (a) 51,034 352,645
Avocent Corp. (a) 32,281 484,861
Bel Fuse, Inc. Class B 1,399 30,358
Black Box Corp. 48,647 1,479,355
Cogo Group, Inc. (a) 34,709 188,817
DG FastChannel, Inc. (a) 3,674 65,066
MRV Communications, Inc. (a) 443,131 327,873
NETGEAR, Inc. (a) 18,075 199,729
PC-Tel, Inc. 8,494 49,860
Plantronics, Inc. 29,318 423,352
-------------
4,244,801
-------------
COMPUTERS & PERIPHERALS 0.8%
Electronics for Imaging, Inc.
(a) 71,532 758,239
Imation Corp. 72,813 897,056
Quantum Corp. (a) 314,491 91,203
Silicon Graphics, Inc. (a) 16,000 83,200
-------------
1,829,698
-------------
CONSTRUCTION & ENGINEERING 1.8%
EMCOR Group, Inc. (a) 81,453 1,447,420
Granite Construction, Inc. 19,834 707,479
Layne Christensen Co. (a) 9,148 240,410
Michael Baker Corp. (a) 8,974 213,850
Perini Corp. (a) 69,715 1,325,979
-------------
3,935,138
-------------
CONSUMER FINANCE 1.2%
Cash America International,
Inc. 42,981 1,520,238
EZCORP, Inc. Class A (a) 69,056 1,093,847
-------------
2,614,085
-------------
DIVERSIFIED CONSUMER SERVICES 0.9%
Corinthian Colleges, Inc. (a) 14,785 211,130
Jackson Hewitt Tax Service,
Inc. 17,431 240,199
Steiner Leisure, Ltd. (a) 57,151 1,480,211
thinkorswim Group, Inc. (a) 18,800 150,400
-------------
2,081,940
-------------
DIVERSIFIED FINANCIAL SERVICES 0.3%
Compass Diversified Holdings 32,077 391,340
Interactive Brokers Group,
Inc. (a) 8,698 185,876
-------------
577,216
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 1.3%
Atlantic Tele-Network, Inc. 63,354 1,541,403
Cincinnati Bell, Inc. (a) 273,122 652,762
Premiere Global Services,
Inc. (a) 56,422 561,399
Shenandoah Telecommunications
Co. 4,784 114,672
-------------
2,870,236
-------------
ELECTRIC UTILITIES 1.6%
Central Vermont Public
Service Corp. 11,238 223,749
Cleco Corp. 5,482 126,141
El Paso Electric Co. (a) 24,047 445,350
V Portland General Electric
Co. 113,827 2,335,730
Sierra Pacific Resources 27,861 230,968
UIL Holdings Corp. 2,525 83,325
-------------
3,445,263
-------------
ELECTRICAL EQUIPMENT 0.5%
Acuity Brands, Inc. 14,659 512,479
Baldor Electric Co. 26,736 469,484
EnerSys (a) 11,386 150,523
Ultralife Corp. (a) 2,454 21,325
-------------
1,153,811
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 2.6%
Agilysys, Inc. 25,060 100,741
Anixter International, Inc.
(a) 15,052 505,898
Benchmark Electronics, Inc.
(a) 73,838 885,317
Brightpoint, Inc. (a) 5,608 32,302
CTS Corp. 32,130 224,589
Methode Electronics, Inc. 124,156 942,344
MTS Systems Corp. 7,043 228,757
Park Electrochemical Corp. 62,159 1,343,877
Plexus Corp. (a) 10,764 200,856
Sanmina-SCI Corp. (a) 658,885 494,164
</Table>
12 MainStay Small Cap Opportunity 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)
ELECTRONIC EQUIPMENT & INSTRUMENTS (CONTINUED)
ScanSource, Inc. (a) 3,920 $ 77,773
Smart Modular Technologies,
Inc. (a) 5,604 15,187
SYNNEX Corp. (a) 10,683 164,839
Technitrol, Inc. 89,936 518,931
-------------
5,735,575
-------------
ENERGY EQUIPMENT & SERVICES 0.8%
Gulfmark Offshore, Inc. (a) 3,351 123,987
Lufkin Industries, Inc. 17,418 911,310
Matrix Service Co. (a) 7,447 91,226
Newpark Resources, Inc. (a) 120,746 694,289
PHI, Inc. (a) 301 6,315
-------------
1,827,127
-------------
FOOD & STAPLES RETAILING 1.1%
Andersons, Inc. (The) 52,620 1,401,270
Ingles Markets, Inc. Class A 17,495 326,457
Winn-Dixie Stores, Inc. (a) 44,842 673,527
-------------
2,401,254
-------------
FOOD PRODUCTS 2.1%
Cal-Maine Foods, Inc. 57,991 1,704,355
Chiquita Brands
International, Inc. (a) 26,864 366,694
V Fresh Del Monte Produce,
Inc.(a) 109,626 2,314,205
Reddy Ice Holdings, Inc. 77,936 207,310
-------------
4,592,564
-------------
GAS UTILITIES 3.9%
Chesapeake Utilities Corp. 1,407 43,955
Laclede Group, Inc. (The) 35,063 1,834,496
New Jersey Resources Corp. 52,908 1,970,294
Nicor, Inc. 40,614 1,876,773
V WGL Holdings, Inc. 86,358 2,779,864
-------------
8,505,382
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 1.0%
CONMED Corp. (a) 15,966 418,309
Invacare Corp. 16,031 291,604
Medical Action Industries,
Inc. (a) 5,184 59,616
STERIS Corp. 23,810 810,493
Zoll Medical Corp. (a) 24,388 587,263
-------------
2,167,285
-------------
HEALTH CARE PROVIDERS & SERVICES 4.3%
AMERIGROUP Corp. (a) 38,231 955,775
Catalyst Health Solutions,
Inc. (a) 19,407 327,396
Centene Corp. (a) 62,487 1,177,255
Chemed Corp. 3,773 165,220
Cross Country Healthcare,
Inc. (a) 50,342 569,871
Emergency Medical Services,
L.P. (a) 3,200 105,152
Gentiva Health Services, Inc.
(a) 20,026 543,706
Healthspring, Inc. (a) 29,599 488,975
Kindred Healthcare, Inc. (a) 43,508 630,431
Magellan Health Services,
Inc. (a) 42,876 1,583,839
Molina Healthcare, Inc. (a) 35,825 797,823
MWI Veterinary Supply, Inc.
(a) 982 34,007
Owens & Minor, Inc. 2,272 98,309
PharMerica Corp. (a) 14,862 305,117
PSS World Medical, Inc. (a) 38,179 692,567
RehabCare Group, Inc. (a) 8,970 153,656
Res-Care, Inc. (a) 58,128 895,753
-------------
9,524,852
-------------
HEALTH CARE TECHNOLOGY 0.4%
Computer Programs & Systems,
Inc. 32,922 911,610
-------------
HOTELS, RESTAURANTS & LEISURE 0.9%
Bob Evans Farms, Inc. 9,308 194,351
CEC Entertainment, Inc. (a) 778 19,979
Domino's Pizza, Inc. (a) 8,584 51,075
Einstein Noah Restaurant
Group, Inc. (a) 2,220 17,805
Jack in the Box, Inc. (a) 66,383 1,334,298
Papa John's International,
Inc. (a) 15,682 353,786
-------------
1,971,294
-------------
HOUSEHOLD DURABLES 1.4%
American Greetings Corp.
Class A 32,316 377,451
National Presto Industries,
Inc. 17,628 1,167,855
Ryland Group, Inc. 86,300 1,621,577
-------------
3,166,883
-------------
INSURANCE 7.3%
American Physicians Capital,
Inc. 43,048 1,761,094
American Safety Insurance
Holdings, Ltd. (a) 100 1,035
Amerisafe, Inc. (a) 6,545 112,836
Argo Group International (a) 10,508 335,205
V Aspen Insurance Holdings,
Ltd. 119,449 2,742,549
Castlepoint Holdings, Ltd. 115,807 1,044,579
CNA Surety Corp. (a) 4,108 56,896
First Mercury Financial Corp.
(a) 19,183 206,985
Flagstone Reinsurance
Holdings, Ltd. 5,256 55,661
Horace Mann Educators Corp. 25,799 205,360
V IPC Holdings, Ltd. 89,858 2,480,979
Maiden Holdings, Ltd. 6,900 31,188
Montpelier Re Holdings, Ltd. 21,517 307,908
National Financial Partners
Corp. 13,723 91,395
Phoenix Cos., Inc. (The) 137,359 888,713
V Platinum Underwriters
Holdings, Ltd. 80,445 2,553,324
Safety Insurance Group, Inc. 13,008 494,174
SeaBright Insurance Holdings,
Inc. (a) 160,690 1,680,817
Tower Group, Inc. 18,877 396,983
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
INSURANCE (CONTINUED)
Validus Holdings, Ltd. 11,404 $ 202,307
Zenith National Insurance
Corp. 16,996 558,489
-------------
16,208,477
-------------
INTERNET SOFTWARE & SERVICES 1.0%
ModusLink Global Solutions,
Inc. (a) 16,038 89,171
Perficient, Inc. (a) 20,283 111,354
S1 Corp. (a) 104,488 655,140
SonicWALL, Inc. (a) 26,298 117,815
United Online, Inc. 150,906 1,116,704
-------------
2,090,184
-------------
IT SERVICES 2.7%
Acxiom Corp. 41,887 329,232
CACI International, Inc.
Class A (a) 3,434 141,412
CIBER, Inc. (a) 140,637 759,440
CSG Systems International,
Inc. (a) 70,991 1,180,580
Gevity HR, Inc. 4,864 16,586
Heartland Payment Systems,
Inc. 4,600 80,086
infoGROUP, Inc. 138,645 618,357
Integral Systems Inc. (a) 26,720 656,510
ManTech International Corp.
Class A (a) 6,962 375,530
MAXIMUS, Inc. 9,918 316,781
Perot Systems Corp. Class A
(a) 24,527 352,943
SAIC, Inc. (a) 38,738 715,491
SI International, Inc. (a) 369 10,627
SRA International, Inc. Class
A (a) 15,822 292,391
TeleTech Holdings, Inc. (a) 7,589 68,605
-------------
5,914,571
-------------
LEISURE EQUIPMENT & PRODUCTS 0.3%
Jakks Pacific, Inc. (a) 16,255 363,624
Nautilus, Inc. (a) 39,198 95,643
Polaris Industries, Inc. 2,387 80,370
RC2 Corp. (a) 4,171 52,972
-------------
592,609
-------------
LIFE SCIENCES TOOLS & SERVICES 0.3%
Affymetrix, Inc. (a) 23,102 85,246
Albany Molecular Research,
Inc. (a) 7,341 92,864
Life Sciences Research, Inc.
(a) 3,487 64,300
PAREXEL International Corp.
(a) 32,222 335,109
Varian, Inc. (a) 961 35,413
-------------
612,932
-------------
MACHINERY 3.2%
Ampco-Pittsburgh Corp. 11,845 280,016
Barnes Group, Inc. 21,400 310,514
Cascade Corp. 3,943 130,158
Chart Industries, Inc. (a) 7,430 101,197
Circor International, Inc. 6,935 212,558
Force Protection, Inc. (a) 489,409 1,365,451
L.B. Foster Co. Class A (a) 44,387 1,220,642
Lindsay Corp. 20,619 981,052
Mueller Industries, Inc. 12,956 296,304
NACCO Industries, Inc. Class
A 16,535 1,018,721
Robbins & Myers, Inc. 35,928 732,931
Tecumseh Products Co. Class A
(a) 22,501 416,719
Twin Disc, Inc. 7,858 60,899
-------------
7,127,162
-------------
MARINE 0.2%
Eagle Bulk Shipping, Inc. 22,015 219,489
Genco Shipping & Trading,
Ltd. 12,115 252,598
-------------
472,087
-------------
MEDIA 0.0%++
Idearc, Inc. 84,243 32,012
-------------
METALS & MINING 1.5%
A.M. Castle & Co. 19,051 231,851
China Precision Steel, Inc.
(a) 2,339 5,076
Compass Minerals
International, Inc. 18,291 1,004,725
Horsehead Holding Corp. (a) 16,147 55,868
Olympic Steel, Inc. 33,891 774,748
Schnitzer Steel Industries,
Inc. Class A 34,737 935,467
Stillwater Mining Co. (a) 53,890 213,404
Sutor Technology Group, Ltd.
(a) 6,579 14,145
-------------
3,235,284
-------------
MULTI-UTILITIES 0.3%
Northwestern Corp. 23,347 456,200
PNM Resources, Inc. 30,509 297,463
-------------
753,663
-------------
MULTILINE RETAIL 0.1%
Fred's, Inc. 22,961 281,272
-------------
OIL, GAS & CONSUMABLE FUELS 1.7%
Brigham Exploration Co. (a) 11,450 89,768
Callon Petroleum Co. (a) 9,292 95,893
Contango Oil & Gas Co. (a) 321 17,655
International Coal Group,
Inc. (a) 131,961 617,577
Meridian Resource Corp. (a) 531,029 626,614
Nordic American Tanker
Shipping 1,250 37,063
Pacific Ethanol, Inc. (a) 686,184 617,566
Rosetta Resources, Inc. (a) 28,786 303,692
Stone Energy Corp. (a) 25,849 784,259
Swift Energy Co. (a) 7,950 255,036
Teekay Tankers, Ltd. 13,732 166,844
VAALCO Energy, Inc. (a) 24,897 131,954
-------------
3,743,921
-------------
</Table>
14 MainStay Small Cap Opportunity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
PAPER & FOREST PRODUCTS 0.6%
Buckeye Technologies, Inc.
(a) 234,302 $ 1,380,039
KapStone Paper and Packaging
Corp. (a) 5,238 25,090
Verso Paper Corp. 1,200 1,860
-------------
1,406,989
-------------
PERSONAL PRODUCTS 0.1%
Elizabeth Arden, Inc. (a) 11,417 197,400
Prestige Brands Holdings,
Inc. (a) 7,360 50,858
-------------
248,258
-------------
PHARMACEUTICALS 0.1%
Obagi Medical Products, Inc.
(a) 9,764 81,236
ViroPharma, Inc. (a) 12,100 151,734
-------------
232,970
-------------
PROFESSIONAL SERVICES 0.9%
CDI Corp. 60,701 789,113
Heidrick & Struggles
International, Inc. 17,143 413,661
ICF International, Inc. (a) 3,851 71,552
MPS Group, Inc. (a) 957 7,455
On Assignment, Inc. (a) 22,429 145,788
Spherion Corp. (a) 23,230 73,871
Watson Wyatt Worldwide, Inc.
Class A 12,154 516,180
-------------
2,017,620
-------------
REAL ESTATE INVESTMENT TRUSTS 7.9%
Agree Realty Corp. 22,898 459,563
Arbor Realty Trust, Inc. 101,128 364,061
Associated Estates Realty
Corp. 4,315 35,210
Corporate Office Properties
Trust 63,976 1,989,014
DiamondRock Hospitality Co. 42,615 220,746
EastGroup Properties, Inc. 6,937 232,251
Education Realty Trust, Inc. 101,031 429,382
Entertainment Properties
Trust 21,405 801,617
Equity Lifestyle Properties,
Inc. 19,229 807,426
Equity One, Inc. 8,838 154,400
First Potomac Realty Trust 25,429 312,268
Hersha Hospitality Trust 4,126 17,370
Highwoods Properties, Inc. 36,726 911,539
Home Properties, Inc. 7,042 285,130
Investors Real Estate Trust 39,021 385,527
Lexington Realty Trust 14,693 117,985
Mid-America Apartment
Communities, Inc. 40,529 1,428,242
National Health Investors,
Inc. 49,703 1,488,108
National Retail Properties,
Inc. 65,561 1,168,953
V OMEGA Healthcare
Investors, Inc. 143,207 2,158,129
Parkway Properties, Inc. 14,067 242,656
Pennsylvania Real Estate
Investment Trust 113,150 1,431,347
PS Business Parks, Inc. 12,100 547,767
Ramco-Gershenson Properties
Trust 22,406 295,311
Saul Centers, Inc. 473 17,307
Strategic Hotels & Resorts,
Inc. 23,902 118,315
U-Store-It Trust 152,210 1,044,161
-------------
17,463,785
-------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.0%++
Meruelo Maddux Properties,
Inc. (a) 47,841 46,884
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.4%
Amkor Technology, Inc. (a) 58,555 237,733
MKS Instruments, Inc. (a) 12,800 237,440
Trident Microsystems, Inc.
(a) 270,653 489,882
-------------
965,055
-------------
SOFTWARE 0.3%
Blackbaud, Inc. 2,059 31,297
Jack Henry & Associates,
Inc. 3,444 65,470
JDA Software Group, Inc. (a) 26,941 384,718
Pegasystems, Inc. 2,168 28,357
Quest Software, Inc. (a) 13,800 182,850
-------------
692,692
-------------
SPECIALTY RETAIL 4.6%
Aeropostale, Inc. (a) 54,177 1,311,625
Asbury Automotive Group,
Inc. 105,047 341,403
Books-A-Million, Inc. 64,724 203,881
Cache, Inc. (a) 2,830 10,160
Cato Corp. (The) Class A 10,025 155,588
Charlotte Russe Holding, Inc.
(a) 39,506 333,826
Childrens Place Retail
Stores, Inc. (The) (a) 2,447 81,803
Citi Trends, Inc. (a) 11,133 186,255
Finish Line, Inc. (The) Class
A 123,331 1,180,278
Genesco, Inc. (a) 64,577 1,602,155
Gymboree Corp. (The) (a) 5,054 130,696
HOT Topic, Inc. (a) 21,297 138,005
Jo-Ann Stores, Inc. (a) 67,847 1,299,948
JOS. A. Bank Clothiers, Inc.
(a) 810 20,631
Men's Wearhouse, Inc. (The) 545 8,333
New York & Co., Inc. (a) 28,820 81,272
Sonic Automotive, Inc. 58,606 300,649
Tractor Supply Co. (a) 48,898 2,032,201
Wet Seal, Inc. (The) (a) 246,828 725,674
-------------
10,144,383
-------------
TEXTILES, APPAREL & LUXURY GOODS 2.8%
Carter's, Inc. (a) 13,936 296,001
G-III Apparel Group, Ltd. (a) 99,501 1,374,109
Maidenform Brands, Inc. (a) 52,617 577,735
Perry Ellis International,
Inc. (a) 22,660 221,841
Skechers U.S.A., Inc. Class A
(a) 1,725 23,425
Steven Madden, Ltd. (a) 83,518 1,819,022
Unifi, Inc. (a) 23,696 113,741
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
TEXTILES, APPAREL & LUXURY GOODS (CONTINUED)
Warnaco Group, Inc. (The) (a) 38,238 $ 1,139,875
Wolverine World Wide, Inc. 25,038 588,393
-------------
6,154,142
-------------
THRIFTS & MORTGAGE FINANCE 3.4%
Anchor Bancorp Wisconsin,
Inc. 35,317 201,307
Bank Mutual Corp. 87,567 1,009,647
Dime Community Bancshares 66,184 1,105,273
ESSA Bancorp, Inc. 13,974 193,680
First Financial Holdings,
Inc. 71,371 1,548,751
First Niagara Financial
Group, Inc. 45,096 711,164
Flushing Financial Corp. 115,363 1,793,895
Guaranty Financial Group,
Inc. (a) 368,779 748,621
United Financial Bancorp,
Inc. 3,809 53,326
Westfield Financial, Inc. 3,995 41,348
-------------
7,407,012
-------------
TOBACCO 0.3%
Alliance One International,
Inc. (a) 163,351 545,592
-------------
TRADING COMPANIES & DISTRIBUTORS 1.5%
Aircastle, Ltd. 187,326 1,301,916
Applied Industrial
Technologies, Inc. 68,290 1,378,775
Kaman Corp. Class A 19,374 494,618
TAL International Group,
Inc. 3,997 66,190
Textainer Group Holdings,
Ltd. 3,819 42,124
-------------
3,283,623
-------------
WIRELESS TELECOMMUNICATION SERVICES 0.8%
Syniverse Holdings, Inc. (a) 68,305 1,284,134
USA Mobility, Inc. (a) 46,853 452,131
-------------
1,736,265
-------------
Total Common Stocks
(Cost $287,436,162) 216,761,565
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS 2.0%
- --------------------------------------------------------------
REPURCHASE AGREEMENT 0.0%++
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$47,868 (Collateralized by
a Federal National Mortgage
Association Security with a
rate of 4.88% and a
maturity
date of 4/15/09, with a
Principal Amount of $50,000
and a
Market Value of $50,562) $ 47,867 47,867
-------------
Total Repurchase Agreement
(Cost $47,867) 47,867
-------------
U.S. GOVERNMENT 2.0%
United States Treasury Bills
0.357%, due 1/8/09 (b) 4,100,000 4,097,232
0.427%,due 1/29/09 (b)(c) 300,000 299,685
-------------
Total U.S. Government
(Cost $4,393,881) 4,396,917
-------------
Total Short-Term Investments
(Cost $4,441,748) 4,444,784
-------------
Total Investments
(Cost $291,877,910) (e) 100.2% 221,206,349
Liabilities in Excess of
Cash and Other Assets (0.2) (381,694)
----- ------------
Net Assets 100.0% $ 220,824,655
===== ============
</Table>
<Table>
<Caption>
CONTRACTS UNREALIZED
LONG APPRECIATION (D)
FUTURES CONTRACTS 0.3%
- --------------------------------------------------------
Russell 2000 Index
Mini December 2008 85 $ 567,308
---------
Total Futures Contracts
(Settlement Value
$4,560,250) $567,308
---------
---------
</Table>
<Table>
++ Less than one-tenth of a percent.
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
(a) Non-income producing security.
(b) Interest rate presented is yield to
maturity.
(c) Segregated, or partially segregated as
collateral for futures contracts.
(d) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2008.
(e) At October 31, 2008, cost is $296,346,115
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized
appreciation $ 8,383,146
Gross unrealized
depreciation (83,522,912)
------------
Net unrealized depreciation $(75,139,766)
============
</Table>
16 MainStay Small Cap Opportunity 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, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $291,877,910) $ 221,206,349
Receivables:
Dividends and interest 481,600
Variation margin on futures
contracts 183,537
Fund shares sold 79,293
Other assets 37,448
-------------
Total assets 221,988,227
-------------
LIABILITIES:
Payables:
Transfer agent (See Note 3) 356,321
Fund shares redeemed 344,437
Manager (See Note 3) 192,525
Shareholder communication 111,489
Professional fees 64,471
Custodian 40,904
NYLIFE Distributors (See Note 3) 40,776
Trustees 3,916
Accrued expenses 8,696
Dividend payable 37
-------------
Total liabilities 1,163,572
-------------
Net assets $ 220,824,655
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 216,821
Additional paid-in capital 485,992,240
-------------
486,209,061
Accumulated undistributed net
investment income 4,695,596
Accumulated net realized loss on
investments and futures
transactions (199,975,749)
Net unrealized depreciation on
investments and futures contracts (70,104,253)
-------------
Net assets $ 220,824,655
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 11,480,171
=============
Shares of beneficial interest
outstanding 1,132,616
=============
Net asset value per share
outstanding $ 10.14
Maximum sales charge (5.50% of
offering price) 0.59
-------------
Maximum offering price per share
outstanding $ 10.73
=============
CLASS A
Net assets applicable to
outstanding shares $ 64,526,798
=============
Shares of beneficial interest
outstanding 6,365,141
=============
Net asset value per share
outstanding $ 10.14
Maximum sales charge (5.50% of
offering price) 0.59
-------------
Maximum offering price per share
outstanding $ 10.73
=============
CLASS B
Net assets applicable to
outstanding shares $ 13,304,834
=============
Shares of beneficial interest
outstanding 1,371,993
=============
Net asset value and offering price
per share outstanding $ 9.70
=============
CLASS C
Net assets applicable to
outstanding shares $ 15,123,222
=============
Shares of beneficial interest
outstanding 1,558,836
=============
Net asset value and offering price
per share outstanding $ 9.70
=============
CLASS I
Net assets applicable to
outstanding shares $ 116,389,630
=============
Shares of beneficial interest
outstanding 11,253,465
=============
Net asset value and offering price
per share outstanding $ 10.34
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 12,285,394
Income from securities
loaned--net 2,264,481
Interest 264,729
-------------
Total income 14,814,604
-------------
EXPENSES:
Manager (See Note 3) 5,135,480
Transfer agent--Investor Class
(See Note 3) 44,791
Transfer agent--Class A (See Note
3) 769,608
Transfer agent--Classes B and C
(See Note 3) 285,863
Transfer agent Class I (See Note
3) 1,142,770
Distribution/Service--Investor
Class (See Note 3) 23,061
Distribution/Service--Class A
(See Note 3) 386,432
Service--Class B (See Note 3) 53,048
Service--Class C (See Note 3) 73,011
Distribution--Class B (See Note
3) 159,143
Distribution--Class C (See Note
3) 219,032
Shareholder communication 135,331
Custodian 88,447
Professional fees 82,226
Registration 78,078
Trustees 21,213
Miscellaneous 55,055
-------------
Total expenses before waiver 8,752,589
Expense waiver from Manager (See
Note 3) (1,248,722)
-------------
Net expenses 7,503,867
-------------
Net investment income 7,310,737
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on:
Security transactions (188,084,235)
Futures transactions (2,682,417)
-------------
Net realized loss on investments
and futures transactions (190,766,652)
-------------
Net change in unrealized
appreciation (depreciation) on:
Security transactions (55,625,393)
Futures contracts 370,077
-------------
Net change in unrealized
depreciation on investments and
futures contracts (55,255,316)
-------------
Net realized and unrealized loss on
investments and futures
transactions (246,021,968)
-------------
Net decrease in net assets
resulting from operations $(238,711,231)
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $3,787.
18 MainStay Small Cap Opportunity 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, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 7,310,737 $ 7,511,528
Net realized gain (loss)
on investments and
futures transactions (190,766,652) 106,602,356
Net change in unrealized
appreciation
(depreciation) on
investments and futures
contracts (55,255,316) (174,717,548)
-------------------------------
Net decrease in net
assets resulting from
operations (238,711,231) (60,603,664)
-------------------------------
Dividends and distributions to
shareholders:
From net investment
income:
Class A (1,870,802) --
Class I (7,498,289) (116,165)
-------------------------------
(9,369,091) (116,165)
-------------------------------
From net realized gain on
investments:
Class A (28,928,748) --
Class B (3,462,812) --
Class C (5,460,212) --
Class I (57,146,695) --
-------------------------------
(94,998,467) --
-------------------------------
Total dividends and
distributions to
shareholders (104,367,558) (116,165)
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares 135,834,496 287,310,908
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 93,050,364 109,458
Cost of shares redeemed (683,885,456) (738,943,015)
-------------------------------
Decrease in net assets
derived from capital
share transactions (455,000,596) (451,522,649)
-------------------------------
Net decrease in net
assets (798,079,385) (512,242,478)
NET ASSETS:
Beginning of year 1,018,904,040 1,531,146,518
-------------------------------
End of year $ 220,824,655 $1,018,904,040
===============================
Accumulated undistributed
net investment income at
end of year $ 4,695,596 $ 7,260,557
===============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH -------------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------
2008 2008 2007 2006 2005
Net asset value at
beginning of period $ 13.86 $ 18.65 $ 19.87 $ 19.60 $ 18.58
------- ------- -------- -------- --------
Net investment income
(loss) (a) 0.10 0.17 0.07 (0.07) (0.08)
Net realized and
unrealized gain (loss)
on investments (3.82) (6.55) (1.29) 2.14 4.01
------- ------- -------- -------- --------
Total from investment
operations (3.72) (6.38) (1.22) 2.07 3.93
------- ------- -------- -------- --------
Less dividends and
distributions:
From net investment
income -- (0.12) -- -- --
From net realized gain
on investments -- (2.01) -- (1.80) (2.91)
------- ------- -------- -------- --------
Total dividends and
distributions -- (2.13) -- (1.80) (2.91)
------- ------- -------- -------- --------
Net asset value at end of
period $ 10.14 $ 10.14 $ 18.65 $ 19.87 $ 19.60
======= ======= ======== ======== ========
Total investment return
(b)(d) (26.91%)(c) (38.10%) (6.09%) 11.20% 22.66%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 1.10% ++ 1.24% 0.33% (0.39%) (0.44%)
Net expenses 1.80% ++ 1.65% 1.66% 1.64% 1.66%
Expenses (before
waiver/reimbursement) 1.83% ++ 1.84% 1.66% 1.64% 1.66%
Portfolio turnover rate 158% 158% 134% 124% 159%
Net assets at end of
period (in 000's) $11,480 $64,527 $301,031 $502,182 $194,615
<Caption>
CLASS A
-----------
JANUARY 2,
2004**
THROUGH
OCTOBER 31,
-----------
2004
Net asset value at
beginning of period $ 16.78
-------
Net investment income
(loss) (a) (0.09)
Net realized and
unrealized gain (loss)
on investments 1.89
-------
Total from investment
operations 1.80
-------
Less dividends and
distributions:
From net investment
income --
From net realized gain
on investments --
-------
Total dividends and
distributions --
-------
Net asset value at end of
period $ 18.58
=======
Total investment return
(b)(d) 10.73% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) (0.36%)++
Net expenses 1.87% ++#
Expenses (before
waiver/reimbursement) 1.87% ++#
Portfolio turnover rate 132%
Net assets at end of
period (in 000's) $24,621
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 17.94 $ 19.26 $ 19.19 $ 18.37 $16.15
------- ------- -------- ------- ------
Net investment income
(loss) (a) 0.06 (0.09) (0.21) (0.22) (0.25)
Net realized and
unrealized gain (loss)
on investments (6.29) (1.23) 2.08 3.95 3.28
------- ------- -------- ------- ------
Total from investment
operations (6.23) (1.32) 1.87 3.73 3.03
------- ------- -------- ------- ------
Less dividends and
distributions:
From net investment
income -- -- -- -- --
From net realized gain
on investments (2.01) -- (1.80) (2.91) (0.81)
------- ------- -------- ------- ------
Total dividends and
distributions (2.01) -- (1.80) (2.91) (0.81)
------- ------- -------- ------- ------
Net asset value at end of
period $ 9.70 $ 17.94 $ 19.26 $ 19.19 $18.37
======= ======= ======== ======= ======
Total investment return
(b)(d) (38.60%) (6.80%) 10.32% 21.72% 19.29%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.45% (0.44%) (1.14%) (1.19%) (1.13%)
Net expenses 2.45% 2.41% 2.39% 2.41% 2.62% #
Expenses (before
waiver/reimbursement) 2.67% 2.41% 2.39% 2.41% 2.62% #
Portfolio turnover rate 158% 134% 124% 159% 132%
Net assets at end of
period (in 000's) $15,123 $54,264 $120,414 $48,316 $5,518
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
# Includes transfer agent fees paid directly which amounted to 0.02% of average
net assets for the period ended October 31, 2004 and custodian fees and other
expenses paid indirectly which amounted to less than 0.01% of average net
assets for the period indicated.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions. Class I shares are not subject
to sales charges.
(c) Total return is not annualized.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
20 MainStay Small Cap Opportunity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
CLASS B
-------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
-------------------------------------------------------
2008 2007 2006 2005 2004
$ 17.94 $ 19.25 $ 19.18 $ 18.38 $ 16.71
------- ------- ------- ------- -------
0.06 (0.08) (0.21) (0.22) (0.19)
(6.29) (1.23) 2.08 3.93 1.86
------- ------- ------- ------- -------
(6.23) (1.31) 1.87 3.71 1.67
------- ------- ------- ------- -------
-- -- -- -- --
(2.01) -- (1.80) (2.91) --
------- ------- ------- ------- -------
(2.01) -- (1.80) (2.91) --
------- ------- ------- ------- -------
$ 9.70 $ 17.94 $ 19.25 $ 19.18 $ 18.38
======= ======= ======= ======= =======
(38.56%) (6.81%) 10.32% 21.59% 9.99% (c)
0.47% (0.41%) (1.12%) (1.19%) (1.12%)++
2.44% 2.41% 2.39% 2.41% 2.62% ++#
2.66% 2.41% 2.39% 2.41% 2.62% ++#
158% 134% 124% 159% 132%
$13,305 $32,502 $46,112 $48,496 $14,905
</Table>
<Table>
<Caption>
CLASS I
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2008 2007 2006 2005 2004
$ 19.03 $ 20.18 $ 19.79 $ 18.67 $ 16.26
-------- -------- -------- -------- --------
0.24 0.17 0.02 0.01 0.06
(6.69) (1.32) 2.17 4.02 3.21
-------- -------- -------- -------- --------
(6.45) (1.15) 2.19 4.03 3.27
-------- -------- -------- -------- --------
(0.23) (0.00)++ -- -- (0.05)
(2.01) -- (1.80) (2.91) (0.81)
-------- -------- -------- -------- --------
(2.24) (0.00)++ (1.80) (2.91) (0.86)
-------- -------- -------- -------- --------
$ 10.34 $ 19.03 $ 20.18 $ 19.79 $ 18.67
======== ======== ======== ======== ========
(37.81%) (5.69%) 11.73% 23.15% 20.72%
1.69% 0.81% 0.09% 0.06% 0.32%
1.20% 1.19% 1.17% 1.16% 1.18% #
1.48% 1.35% 1.17% 1.16% 1.18% #
158% 134% 124% 159% 132%
$116,390 $631,108 $862,439 $317,602 $194,476
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
Eclipse Funds (the "Trust") was organized on July 30, 1986 as a Massachusetts
business trust. The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company,
and is comprised of three funds (collectively referred to as the "Funds"). These
financial statements and notes relate only to the MainStay Small Cap Opportunity
Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class I shares commenced on
January 12, 1987. Class A shares and Class B shares commenced on January 2,
2004. Class C shares commenced on December 30, 2002. Investor Class shares
commenced on February 28, 2008. Investor Class and 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
Investor Class and 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. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The five
classes of shares have the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and bear the same conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Investor Class and Class A shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a
distribution or service fee.
The Fund's investment objective is to seek high total return.
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"). Securities that are 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. Futures
contracts are valued at the last posted settlement price on the market where
such futures are primarily traded. Investments in other mutual funds are valued
at their net asset values as of the close of the New York Stock Exchange on the
date of valuation.
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 which mature in 60 days or less are valued at 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 the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's 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: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) 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 Manager, as defined in Note 3(A), reflect the
security's market value; and (vi) 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, 2008, 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. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as
22 MainStay Small Cap Opportunity Fund
defined in Note 3(A), determined that the adoption of the Interpretation did not
have an impact on the Fund's financial statements upon adoption. The Manager
continually reviews the Fund's tax positions and such conclusions under the
Interpretation based on factors, including, but not limited to, ongoing analyses
of tax laws and regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(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 pro rata 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 fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata 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 amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such 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 objectives. The Fund's investment in futures contracts and other
derivatives may increase the volatility of the Fund's net asset value and may
result in a loss to the Fund.
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
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 may also record realized
gain or loss on securities deemed sold due to borrower's inability to return
securities on loan. 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.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, 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
York Life Insurance Company ("New York Life"), serves as the Fund's Manager.
Pursuant to an Amended and Restated Management Agreement ("Management
Agreement"). 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 NYLIM directly, without a subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of 1.00% of the average
daily net assets of the Fund. The Manager has also contractually agreed to waive
its management fee to 0.95% on assets over $1.0 billion. Prior to May 1, 2008,
the Manager had agreed to waive it management fee to 0.95% on assets over $1.5
billion.
Effective May 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.80%; Class A, 1.55%; Class B,
2.40%; Class C, 2.40%; and Class I, 1.19%. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
Between April 1, 2008 and May 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Investor Class, 1.80%,
Class A, 1.70%; Class B, 2.55%; Class C, 2.55%; and Class I, 1.19%.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $5,135,480 and waived its fees in the amount of $1,248,722.
As of October 31, 2008, 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,
2010 2011 TOTAL
$1,305,029 $1,248,722 $2,553,751
- ---------------------------------------
</Table>
Between May 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses
24 MainStay Small Cap Opportunity Fund
did not exceed the following percentages of average daily net assets for each
class: Class A, 1.70%; Class B, 2.45%; Class C, 2.45%; and Class I, 1.19%. Prior
to May 1, 2007, NYLIM had a different expense limitation agreement in place with
respect to the Fund.
State Street Bank and Trust Company 1 Lincoln Street, Boston, Massachusetts,
02111, 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, State Street Bank and Trust Company 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 Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and 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 distribution 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 Investor Class and Class A shares were $4,645
and $10,263, respectively for the year ended October 31, 2008. The Fund was also
advised that the Distributor retained contingent deferred sales charges on
redemptions of Investor Class, Class A, Class B and Class C shares of $2, $241,
$61,687, and $4,255 respectively, for the year ended October 31, 2008.
(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, 2008 amounted
to $2,243,032.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 878 0.0%++
- --------------------------------------------------
Class B 845 0.0++
- --------------------------------------------------
Class C 1,292 0.0++
- --------------------------------------------------
Class I 2,754,157 2.4
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the 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, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $27,933.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$4,695,596 $(194,940,236) $-- $(75,139,766) $(265,384,406)
- -----------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals, futures and REIT adjustments.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$(506,607) $506,606 $1
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to real estate investment
trusts, distributions, distribution redesignations, prior year net operating
loss, and the treatment of passive foreign investment companies.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $194,940,236 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
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $194,940
- ----------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007 shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $ 19,289,432 $116,165
Long-Term Capital Gains 85,078,126 --
- -----------------------------------------------------
$104,367,558 $116,165
=====================================================
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
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. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. 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
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $818,466 and $1,357,926, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 297,156 $ 4,040,651
Shares redeemed (246,008) (3,187,536)
------------------------
Net increase in shares
outstanding before
conversion 51,148 853,115
Shares converted into
Investor Class
(See Note 1) 1,181,962 15,686,288
Shares converted from
Investor Class
(See Note 1) (100,494) (1,335,891)
------------------------
Net increase 1,132,616 $ 15,203,512
========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 3,978,284 $ 56,156,683
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,664,669 25,644,532
Shares redeemed (14,436,478) (203,503,496)
---------------------------
Net decrease in shares
outstanding before
conversion (8,793,525) (121,702,281)
Shares converted into Class
A
(See Note 1) 161,393 2,200,573
Shares converted from Class
A
(See Note 1) (1,142,652) (15,144,175)
---------------------------
Net decrease (9,774,784) $(134,645,883)
===========================
Year ended October 31,
2007:
Shares sold 5,734,593 $ 116,384,929
Shares redeemed (15,004,589) (302,865,310)
---------------------------
Net decrease in shares
outstanding before
conversion (9,269,996) (186,480,381)
Shares converted from Class
B (See Note 1) 130,371 2,692,704
---------------------------
Net decrease (9,139,625) $(183,787,677)
===========================
</Table>
26 MainStay Small Cap Opportunity Fund
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 164,553 $ 2,135,917
Shares issued to
shareholders in
reinvestment of dividends
and distributions 217,627 3,209,993
Shares redeemed (716,632) (9,649,628)
---------------------------
Net decrease in shares
outstanding before
conversion (334,452) (4,303,718)
Shares converted from Class
B
(See Note 1) (105,204) (1,406,795)
---------------------------
Net decrease (439,656) $ (5,710,513)
===========================
Year ended October 31,
2007:
Shares sold 193,571 $ 3,798,476
Shares redeemed (642,319) (12,462,464)
---------------------------
Net decrease in shares
outstanding before
conversion (448,748) (8,663,988)
Shares reacquired upon
conversion into Class A
(See Note 1) (135,051) (2,692,704)
---------------------------
Net decrease (583,799) $ (11,356,692)
===========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 175,386 $ 2,462,014
Shares issued to
shareholders in
reinvestment of dividends
and distributions 249,183 3,677,942
Shares redeemed (1,889,664) (25,824,537)
---------------------------
Net decrease (1,465,095) $ (19,684,581)
===========================
Year ended October 31,
2007:
Shares sold 166,130 $ 3,290,628
Shares redeemed (3,395,099) (66,105,919)
---------------------------
Net decrease (3,228,969) $ (62,815,291)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 4,947,957 $ 71,039,231
Shares issued to
shareholders in
reinvestment of dividends
and distributions 3,845,657 60,517,897
Shares redeemed (30,698,488) (441,720,259)
---------------------------
Net decrease (21,904,874) $(310,163,131)
===========================
Year ended October 31,
2007:
Shares sold 7,909,925 $ 163,836,875
Shares issued to
shareholders in
reinvestment of dividends
and distributions 5,288 109,458
Shares redeemed (17,504,785) (357,509,322)
---------------------------
Net decrease (9,589,572) $(193,562,989)
===========================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, 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 and 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, 2008, the Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's 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.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 10--SUBSEQUENT EVENT:
As of January 1, 2009, the portfolio managers who manage the day-to-day
investment operations of the Fund will transition from a division within NYLIM,
currently referred to as NYLIM Equity Investors or Equity Investors Group, into
a wholly-owned subsidiary of NYLIM Holdings LLC. The new legal entity will be
named Madison Square Investors LLC ("MSI"). The creation of MSI is not expected
to impact the portfolio management team or investment strategy of the Fund. The
Fund's Board of Trustees (the "Board") approved the appointment of MSI as a
subadvisor to the Fund at a meeting on September 25, 2008. The Board also
approved a new Subadvisory Agreement between NYLIM and MSI. There will be no
change in the management fees paid by the Fund as a result of this transition.
At the same September 25th meeting, the Board approved a subadvisory agreement
between NYLIM and MacKay Shields LLC ("MacKay") on behalf of the Fund. The
Subadvisory Agreement provides that MacKay will manage the assets of the Fund as
directed by NYLIM, and pursuant to the Fund's registration statements, subject
to the approval of the Fund's shareholders. If the Fund's shareholders approve
the Subadvisory Agreement with Mackay, the Fund will adopt the investment
objective, strategies,
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
risks and process of the MainStay Small Cap Value Fund ("Small Cap Value Fund"),
a series of the Mainstay Funds.
At the September 25th meeting, the Board also approved a separate but related
proposal for the Small Cap Value Fund. This separate proposal was submitted to
shareholders of the Small Cap Value Fund seeking approval of an Agreement and
Plan of Reorganization providing for (i) the acquisition of all the assets and
the assumption of all the liabilities of the Small Cap Value Fund by the Small
Cap Opportunity Fund, in exchange for shares of the Small Cap Opportunity Fund
having an aggregate net asset value equal to the aggregate net asset value of
the shares of the Small Cap Value Fund; and (ii) subsequent redemption of the
shares and liquidation and dissolution of the Small Cap Value Fund (the "Small
Cap Value Fund Merger").
The proposals relating to the new Subadvisory Agreement and the Small Cap Value
Fund Merger will be presented to the Funds' respective shareholders for approval
at separate meetings to be held on January 20, 2009. The Small Cap Value Fund
Merger is contingent on the shareholders of the Small Cap Opportunity Fund
approving the new Subadvisory Agreement with Mackay. Assuming shareholders of
the Fund approve the new Subadvisory Agreement and shareholders of the Small Cap
Value Fund approve the Agreement and Plan of Reorganization, then the Small Cap
Value Fund will merge with and into the Fund, and the Fund will be renamed the
"MainStay Small Company Value Fund," on or about February 13, 2009. The Fund
will also reduce its management fee and adopt the investment objective,
strategies, process, and risks of the Small Cap Value Fund in anticipation of
the Small Cap Value Fund Merger. Changing the Fund's investment objective,
strategies, process, and risks does not require shareholder approval.
28 MainStay Small Cap Opportunity Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Eclipse Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Opportunity Fund ("the
Fund"), one of the funds constituting Eclipse Funds as of October 31, 2008, 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 the financial highlights for each of the years in the five-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.
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, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. 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 Opportunity Fund of Eclipse Funds as of October 31, 2008, 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 the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the Small Cap Opportunity Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management Agreement
(the "Agreement") for the Fund for one year.
In reaching its decision to approve the Agreement, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund, prepared by the Investment Consulting Group at New York
Life Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management fee and
ordinary operating expenses. The Board also requested and received information
on the profitability of the Fund to NYLIM and its affiliates, discussed in
greater detail below, and responses to a comprehensive list of questions
encompassing a variety of topics prepared on behalf of the Board by independent
legal counsel to the Board. In addition, the Board considered information
provided to it by NYLIM and independent legal counsel concerning the Agreement,
which was amended and restated to more completely reflect the services provided
to the Fund, but did not result in a material amendment to the Fund's prior
contractual arrangements.
In determining to approve the Agreement for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM as adviser to the
Fund; (ii) the investment performance of the Fund; (iii) the cost of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreement was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreement were based also
on the Board's consideration of the Agreement in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreement is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM
In considering the approval of the Agreement, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds and serves a variety of other investment
advisory clients, including other pooled investment vehicles. The Board
considered NYLIM's performance in fulfilling its responsibilities for overseeing
the Fund's legal and compliance environment, and for implementing Board
directives as they relate to the Fund. The Board considered the scope and
quality of NYLIM's services provided to the Fund's shareholders (including
services provided through its affiliate, NYLIM Service Company LLC), such as the
more extensive servicing needs of New York Life agents and reputation as a high-
quality provider of shareholder services, which has been recognized by
independent third-parties on numerous occasions. The Board noted the role that
the MainStay Family of Funds historically has played in serving the investment
needs of New York Life Insurance Company policyholders, who often maintain
smaller account balances than other retail
30 MainStay Small Cap Opportunity Fund
investors. The Board acknowledged that it had approved NYLIM's recommendation to
create a new "Investor Class" of shares designed principally to address the
higher shareholder-servicing costs typically associated with smaller shareholder
accounts. The Board considered the experience of senior personnel at NYLIM
providing management and administrative services to the Fund, as well as NYLIM's
reputation and financial condition. The Board also reviewed NYLIM's willingness
to invest in personnel designed to benefit the Fund, including enhancements to
investment teams at NYLIM, and that NYLIM also is responsible for paying all of
the salaries and expenses for the Fund's officers. The Board further considered
NYLIM's track record and experience in providing investment advisory services to
the Fund. In this regard, the Board considered the experience of the Fund's
portfolio management team, the number of accounts managed by the portfolio
managers and NYLIM's method for compensating portfolio managers. In addition,
the Board considered the benefits to shareholders of being part of the MainStay
Family of Funds, including the privilege of exchanging investments between the
same class of shares without the imposition of a sales charge, as described more
fully in the Fund's prospectus. Based on these considerations, the Board
concluded, within the context of its overall determinations regarding the
Agreement, that the Fund is likely to continue to benefit from the nature,
extent and quality of these services as a result of NYLIM's experience,
personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM concerning Fund investment
performance, as well as discussions between the Fund's portfolio managers and
the Board that occurred at meetings from time to time throughout the year and in
previous years. The Board considered specific actions that NYLIM had taken, or
had agreed with the Board to take, to improve investment performance, and any
results of those actions. In considering the Fund's investment performance, the
Board focused principally on the Fund's long-term performance track record, as
opposed to the Fund's short-term investment performance.
As part of its evaluation of the Fund's investment performance, the Board noted
the difficult environment for the small cap value asset class, as well as the
Fund's relative underperformance when compared to peer small cap value funds.
The Board considered the negative impact of fees and expenses on the Fund's
relative investment performance, and took into account NYLIM's agreement to take
specific steps designed to mitigate the impact of fees and expenses on the
Fund's investment performance, as discussed below.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that NYLIM is taking appropriate
and reasonable actions to address the Board's concerns about the Fund's
investment performance. The Fund discloses more information about its
performance in the Manager Discussions and Financial Highlights sections of this
Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreement and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund. The Board acknowledged that NYLIM must be in a position to pay
and retain experienced professional personnel to provide services to the Fund,
and that NYLIM's ability to maintain a strong financial position is important in
order for NYLIM to continue to provide high-quality ongoing services to the Fund
and its shareholders. The Board noted, for example, increased costs borne by
NYLIM and its affiliates due to new and ongoing regulatory and compliance
requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's
mainstayinvestments.com 31
profitability with respect to the Fund, and noting that other profitability
methodologies may also be reasonable, the Board concluded that the profitability
methodology presented by NYLIM to the Board with respect to the Fund was
reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM from legally permitted "soft-dollar" arrangements
by which brokers provide research and other services to NYLIM in exchange for
commissions paid by the Fund with respect to trades on the Fund's portfolio
securities. The Board also considered that, in addition to fees earned by NYLIM
for managing the Fund, NYLIM affiliates also earn revenues from serving the Fund
in various other capacities, including as transfer agent and distributor. The
information provided to the Board indicated that the profitability to NYLIM and
its affiliates arising directly from these other arrangements was not excessive.
The Board noted that, although it assessed the overall profitability of the Fund
to NYLIM and its affiliates as part of the annual contract review process, when
considering the reasonableness of the fees to be paid to NYLIM and its
affiliates under the Agreement, the Board considered the profitability of
NYLIM's relationship with the Fund on a pre-tax basis, and without regard to
distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreement, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through contractual breakpoints, expense
waivers and reimbursements. While recognizing that any precise determination of
future economies of scale is necessarily refutable, the Board considered the
extent to which NYLIM may realize a larger profit margin as the Fund's assets
grow over time. The Board also observed that NYLIM subsidizes many of the Fund's
overall expenses through the operation of contractual and voluntary expense
limitations that may be lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT FEE AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fee to be paid under the Agreement
and the Fund's total ordinary operating expenses.
The Board considered information provided by NYLIM on the fees that NYLIM
charges to other investment advisory clients, including institutional separate
accounts and other funds with similar investment objectives as the Fund. In this
regard, the Board took into account the relative scope of services provided to
the Fund as opposed to NYLIM's other investment advisory clients. The Board also
considered comparative data provided by Strategic Insight on the fees and
expense ratios charged by similar mutual funds managed by other investment
advisers. This comparative information assisted the Board in evaluating the
reasonableness of the Fund's management fee when compared to similar fees
charged by NYLIM to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
The Board considered that NYLIM, after discussions with the Board, recently had
agreed to move the existing contractual management fee breakpoint on that Fund
from the $1.5 billion asset level to the $1.0 billion asset level, and to impose
a new contractual expense limitation that is expected to have an immediate
positive impact on the Fund's total expenses.
In assessing the reasonableness of the Fund's management fee and total ordinary
operating expenses, the Board took note of any fee and expense arrangements that
had been negotiated by the Board with NYLIM in recent years and observed that
NYLIM has subsidized the total ordinary operating expenses of the Fund and Fund
share classes through the imposition of expense limitation arrangements that may
be modified only with the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
fee and total ordinary operating expenses were within a range that is
competitive and, within the context of the Board's overall conclusions regarding
the Agreement, supports the conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreement for one year.
32 MainStay Small Cap Opportunity Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advised shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) 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 $85,078,126.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$4,579,566 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008
should be multiplied by 0.7% to arrive at the amount eligible for qualified
interest income and 97.7% for the corporate dividends received deduction.
In January 2009, 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 2008. 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, 2008.
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 mainstayinvestments.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 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.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 800-MAINSTAY (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).
mainstayinvestments.com 33
TRUSTEES AND OFFICERS
The Trustees oversee the Fund and the Manager. Each Trustee serves until his or
her successor is elected and qualified or until his or her resignation, death or
removal. The Retirement Policy provides that a Trustee shall tender his or her
resignation upon reaching age 72. A Trustee reaching the age of 72 may continue
for additional one-year periods with the approval of the Board's Nominating and
Governance Committee, except that no Trustee shall serve on the Board past his
or her 75th birthday. Officers serve a term of one year and are elected annually
by the Trustees. The business address of each Trustee and officer listed below
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 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND
POSITION(S) HELD COMPLEX OTHER
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. KIM Indefinite; Trustee Member of the Board of 73 Director, Eclipse Funds
9/24/60 since September Managers and President and Inc. since September 2008,
2008 Chief Executive Officer (22 funds); Trustee, The
(since April 2008) of New MainStay Funds since
York Life Investment September 2008 (21 funds);
Management LLC and New York Director, ICAP Funds, Inc.,
Life Investment Management since September 2008 (4
Holdings LLC; Member of the funds); Director, MainStay
Board of Managers, MacKay VP Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- --------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
34 MainStay Small Cap Opportunity Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND
POSITIONS(S) HELD COMPLEX OTHER
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman since 2005 Management Advisors LLC Director since 1990,
8/12/51 and Trustee since (since 1990) Eclipse Funds Inc. (22
2000 funds); Chairman and
Trustee, The MainStay Funds
since 2007 (21 funds);
Chairman and Director, ICAP
Funds, Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc., since
1991 (68 portfolios)
- --------------------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Trustee Retired; Partner, Ernst & 73 Director, Eclipse Funds
LATSHAW and Audit Committee Young LLP (2002 to 2003); Inc. since 2007 (22 funds);
3/27/51 Financial Expert Partner, Arthur Andersen Trustee, The MainStay Funds
since 2007 LLP (1989 to 2002); since 2006 (21 funds);
Consultant to the Audit and Director, ICAP Funds, Inc.,
Compliance Committee (2004 since 2007 (4 funds);
to 2006) Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, State Farm
Associates Funds Trusts
since 2005 (4 portfolios);
Trustee, State Farm Mutual
Fund Trust since 2005 (16
portfolios); Trustee, State
Farm Variable Product Trust
since 2005 (9 portfolios)
- --------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Trustee Independent Consultant; 73 Director, Eclipse Funds
12/5/41 since 2002 President and Chief Inc. since 2002 (22 funds);
Executive Officer, Babson- Trustee, The MainStay Funds
United, Inc. (financial since 2007 (21 funds);
services firm) (2000 to Director, ICAP Funds, Inc.,
2004); Independent since 2006 (4 funds);
Consultant (1999 to 2000); Director, MainStay VP
Head of Global Funds, Series Fund, Inc., since
Citicorp (1995 to 1999) 2007 (23 portfolios)
- --------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Trustee Managing Director, ICC 73 Director, Eclipse Funds
NOLAN, JR. since 2007 Capital Management; Inc. since 2007 (22 funds);
11/16/46 President--Shields/ Trustee, The MainStay Funds
Alliance, Alliance Capital since 2007 (21 funds);
Management (1994 to 2004) Director, ICAP Funds, Inc.,
since 2007 (4 funds);
Director, MainStay VP
Series Fund, Inc., since
2006 (23 portfolios)
- --------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Trustee Chairman (since 1990) and 73 Director, Eclipse Funds
TRUTANIC since 2007 Chief Executive Officer Inc. since 2007 (22 funds);
2/13/52 (1990 to 1999 and since Trustee, The MainStay Funds
2004), Somerset & Company since 1994 (21 funds);
(financial advisory firm); Director, ICAP Funds, Inc.,
Managing Director and since 2007 (4 funds);
Advisor, The Carlyle Group Director, MainStay VP
(private investment firm) Series Fund, Inc., since
(2002 to 2004); Senior 2007 (23 portfolios)
Managing Director, Partner
and Member of the Board,
Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- --------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND
POSITIONS(S) HELD COMPLEX OTHER
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. WEIL Indefinite; Trustee V. Duane Rath Professor of 73 Director, Eclipse Funds
5/22/40 and Audit Committee Accounting, Graduate School Inc. since 2007 (22 funds);
Financial Expert of Business, University of Trustee, The MainStay Funds
since 2007 Chicago; President, Roman since 2007 (21 funds);
L. Weil Associates, Inc. Director, ICAP Funds, Inc.,
(consulting firm); Board since 2007 (4 funds);
Member and Chairman of the Director, MainStay VP
Board, Ygomi LLC Series Fund, Inc., since
(information and 1994 (23 portfolios)
communications company)
- --------------------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Trustee Retired. Managing Director 73 Director, Eclipse Funds
WEISSER since 2007 of Salomon Brothers, Inc. Inc. since 2007 (22 funds);
10/22/41 (1971 to 1995) Trustee, The MainStay Funds
since 2007 (21 funds);
Director, ICAP Funds, Inc.,
since 2007 (4 funds);
Director, MainStay VP
Series Fund, Inc., since
1997 (23 portfolios);
Trustee, Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- --------------------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S) HELD
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENINTENDE Principal Financial Management Holdings LLC (since July 2008); Managing
5/12/64 and Accounting Director, New York Life Investment Management LLC
Officer since 2007 (since 2007); Treasurer and Principal Financial and
Accounting Officer, Eclipse Funds Inc., The MainStay
Funds, MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since 2007); Vice President, Prudential
Investments (2000 to 2007); Assistant Treasurer,
JennisonDryden Family of Funds, Target Portfolio
Trust, The Prudential Series Fund and American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China Fund (2007)
- --------------------------------------------------------------------------------------------
STEPHEN P. President since President and Chief Operating Officer, NYLIFE
FISHER 2007 Distributors LLC (since January 2008); Senior
2/22/59 Managing Director and Chief Marketing Officer, New
York Life Investment Management LLC (since 2005);
Chairman of the Board, NYLIM Service Company (since
January 2008); Managing Director--Retail Marketing,
New York Life Investment Management LLC (2003 to
2005); President, Eclipse Funds Inc., The MainStay
Funds, MainStay VP Series Fund, Inc., and ICAP Funds,
Inc. (since 2007); Managing Director, UBS Global
Asset Management (1999 to 2003)
- --------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC
HARRINGTON Administration (including predecessor advisory organizations) (since
2/8/59 since 2005 2000); Executive Vice President, New York Life Trust
Company and New York Life Trust Company, FSB (since
2006); Vice President--Administration, Eclipse Funds
Inc., The MainStay Funds and MainStay VP Series Fund,
Inc. (since 2005) and ICAP Funds, Inc. (since 2006)
- --------------------------------------------------------------------------------------------
</Table>
36 MainStay Small Cap Opportunity Fund
<Table>
<Caption>
POSITIONS(S) HELD
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and Chief (since March 2008); Senior Managing Director and
12/16/65 Compliance Officer Chief Compliance Officer (since 2006) and Managing
since 2006 Director and Chief Compliance Officer (2003 to 2006),
New York Life Investment Management LLC and New York
Life Investment Management Holdings LLC; Senior
Managing Director, Compliance (since 2006) and
Managing Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds Inc., The MainStay
Funds, MainStay VP Series Fund, Inc., and ICAP Funds,
Inc. (since 2006); Vice President--Compliance,
Eclipse Funds Inc., The MainStay Funds and MainStay
VP Series Fund, Inc. (2004 to 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 Chief Legal Officer Managing Director, Associate General Counsel and
E.H. MORRISON since January 2008 Assistant Secretary, New York Life Investment
3/26/56 and Secretary since Management LLC (since 2004); Managing Director and
2004 Secretary, NYLIFE Distributors LLC (since 2004);
Secretary, NYLIM Service Company (since January
2008); Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds Inc., The MainStay Funds
and MainStay VP Series Fund, Inc. (since 2004) and
ICAP Funds, Inc. (since 2006); Chief Legal
Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company
of America (2000 to 2004)
- --------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.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 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH 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 MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
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 INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION 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 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL 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
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
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.
mainstayinvestments.com Eclipse Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04847
NYLIM-AO14620 (RECYCLE LOGO) MS308-08 MSSR11-12/08
B1
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
BALANCED FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
BALANCED FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 19
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 26
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 34
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT 35
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 38
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 38
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 38
- ---------------------------------------------
TRUSTEES AND OFFICERS 39
INVESTMENT AND PERFORMANCE COMPARISON(1)
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, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------
With sales charges (29.97%) (0.66%) 3.07%
Excluding sales charges (25.89) 0.47 3.66
</Table>
(With sales charges)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/98 9450 10000 10000 10000 10000
9455 10570 10091 10397 11712
10285 11822 10749 11436 14491
10826 11660 12279 12000 11880
11035 11313 13009 12127 10927
13222 15100 13683 14765 14847
14286 18081 14260 16738 17087
15565 21607 14312 18691 20178
17176 26040 14979 21304 23691
18265 28573 15820 23049 27301
10/31/08 13536 17479 15880 17379 16197
</Table>
CLASS A SHARES(3)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------
With sales charges (29.92%) (0.65%) 3.08%
Excluding sales charges (25.84) 0.48 3.67
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/98 23625 25000 25000 25000 25000
23637 26425 25227 25992 29281
25712 29556 26872 28591 36228
27066 29149 30698 30000 29700
27586 28283 32523 30317 27317
33055 37751 34208 36911 37119
35715 45203 35651 41846 42718
38913 54018 35780 46727 50446
42940 65099 37448 53260 59228
45662 71432 39550 57623 68252
10/31/08 33864 43697 39699 43447 40494
</Table>
CLASS B SHARES(3)--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 (29.88%) (0.59%) 2.89%
Excluding sales charges (26.47) (0.27) 2.89
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/98 10000 10000 10000 10000 10000
9931 10570 10091 10397 11712
10724 11822 10749 11436 14491
11202 11660 12279 12000 11880
11331 11313 13009 12127 10927
13479 15100 13683 14765 14847
14466 18081 14260 16738 17087
15651 21607 14312 18691 20178
17136 26040 14979 21304 23691
18088 28573 15820 23049 27301
10/31/08 13301 17479 15880 17379 16197
</Table>
1. 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 maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, 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
1.00%, 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 or individual 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
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(4)--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 (27.16%) (0.28%) 2.89%
Excluding sales charges (26.48) (0.28) 2.89
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/98 10000 10000 10000 10000 10000
9930 10570 10091 10397 11712
10725 11822 10749 11436 14491
11203 11660 12279 12000 11880
11331 11313 13009 12127 10927
13487 15100 13683 14765 14847
14471 18081 14260 16738 17087
15650 21607 14312 18691 20178
17136 26040 14979 21304 23691
18089 28573 15820 23049 27301
10/31/08 13299 17479 15880 17379 16197
</Table>
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------
(25.62%) 0.88% 4.00%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/98 10000 10000 10000 10000 10000
10027 10570 10091 10397 11712
10936 11822 10749 11436 14491
11539 11660 12279 12000 11880
11791 11313 13009 12127 10927
14164 15100 13683 14765 14847
15361 18081 14260 16738 17087
16815 21607 14312 18691 20178
18639 26040 14979 21304 23691
19900 28573 15820 23049 27301
10/31/08 14802 17479 15880 17379 16197
</Table>
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------
(25.69%) 0.77% 3.89%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/98 10000 10000 10000 10000 10000
10016 10570 10091 10397 11712
10913 11822 10749 11436 14491
11504 11660 12279 12000 11880
11743 11313 13009 12127 10927
14091 15100 13683 14765 14847
15267 18081 14260 16738 17087
16691 21607 14312 18691 20178
18478 26040 14979 21304 23691
19705 28573 15820 23049 27301
10/31/08 14643 17479 15880 17379 16197
</Table>
CDSC and have an annual 12b-1 fee of 0.25%. 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 0.50%, 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 certain management fee waivers or expense reimbursements
from the Fund pursuant to the contract 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.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class A, B, R1 and R2 shares, first offered on
January 1, 2004, include the historical performance of Class I shares through
December 31, 2003, adjusted for differences in certain contractual expenses
and fees. Unadjusted, the performance shown for Class A, B, R1 and R2 shares
might have been lower.
4. Performance figures for Class C shares, first offered on January 1, 2004,
include the historical performance of L Class shares (which were redesignated
as Class C shares on January 1, 2004) through December 31, 2003, and the
historical performance of Class I shares through December 29, 2002, adjusted
for differences in certain contractual expenses and fees. Unadjusted, the
performance shown for Class C shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE FOLLOWING PAGE ARE AN INTEGRAL PART
OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Balanced Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------
(25.86%) 0.52% 3.63%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/98 10000 10000 10000 10000 10000
9990 10570 10091 10397 11712
10861 11822 10749 11436 14491
11421 11660 12279 12000 11880
11630 11313 13009 12127 10927
13922 15100 13683 14765 14847
15039 18081 14260 16738 17087
16400 21607 14312 18691 20178
18112 26040 14979 21304 23691
19272 28573 15820 23049 27301
10/31/08 14288 17479 15880 17379 16197
</Table>
CLASS R3(5) SHARES--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------
(26.02%) 0.28% 3.38%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MainStay Balanced Fund Russell Midcap Value Index ML Corp Govt 1-10 Balanced composite
10/31/98 10000 10000 10000 10000
9967 10570 10091 10397
10805 11822 10749 11436
11333 11660 12279 12000
11511 11313 13009 12127
13746 15100 13683 14765
14818 18081 14260 16738
16123 21607 14312 18691
17763 26040 14979 21304
18846 28573 15820 23049
10/31/08 13942 17479 15880 17379
Russell Midcap Index
10/31/98 10000
11712
14491
11880
10927
14847
17087
20178
23691
27301
10/31/08 16197
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- -----------------------------------------------------------------------------------------------
Russell Midcap(R) Value Index(6) (38.83%) 2.97% 5.74%
Balanced Composite Index(7) (24.60) 3.31 5.68
Merrill Lynch Corporate & Government 1-10 Years Bond Index(8) 0.38 3.02 4.73
Russell Midcap(R) Index(9) (40.67) 1.76 4.94
Average Lipper mixed-asset target allocation growth fund(10) (30.82) 0.71 1.78
</Table>
5. Performance figures for Class R3 shares, first offered to the public on
April 28, 2006, include the historical performance of Class I shares through
April 27, 2006, adjusted for differences in certain contractual expenses and
fees. Unadjusted, the performance shown for Class R3 shares might have been
lower.
6. 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. 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.
7. The Fund's Balanced Composite Index consists of the Russell Midcap(R) Value
Index and the Merrill Lynch Corporate & Government 1-10 Years Bond Index
weighted 60%/40%, respectively. Results assume that all income and capital
gains are reinvested in the index or indices that produce them. An
investment cannot be made directly in an index.
8. The Merrill Lynch Corporate & Government 1-10 Years Bond Index is a market-
capitalization-weighted index that consists of U.S. government and fixed-
coupon domestic investment-grade corporate bonds. Results assume
reinvestment of all income and capital gains. An investment cannot be made
directly in an index.
9. The Russell Midcap(R) Index is an unmanaged index that measures the
performance of the 800 smallest companies in the Russell 1000(R) Index,
which, in turn, is an unmanaged index that measures the performance of the
1,000 largest U.S. companies based on total market capitalization. Results
assume reinvestment of all income and capital gains. An investment cannot be
made directly in an index.
10. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING TWO PAGES IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY BALANCED FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
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, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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, 2008, to October 31, 2008.
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, 2008. 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.
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 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $772.50 $6.06 $1,018.30 $ 6.90
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $773.40 $5.57 $1,018.90 $ 6.34
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $769.80 $9.43 $1,014.50 $10.74
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $769.70 $9.43 $1,014.50 $10.74
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $774.20 $4.19 $1,020.40 $ 4.77
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $773.90 $4.64 $1,019.90 $ 5.28
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $773.10 $5.75 $1,018.70 $ 6.55
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $772.40 $6.82 $1,017.40 $ 7.76
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.36% for Investor Class, 1.25% for Class A, 2.12% for Class B and Class C,
0.94% for Class I, 1.04% for Class R1, 1.29% for Class R2 and 1.53% for Class
R3) multiplied by the average account value over the period, divided by 366
and multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
8 MainStay Balanced Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 58.9
Corporate Bonds 30.9
Federal Agencies 6.8
Short-Term Investments (including collateral
from securities lending is 0.1%) 3.0
Cash and Other Assets, Less Liabilities 0.2
Yankee Bond 0.1
Futures Contracts 0.1
Convertible Bond 0.0
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM
INVESTMENTS)
<Table>
1. Federal Home Loan Bank, 3.375%-5.50%,
due 2/27/13-12/8/17
2. Federal National Mortgage Association,
3.625%-5.375%, due 2/12/13-6/12/17
3. Federal Home Loan Mortgage Corporation,
3.50%-5.25%, due 12/21/12-11/17/17
4. General Electric Capital Corp., 6.875%,
due 11/15/10
5. HSBC Finance Corp., 6.375%-6.75%,
due 11/15/08-11/27/12
6. Goldman Sachs Group, Inc. (The),
6.65%-7.35%,
due 5/15/09-10/1/09
7. Bank One Corp., 7.875%, due 8/1/10
8. Altria Group, Inc., 7.00%, due 11/4/13
9. Bank of America Corp., 7.80%, due
2/15/10-9/15/16
10. Wells Fargo Bank N.A., 6.45%-7.55%,
due 6/21/10-2/1/11
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS JOAN M. SABELLA, TONY H. ELAVIA AND
THOMAS GIRARD OF NEW YORK LIFE INVESTMENT MANAGEMENT LLC, THE FUND'S MANAGER.
HOW DID MAINSTAY BALANCED FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Balanced Fund returned -25.89% for
Investor Class shares,(1) -25.84% for Class A shares, -26.47% for Class B shares
and -26.48% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, Class I shares returned -25.62%, Class R1 shares returned
- -25.69%, Class R2 shares returned -25.86% and Class R3 shares returned -26.02%.
All share classes outperformed the -30.82% return of the average Lipper(2)
mixed-asset target allocation growth fund and the -38.83% return of the Russell
Midcap(R) Value Index.(3) All share classes underperformed the -24.60% return of
the Fund's Balanced Composite Index(4) for the 12 months ended October 31, 2008.
The Russell Midcap(R) Value Index is the Fund's broad-based securities-market
index. See pages 5 and 6 for Fund returns with sales charges.
WHAT FACTORS WERE RESPONSIBLE FOR THE FUND'S PERFORMANCE DURING THE REPORTING
PERIOD?
The most significant factors affecting the equity portion of the Fund were the
sharp decline in the equity market as a whole, the severe setbacks experienced
by financial stocks in particular, and the ensuing uncertainty and elevated
volatility that characterized the markets. The equity portion of the Fund
benefited from its position in the financials sector, which was underweight in
relation to the Russell Midcap(R) Value Index.
On the fixed-income side, the Fund's performance relative to the Merrill Lynch
Corporate & Government 1-10 Years Bond Index,(5) the fixed-income component of
the Fund's Balanced Composite Index, benefited from a reduced allocation to
corporate bonds and more importantly from minimal exposure to the most severely
distressed fixed-income securities.
DURING THE REPORTING PERIOD, WHICH EQUITY SECTORS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH EQUITY SECTORS WERE THE
WEAKEST?
The equity portion of the Fund utilizes a proprietary quantitative investment
process that focuses on a combination of valuation, growth and momentum factors.
Sector holdings are a residual of the Fund's investment process and are not a
product of top-down, macroeconomic analysis. All sectors of the Russell
MidCap(R) Value Index produced negative returns during the reporting period.
Even in a broadly declining market, however, some sectors performed better than
others. On an absolute basis, the equity sectors that strengthened the Fund's
returns the most were utilities, telecommunication services and materials. From
a sector standpoint, the weakest contributors to the Fund's returns were
consumer discretionary and industrials. The Fund's financial holdings were weak
contributors in absolute terms, but as a group, they outperformed the financials
sector of the Russell MidCap(R) Value Index and helped the Fund's relative
returns.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE
FUND'S PERFORMANCE AND WHICH STOCKS WERE THE WEAKEST?
The strongest individual contributors to performance in the equity portion of
the Fund were Chubb (an insurance company), Wal-Mart Stores and First Solar. As
a discount retailer, Wal-Mart Stores benefited as the economy weakened and
consumers looked for lower-price alternatives. Market conditions during the
first half of the reporting period were positive for alternative energy stocks
such as First Solar.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The principal risk of
investing in value stocks is that they may never reach what the portfolio
manager believes is their full value or that they may even go down in value. The
Fund can invest in foreign securities, which 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 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's use
of securities lending presents the risk of default by the borrower, which may
also result in a loss to the Fund. The Fund invests in mid-cap stocks, which may
be more volatile and less liquid than the securities of larger companies. The
values of debt securities fluctuate depending on various factors, including
interest rates, issuer creditworthiness, market conditions and maturities.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 7 for more information on Lipper Inc.
3. See footnote on page 7 for more information on the Russell Midcap(R) Value
Index.
4. See footnote on page 7 for more information on the Fund's Balanced Composite
Index.
5. See footnote on page 7 for more information on the Merrill Lynch Corporate &
Government 1-10 Years Bond Index.
10 MainStay Balanced Fund
The stocks that most severely detracted from the Fund's absolute return included
Assurant and Goldman Sachs Group, both of which are in the financials sector.
CIGNA, a health care company, was also particularly weak.
DID THE EQUITY PORTION OF THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES
DURING THE REPORTING PERIOD?
The equity portion of the Fund selects securities using a proprietary investment
process, which seeks stocks that have attractive relative valuations, strong
operating results and positive price trends. Among the stocks that fit the
Fund's purchase criteria during the reporting period were BJ's Wholesale Club
and Coca-Cola Enterprises.
Among the stocks the Fund sold because of unattractive valuations, weak
operating results and deteriorating price trends were Delta Air Lines and Credit
Suisse FB USA.
DURING THE REPORTING PERIOD, HOW DID SECTOR WEIGHTINGS CHANGE IN THE EQUITY
PORTION OF THE FUND DURING THE REPORTING PERIOD?
Weighting changes in the equity portion of the Fund result from a combination of
stock performance and the Fund's proprietary quantitative security-selection
process. During the reporting period, the Fund's equity weightings decreased
substantially relative to the Russell Midcap(R) Value Index in the consumer
discretionary and utilities sectors. The Fund's equity weighting in materials
decreased more moderately.
The Fund began the reporting period significantly underweight in financial
stocks and substantially increased its weighing in the financials sector during
the reporting period. Even so, the Fund remained underweight in the sector as of
October 31, 2008. The Fund also increased its equity weightings in information
technology and telecommunication services during the reporting period, but to a
lesser degree than in financials.
HOW WAS THE EQUITY PORTION OF THE FUND POSITIONED AT THE END OF THE REPORTING
PERIOD?
As of October 31, 2008, the equity portion of the Fund was significantly
overweight relative to the Russell Midcap(R) Value Index in information
technology and only moderately overweight in industrials. At the end of October
2008, the Fund was underweight in utilities and financials. The Fund's
significantly underweight position in financials helped mitigate losses in that
sector.
WHAT FACTORS AFFECTED THE BOND PORTION OF THE FUND DURING THE REPORTING PERIOD?
During the reporting period, investors faced volatile capital markets as the
result of continued weakness in home prices, a deteriorating economy and a
credit crunch or deleveraging process that caused financial institutions to take
significant write-downs. Monetary policymakers responded aggressively in an
attempt to cushion the blow and prevent widespread finan-cial panic.
Nevertheless, weak economic conditions forced short-term interest rates
downward, as investors sought relative safety in the highest quality fixed
income instruments. Investors favored U.S. Treasury securities and government
agency securities and eschewed bonds issued by entities thought to be more
vulnerable to the economic downturn. As a result, the corporate bond sector
significantly underperformed government bonds and other high-quality sectors
during the reporting period.
In light of these conditions, a substantial allocation to corporate bonds,
particularly those issued by financial services companies, detracted from the
Fund's performance relative to the Merrill Lynch Corporate & Government 1-10
Years Bond Index. Fortunately, the Fund's focus on high-quality corporate bonds
limited the magnitude of the performance shortfall compared to the Merrill Lynch
Corporate & Government 1-10 Years Bond Index.
The bond portion of the Fund has historically been concentrated in corporate
bonds to the exclusion of Treasury and agency securities. This strategy had been
implemented in an effort to capture additional total return. To help reduce the
potential for losses, however, the Fund's corporate bond positions have
generally been of higher quality and shorter duration than those in the Merrill
Lynch Corporate & Government 1-10 Years Bond Index.
During the reporting period, we began to gradually reduce the Fund's exposure to
corporate bonds, redirecting those assets to Treasury and agency securities.
This effort was impeded by the need to reallocate proceeds from corporate bond
sales to equities to maintain the Fund's target mix between stocks and bonds in
a declining equity market. Nevertheless, some progress was made, and the Fund
benefited from the strategy's implementation in a period when investors rewarded
higher quality and lower risk.
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.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 37.8%+
CONVERTIBLE BOND 0.0%++
- ----------------------------------------------------------------
INTERNET 0.0%++
At Home Corp.
4.75%, due 12/19/08
(a)(b)(c)(d) $ 177,810 $ 18
-------------
Total Convertible Bond
(Cost $13,325) 18
-------------
CORPORATE BONDS 30.9%
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 2.1%
General Dynamics Corp.
4.50%, due 8/15/10 874,000 879,823
5.375%, due 8/15/15 2,265,000 2,123,947
Lockheed Martin Corp.
7.65%, due 5/1/16 3,820,000 3,931,544
McDonnell Douglas Corp.
9.75%, due 4/1/12 3,600,000 3,897,961
United Technologies Corp.
7.125%, due 11/15/10 3,130,000 3,288,572
-------------
14,121,847
-------------
AGRICULTURE 0.9%
V Altria Group, Inc.
7.00%, due 11/4/13 5,750,000 6,182,584
-------------
BANKS 3.7%
V Bank of America Corp.
7.80%, due 2/15/10 4,500,000 4,541,724
7.80%, due 9/15/16 1,500,000 1,406,468
V Bank One Corp.
7.875%, due 8/1/10 6,450,000 6,602,181
Mellon Funding Corp.
6.375%, due 2/15/10 1,960,000 1,963,687
U.S. Bank N.A.
5.70%, due 12/15/08 1,747,000 1,752,122
6.375%, due 8/1/11 2,500,000 2,474,800
V Wells Fargo Bank N.A.
6.45%, due 2/1/11 3,847,000 3,842,545
7.55%, due 6/21/10 2,000,000 2,064,562
-------------
24,648,089
-------------
BEVERAGES 1.2%
Anheuser-Busch Cos., Inc.
7.50%, due 3/15/12 4,200,000 4,143,695
PepsiCo., Inc.
5.15%, due 5/15/12 4,000,000 3,924,904
-------------
8,068,599
-------------
CHEMICALS 0.8%
E.I. du Pont de Nemours & Co.
4.75%, due 11/15/12 4,400,000 4,240,654
Monsanto Co.
7.375%, due 8/15/12 1,000,000 1,024,935
-------------
5,265,589
-------------
COMPUTERS 0.9%
Hewlett-Packard Co.
5.25%, due 3/1/12 1,000,000 972,478
6.50%, due 7/1/12 1,617,000 1,622,072
International Business
Machines Corp.
7.50%, due 6/15/13 2,940,000 3,118,726
-------------
5,713,276
-------------
COSMETICS & PERSONAL CARE 0.6%
Procter & Gamble Co. (The)
6.875%, due 9/15/09 3,877,000 3,985,843
-------------
DIVERSIFIED FINANCIAL SERVICES 6.3%
Bear Stearns Cos., Inc. (The)
5.30%, due 10/30/15 2,000,000 1,703,134
CIT Group, Inc.
4.75%, due 12/15/10 655,000 401,302
Citigroup, Inc.
5.85%, due 8/2/16 1,500,000 1,302,312
6.50%, due 1/18/11 1,474,000 1,434,811
Credit Suisse First Boston
USA, Inc.
6.125%, due 11/15/11 6,162,000 5,891,297
V General Electric Capital
Corp.
6.875%, due 11/15/10 7,912,000 7,902,110
V Goldman Sachs Group, Inc.
(The)
6.65%, due 5/15/09 1,180,000 1,167,835
7.35%, due 10/1/09 5,650,000 5,647,463
V HSBC Finance Corp.
6.375%, due 11/27/12 2,750,000 2,542,436
6.50%, due 11/15/08 3,000,000 2,997,297
6.75%, due 5/15/11 2,374,000 2,240,050
International Lease Finance
Corp.
6.375%, due 3/15/09 2,000,000 1,822,588
JPMorgan Chase & Co.
5.25%, due 5/1/15 2,250,000 2,006,093
Merrill Lynch & Co., Inc.
6.05%, due 5/16/16 3,800,000 3,075,351
Toyota Motor Credit Corp.
5.50%, due 12/15/08 1,477,000 1,473,308
-------------
41,607,387
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings or issuers held as of October 31, 2008,
excluding short-term investments. May be subject to change daily.
12 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
ELECTRIC 1.0%
Consolidated Edison Co. of
New York
7.50%, due 9/1/10 $ 5,500,000 $ 5,625,169
Interstate Power & Light Co.
6.625%, due 8/1/09 1,311,000 1,310,095
-------------
6,935,264
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.6%
Emerson Electric Co.
4.50%, due 5/1/13 2,250,000 2,123,946
7.125%, due 8/15/10 2,000,000 2,077,986
-------------
4,201,932
-------------
FOOD 3.5%
Campbell Soup Co.
6.75%, due 2/15/11 4,018,000 4,127,237
Hershey Co. (The)
5.45%, due 9/1/16 4,449,000 4,059,966
Kellogg Co.
Series B
6.60%, due 4/1/11 3,000,000 3,023,421
Nabisco, Inc.
7.55%, due 6/15/15 3,330,000 3,166,767
Sysco International Co.
6.10%, due 6/1/12 3,060,000 2,986,976
Unilever Capital Corp.
7.125%, due 11/1/10 5,700,000 5,891,383
-------------
23,255,750
-------------
HEALTH CARE--PRODUCTS 0.4%
Johnson & Johnson
6.625%, due 9/1/09 (e) 2,371,000 2,436,824
-------------
HOUSEHOLD PRODUCTS & WARES 0.7%
Kimberly-Clark Corp.
5.00%, due 8/15/13 5,050,000 4,940,602
-------------
INSURANCE 0.7%
Allstate Corp. (The)
7.20%, due 12/1/09 1,900,000 1,895,664
John Hancock Financial
Services, Inc.
5.625%, due 12/1/08 2,640,000 2,636,418
-------------
4,532,082
-------------
MACHINERY--CONSTRUCTION & MINING 0.7%
Caterpillar, Inc.
5.70%, due 8/15/16 1,000,000 879,342
6.55%, due 5/1/11 3,915,000 3,925,566
-------------
4,804,908
-------------
MACHINERY--DIVERSIFIED 0.4%
Deere & Co.
7.85%, due 5/15/10 2,308,000 2,402,192
-------------
MEDIA 0.5%
Walt Disney Co. (The)
6.375%, due 3/1/12 3,000,000 3,041,880
-------------
MISCELLANEOUS--MANUFACTURING 0.8%
Honeywell International, Inc.
7.50%, due 3/1/10 4,985,000 5,140,582
-------------
OIL & GAS 0.9%
ConocoPhillips
6.375%, due 3/30/09 2,160,000 2,160,836
8.75%, due 5/25/10 1,940,000 2,020,665
Texaco Capital, Inc.
5.50%, due 1/15/09 2,000,000 2,005,924
-------------
6,187,425
-------------
PHARMACEUTICALS 1.3%
Eli Lilly & Co.
6.00%, due 3/15/12 950,000 974,125
Merck & Co., Inc.
4.75%, due 3/1/15 4,617,000 4,245,803
Wyeth
5.50%, due 2/1/14 3,500,000 3,279,843
-------------
8,499,771
-------------
RETAIL 1.2%
Costco Wholesale Corp.
5.30%, due 3/15/12 1,408,000 1,407,158
Target Corp.
7.50%, due 8/15/10 3,034,000 3,238,240
Wal-Mart Stores, Inc.
6.875%, due 8/10/09 3,088,000 3,183,678
-------------
7,829,076
-------------
TELECOMMUNICATIONS 1.2%
BellSouth Corp.
6.00%, due 10/15/11 2,000,000 1,946,576
Southwestern Bell Telephone
Corp.
7.00%, due 7/1/15 4,700,000 4,441,218
Verizon Global Funding Corp.
7.375%, due 9/1/12 2,000,000 1,958,040
-------------
8,345,834
-------------
TEXTILES 0.5%
Cintas Corp. No. 2
6.00%, due 6/1/12 3,095,000 3,158,899
-------------
Total Corporate Bonds
(Cost $214,641,276) 205,306,235
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FEDERAL AGENCIES 6.8%
- ----------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATIONS) 0.2%
Series 2003-17, Class QT
5.00%, due 8/25/27 $ 1,031,000 $ 1,034,772
Series 2003-32, Class PG
5.00%, due 10/25/27 437,000 436,742
-------------
1,471,514
-------------
V FEDERAL HOME LOAN BANK
2.5%
3.375%, due 2/27/13 2,500,000 2,416,270
4.50%, due 9/16/13 2,500,000 2,510,560
4.75%, due 12/16/16 2,500,000 2,406,687
5.00%, due 11/17/17 750,000 732,387
5.00%, due 12/8/17 750,000 732,247
5.125%, due 8/14/13 2,500,000 2,580,080
5.375%, due 5/18/16 2,500,000 2,533,020
5.50%, due 8/13/14 2,000,000 2,075,360
-------------
15,986,611
-------------
V FEDERAL HOME LOAN MORTGAGE CORPORATION 1.8%
3.50%, due 5/29/13 2,000,000 1,943,922
4.125%, due 12/21/12 2,000,000 2,000,538
5.00%, due 4/18/17 2,000,000 1,972,236
5.125%, due 10/18/16 2,000,000 1,992,200
5.125%, due 11/17/17 2,000,000 1,983,496
5.25%, due 4/18/16 2,000,000 2,033,922
-------------
11,926,314
-------------
V FEDERAL NATIONAL MORTGAGE ASSOCIATION 1.9%
3.625%, due 2/12/13 2,000,000 1,961,252
4.375%, due 10/15/15 2,000,000 1,954,066
5.00%, due 2/13/17 2,000,000 1,970,192
5.00%, due 5/11/17 2,000,000 1,965,262
5.25%, due 9/15/16 2,500,000 2,516,307
5.375%, due 6/12/17 2,000,000 2,021,694
-------------
12,388,773
-------------
FREDDIE MAC (COLLATERALIZED MORTGAGE OBLIGATIONS) 0.3%
Series 2734, Class JC
3.50%, due 11/15/23 296,640 296,217
Series 2719, Class WB
4.50%, due 8/15/21 1,030,211 997,539
Series 2589, Class GD
5.00%, due 9/15/28 437,000 439,613
Series 2600, Class MJ
5.00%, due 9/15/29 437,000 423,817
-------------
2,157,186
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(COLLATERALIZED MORTGAGE OBLIGATION) 0.1%
Series 2003-50, Class PC
5.50%, due 3/16/32 874,000 874,585
-------------
Total Federal Agencies
(Cost $45,956,911) 44,804,983
-------------
YANKEE BOND 0.1% (F)
- ----------------------------------------------------------------
CHEMICALS 0.1%
Dow Capital B.V.
8.50%, due 6/8/10 495,000 525,204
-------------
Total Yankee Bond
(Cost $524,973) 525,204
-------------
Total Long-Term Bonds
(Cost $261,136,485) 250,636,440
-------------
<Caption>
SHARES
COMMON STOCKS 58.9%
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 1.2%
L-3 Communications Holdings,
Inc. 7,710 625,821
Lockheed Martin Corp. 43,837 3,728,337
Northrop Grumman Corp. 72,300 3,390,147
-------------
7,744,305
-------------
AGRICULTURE 1.2%
Altria Group, Inc. 108,651 2,085,013
Bunge, Ltd. 24,208 929,829
Lorillard, Inc. 14,045 925,004
Philip Morris International,
Inc. 99,317 4,317,310
-------------
8,257,156
-------------
AIRLINES 0.7%
Southwest Airlines Co. 410,659 4,837,563
-------------
AUTO MANUFACTURERS 0.0%++
Ford Motor Co. (g) 85,364 186,947
-------------
AUTO PARTS & EQUIPMENT 0.1%
Autoliv, Inc. 19,523 417,011
-------------
BANKS 2.3%
Bank of America Corp. 72,939 1,762,936
Bank of New York Mellon Corp.
(The) 788 25,689
BB&T Corp. 25,572 916,756
Capital One Financial Corp. 64,627 2,528,208
Fifth Third Bancorp 40,087 434,944
M&T Bank Corp. 9,113 739,064
</Table>
14 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
BANKS (CONTINUED)
Northern Trust Corp. 47,028 $ 2,648,147
Regions Financial Corp. 66,537 737,895
State Street Corp. 5,881 254,941
U.S. Bancorp 6,946 207,060
Wells Fargo & Co. 155,930 5,309,417
-------------
15,565,057
-------------
BEVERAGES 0.5%
Dr. Pepper Snapple Group,
Inc. (g) 5,558 127,278
Pepsi Bottling Group, Inc.
(The) 148,599 3,435,609
-------------
3,562,887
-------------
BIOTECHNOLOGY 1.2%
Amgen, Inc. (g) 88,124 5,277,746
Gilead Sciences, Inc. (g) 17,160 786,786
Invitrogen Corp. (g) 60,541 1,742,976
-------------
7,807,508
-------------
CHEMICALS 0.8%
C.F. Industries Holdings,
Inc. 37,633 2,415,662
Mosaic Co. (The) 21,528 848,419
Sherwin-Williams Co. (The) 22,910 1,303,808
Terra Industries, Inc. 24,697 543,087
-------------
5,110,976
-------------
COMMERCIAL SERVICES 0.5%
Lender Processing Services,
Inc. 34,715 800,875
Moody's Corp. 111,052 2,842,931
-------------
3,643,806
-------------
COMPUTERS 2.6%
Affiliated Computer Services,
Inc. Class A (g) 85,317 3,497,997
Apple, Inc. (g) 32,819 3,530,996
Computer Sciences Corp. (g) 23,822 718,472
Hewlett-Packard Co. 110,069 4,213,441
International Business
Machines Corp. 47,487 4,414,866
Western Digital Corp. (g) 70,529 1,163,729
-------------
17,539,501
-------------
COSMETICS & PERSONAL CARE 1.3%
Avon Products, Inc. 153,429 3,809,642
Procter & Gamble Co. (The) 73,343 4,733,557
-------------
8,543,199
-------------
DIVERSIFIED FINANCIAL SERVICES 4.1%
Ameriprise Financial, Inc. 9,298 200,837
BlackRock, Inc. 27,702 3,638,381
Citigroup, Inc. 211,142 2,882,088
Goldman Sachs Group, Inc.
(The) 36,967 3,419,448
Invesco, Ltd. 110,297 1,644,528
Janus Capital Group, Inc. 2,135 25,065
JPMorgan Chase & Co. 118,787 4,899,964
NASDAQ OMX Group, Inc. (The)
(g) 95,038 3,084,933
Raymond James Financial, Inc. 100,996 2,352,197
T. Rowe Price Group, Inc. 48,417 1,914,408
TD Ameritrade Holding Corp.
(g) 229,486 3,049,869
-------------
27,111,718
-------------
ELECTRIC 0.9%
Alliant Energy Corp. 74,598 2,191,689
American Electric Power Co.,
Inc. 78,140 2,549,708
DTE Energy Corp. 39,993 1,411,753
-------------
6,153,150
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.6%
Emerson Electric Co. 118,619 3,882,400
-------------
ELECTRONICS 0.1%
Applied Biosystems, Inc. 20,542 633,310
-------------
ENGINEERING & CONSTRUCTION 0.2%
Foster Wheeler, Ltd. (g) 58,012 1,589,529
-------------
FOOD 1.9%
H.J. Heinz Co. 115,997 5,082,989
Kroger Co. (The) 113,159 3,107,346
Safeway, Inc. 137,708 2,929,049
SUPERVALU, Inc. 94,056 1,339,357
-------------
12,458,741
-------------
FOREST PRODUCTS & PAPER 0.6%
International Paper Co. 244,348 4,207,673
-------------
GAS 0.8%
Sempra Energy 121,962 5,194,362
-------------
HEALTH CARE--PRODUCTS 1.5%
DENTSPLY International, Inc. 1,091 33,144
Johnson & Johnson 76,296 4,679,997
Medtronic, Inc. 9,163 369,544
St. Jude Medical, Inc. (g) 119,970 4,562,459
-------------
9,645,144
-------------
HEALTH CARE--SERVICES 0.5%
LifePoint Hospitals, Inc. (g) 68,625 1,644,941
WellCare Health Plans, Inc.
(g) 35,578 859,920
WellPoint, Inc. (g) 18,909 734,993
-------------
3,239,854
-------------
HOME BUILDERS 0.9%
Lennar Corp. Class A 230,865 1,786,895
NVR, Inc. (g) 2,507 1,228,956
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HOME BUILDERS (CONTINUED)
Pulte Homes, Inc. 246,813 $ 2,749,497
-------------
5,765,348
-------------
INSURANCE 5.2%
American Financial Group,
Inc. 29,466 669,762
Arch Capital Group, Ltd. (g) 71,775 5,006,306
Assurant, Inc. 91,771 2,338,325
Axis Capital Holdings, Ltd. 180,542 5,141,836
Chubb Corp. (The) 97,612 5,058,254
CIGNA Corp. 156,479 2,550,608
Genworth Financial, Inc.
Class A 107,195 518,824
Massey Energy Co. 88,512 2,043,742
MBIA, Inc. 136,840 1,345,137
MetLife, Inc. 75,598 2,511,366
Transatlantic Holdings, Inc. 19,845 850,358
Travelers Cos., Inc. (The) 133,924 5,698,466
Unum Group 67,360 1,060,920
-------------
34,793,904
-------------
INTERNET 0.1%
Google, Inc. Class A (g) 1,078 387,390
-------------
IRON & STEEL 0.5%
Cliffs Natural Resources,
Inc. 19,552 527,708
Reliance Steel & Aluminum Co. 49,240 1,232,970
United States Steel Corp. 42,300 1,560,024
-------------
3,320,702
-------------
MACHINERY--CONSTRUCTION & MINING 0.5%
Caterpillar, Inc. 78,539 2,997,834
-------------
MACHINERY--DIVERSIFIED 0.4%
AGCO Corp. (g) 8,208 258,716
Cummins, Inc. 68,676 1,775,275
Flowserve Corp. 16,695 950,279
-------------
2,984,270
-------------
MEDIA 2.9%
Apollo Group, Inc. Class A
(g) 1,518 105,516
CBS Corp. Class B 133,254 1,293,897
Comcast Corp. Class A 269,352 4,244,988
Liberty Media Corp.
Entertainment Class A (g) 264,152 4,252,847
Time Warner, Inc. 428,257 4,321,113
Walt Disney Co. (The) 181,559 4,702,378
-------------
18,920,739
-------------
METAL FABRICATE & HARDWARE 0.1%
Precision Castparts Corp. 14,599 946,161
-------------
MINING 0.2%
Freeport-McMoRan Copper &
Gold, Inc. Class B 50,550 1,471,005
Southern Copper Corp. 3,057 44,510
-------------
1,515,515
-------------
MISCELLANEOUS--MANUFACTURING 2.5%
Dover Corp. 15,772 501,076
Eaton Corp. 84,179 3,754,383
General Electric Co. 162,517 3,170,707
Honeywell International, Inc. 48,734 1,483,950
ITT Corp. 14,243 633,814
John Bean Technologies Corp. 64,605 541,390
Parker Hannifin Corp. 108,823 4,219,068
Tyco International, Ltd. 93,711 2,369,014
-------------
16,673,402
-------------
OIL & GAS 3.7%
Chevron Corp. 66,481 4,959,483
Cimarex Energy Co. 51,296 2,075,436
ConocoPhillips 79,604 4,141,000
ENSCO International, Inc. 88,960 3,381,370
ExxonMobil Corp. 52,442 3,887,001
Marathon Oil Corp. 7,544 219,530
Murphy Oil Corp. 40,005 2,025,853
Occidental Petroleum Corp. 71,327 3,961,502
-------------
24,651,175
-------------
OIL & GAS SERVICES 0.4%
Quest Diagnostics, Inc. 52,829 2,472,397
-------------
PACKAGING & CONTAINERS 0.5%
Edison International 91,500 3,256,485
-------------
PHARMACEUTICALS 2.7%
AmerisourceBergen Corp. 103,935 3,250,048
Forest Laboratories, Inc. (g) 185,032 4,298,293
Herbalife, Ltd. 57,046 1,393,634
Omnicare, Inc. 86,522 2,385,412
Pfizer, Inc. 189,189 3,350,537
Schering-Plough Corp. 213,853 3,098,730
Watson Pharmaceuticals, Inc.
(g) 4,608 120,591
-------------
17,897,245
-------------
REAL ESTATE INVESTMENT TRUSTS 1.9%
Annaly Capital Management,
Inc. 405,783 5,640,384
Public Storage 59,360 4,837,840
Vornado Realty Trust 26,202 1,848,551
-------------
12,326,775
-------------
RETAIL 2.9%
AutoZone, Inc. (g) 3,646 464,099
Big Lots, Inc. (g) 183,538 4,483,833
</Table>
16 MainStay Balanced 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)
RETAIL (CONTINUED)
Gap, Inc. (The) 73,656 $ 953,109
Polo Ralph Lauren Corp. 29,686 1,400,289
Ross Stores, Inc. 149,234 4,878,459
TJX Cos., Inc. 37,154 994,241
Wal-Mart Stores, Inc. 86,187 4,810,097
Yum! Brands, Inc. 34,224 992,838
-------------
18,976,965
-------------
SAVINGS & LOANS 0.3%
Hudson City Bancorp, Inc. 119,000 2,238,390
-------------
SEMICONDUCTORS 1.7%
Broadcom Corp. Class A (g) 178,369 3,046,543
Intel Corp. 263,926 4,222,816
LSI Corp. (g) 967,538 3,725,021
-------------
10,994,380
-------------
SOFTWARE 2.2%
Activision Blizzard, Inc. (g) 377,240 4,700,410
Fluor Corp. 36,406 1,453,691
Microsoft Corp. 180,854 4,038,470
Oracle Corp. (g) 244,023 4,463,181
-------------
14,655,752
-------------
TELECOMMUNICATIONS 3.9%
American Tower Corp. Class A
(g) 55,382 1,789,392
AT&T, Inc. 121,140 3,242,918
CenturyTel, Inc. 133,492 3,351,984
Cisco Systems, Inc. (g) 235,950 4,192,831
Juniper Networks, Inc. (g) 44,802 839,589
Level 3 Communications, Inc.
(g) 880,671 924,705
NII Holdings, Inc. (g) 87,789 2,261,445
PG&E Corp. 73,153 2,682,521
QUALCOMM, Inc. 103,454 3,958,150
Verizon Communications, Inc. 87,388 2,592,802
-------------
25,836,337
-------------
TOYS, GAMES & HOBBIES 0.6%
Hasbro, Inc. 138,027 4,012,445
Mattel, Inc. 1,456 21,869
-------------
4,034,314
-------------
TRANSPORTATION 1.2%
CSX Corp. 89,694 4,100,810
Union Pacific Corp. 57,007 3,806,357
-------------
7,907,167
-------------
Total Common Stocks
(Cost $525,696,192) 390,884,444
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS 3.0%
- ----------------------------------------------------------------
INVESTMENT COMPANY 0.1%
State Street Navigator
Securities Lending Prime
Portfolio (h) $ 272,420 $ 272,420
-------------
Total Investment Company
(Cost $272,420) 272,420
-------------
U.S. GOVERNMENT 2.9%
United States Treasury Bills
0.355%, due 1/8/09 (i) 4,100,000 4,097,233
0.426%, due 1/29/09 (i)(j) 15,250,000 15,233,972
-------------
Total U.S. Government
(Cost $19,334,184) 19,331,205
-------------
Total Short-Term Investments
(Cost $19,606,604) 19,603,625
-------------
Total Investments
(Cost $806,439,281) (l) 99.7% 661,124,509
Cash and Other Assets,
Less Liabilities 0.3 2,305,979
----- ------------
Net Assets 100.0% $ 663,430,488
===== ============
</Table>
<Table>
<Caption>
CONTRACTS UNREALIZED
LONG DEPRECIATION (K)
FUTURES CONTRACTS 0.1%
- --------------------------------------------------------
Standard & Poor's 500
Index Mini December 2008 187 $680,239
--------
Total Futures Contracts
(Settlement Value
$9,044,255) $680,239
========
</Table>
<Table>
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
++ Less than one-tenth of a percent.
(a) Illiquid security. The total market
value of this security at October 31,
2008 is $18, which represents less than
one-tenth of a percent of the Fund's net
assets.
(b) Issue in default.
(c) Restricted security.
(d) Fair valued security. The total market
value of this security at October 31,
2008 is $18, which represents less than
one-tenth of a percent of the Fund's net
assets.
(e) Represents a security, or a portion
thereof, which is out on loan. The
aggregate market value of such securities
is $266,938; cash collateral of $272,420
(included in liabilities) was received
with which the Fund purchased highly
liquid short-term investments.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
(f) Yankee Bond--dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(g) Non-income producing security.
(h) Represents a security, or a portion
thereof, purchased with cash collateral
received for securities on loan.
(i) Interest rate presented is yield to
maturity.
(j) Segregated, or partially segregated as
collateral for futures contracts.
(k) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2008.
(l) At October 31, 2008, cost is $808,455,462
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 10,122,214
Gross unrealized depreciation (157,453,167)
-------------
Net unrealized depreciation $(147,330,953)
=============
</Table>
18 MainStay Balanced 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, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $806,439,281)
including $266,938 market value
of securities loaned $ 661,124,509
Receivables:
Dividends and interest 5,037,343
Fund shares sold 189,763
Variation margin on futures
contracts 23,620
Other assets 62,893
-------------
Total assets 666,438,128
-------------
LIABILITIES:
Securities lending collateral 272,420
Payables:
Fund shares redeemed 1,428,944
Transfer agent (See Note 3) 429,833
Manager (See Note 3) 353,090
NYLIFE Distributors (See Note 3) 201,072
Shareholder communication 153,724
Professional fees 80,695
Custodian 68,182
Trustees 2,515
Accrued expenses 17,165
-------------
Total liabilities 3,007,640
-------------
Net assets $ 663,430,488
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share) 1
billion shares authorized $ 341,912
Additional paid-in capital 876,585,716
-------------
876,927,628
Accumulated undistributed net
investment income 1,192,272
Accumulated net realized loss on
investments and futures
transactions (70,054,879)
Net unrealized depreciation on
investments and futures contracts (144,634,533)
-------------
Net assets $ 663,430,488
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 49,970,862
=============
Shares of beneficial interest
outstanding 2,573,910
=============
Net asset value per share
outstanding $ 19.41
Maximum sales charge (5.50% of
offering price) 1.13
-------------
Maximum offering price per share
outstanding $ 20.54
=============
CLASS A
Net assets applicable to
outstanding shares $ 173,834,452
=============
Shares of beneficial interest
outstanding 8,958,160
=============
Net asset value per share
outstanding $ 19.41
Maximum sales charge (5.50% of
offering price) 1.13
-------------
Maximum offering price per share
outstanding $ 20.54
=============
CLASS B
Net assets applicable to
outstanding shares $ 81,144,153
=============
Shares of beneficial interest
outstanding 4,193,403
=============
Net asset value and offering price
per share outstanding $ 19.35
=============
CLASS C
Net assets applicable to
outstanding shares $ 79,422,769
=============
Shares of beneficial interest
outstanding 4,105,995
=============
Net asset value and offering price
per share outstanding $ 19.34
=============
CLASS I
Net assets applicable to
outstanding shares $ 199,125,808
=============
Shares of beneficial interest
outstanding 10,242,250
=============
Net asset value and offering price
per share outstanding $ 19.44
=============
CLASS R1
Net assets applicable to
outstanding shares $ 25,038,369
=============
Shares of beneficial interest
outstanding 1,289,161
=============
Net asset value and offering price
per share outstanding $ 19.42
=============
CLASS R2
Net assets applicable to
outstanding shares $ 54,848,710
=============
Shares of beneficial interest
outstanding 2,825,974
=============
Net asset value and offering price
per share outstanding $ 19.41
=============
CLASS R3
Net assets applicable to
outstanding shares $ 45,365
=============
Shares of beneficial interest
outstanding 2,338
=============
Net asset value and offering price
per share outstanding $ 19.41
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 19,531,291
Dividends 11,836,142
Income from securities
loaned--net 327,296
-------------
Total income 31,694,729
-------------
EXPENSES:
Manager (See Note 3) 7,265,795
Transfer agent--Investor Class
(See Note 3) 130,493
Transfer agent--Class A (See Note
3) 714,361
Transfer agent--Classes B and C
(See Note 3) 745,668
Transfer agent--Classes I, R1, R2
and R3 (See Note 3) 985,371
Distribution--Class B (See Note
3) 883,151
Distribution--Class C (See Note
3) 913,502
Distribution--Class R3 (See Note
3) 113
Distribution/Service--Investor
Class (See Note 3) 91,819
Distribution/Service--Class A
(See Note 3) 720,502
Service--Class B (See Note 3) 294,384
Service--Class C (See Note 3) 304,501
Distribution/Service--Class R2
(See Note 3) 212,092
Distribution/Service--Class R3
(See Note 3) 113
Shareholder communication 211,764
Professional fees 155,454
Shareholder service--Class R1
(See Note 3) 53,864
Shareholder service--Class R2
(See Note 3) 84,837
Shareholder service--Class R3
(See Note 3) 45
Registration 108,212
Custodian 51,630
Trustees 39,610
Miscellaneous 75,686
-------------
Total expenses before waiver 14,042,967
Expense waiver from Manager (See
Note 3) (324,453)
-------------
Net expenses 13,718,514
-------------
Net investment income 17,976,215
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on:
Security transactions $ (63,573,024)
Futures transactions (5,909,513)
-------------
Net realized loss on investments
and futures transactions (69,482,537)
-------------
Net change in unrealized
appreciation on:
Security transactions (213,832,341)
Futures contracts 655,093
-------------
Net change in unrealized
appreciation on investments and
futures contracts (213,177,248)
-------------
Net realized and unrealized loss on
investments and futures
transactions (282,659,785)
-------------
Net decrease in net assets
resulting from operations $(264,683,570)
=============
</Table>
20 MainStay Balanced 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, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 17,976,215 $ 23,165,228
Net realized gain (loss)
on investments and
futures transactions (69,482,537) 78,319,047
Net change in unrealized
appreciation on
investments and futures
contracts (213,177,248) (17,178,478)
-------------------------------
Net increase (decrease)
in net assets resulting
from operations (264,683,570) 84,305,797
-------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (603,646) --
Class A (5,418,133) (7,647,310)
Class B (1,193,014) (1,634,527)
Class C (1,241,955) (1,807,832)
Class I (6,524,922) (8,567,992)
Class R1 (1,171,162) (2,177,517)
Class R2 (1,521,875) (2,017,792)
Class R3 (738) (250)
-------------------------------
(17,675,445) (23,853,220)
-------------------------------
From net realized gain on investments:
Class A (24,077,693) (10,882,648)
Class B (8,794,284) (4,100,776)
Class C (9,531,313) (4,451,148)
Class I (24,773,850) (9,741,269)
Class R1 (4,242,231) (2,831,505)
Class R2 (6,428,934) (2,863,815)
Class R3 (2,379) (270)
-------------------------------
(77,850,684) (34,871,431)
-------------------------------
Total dividends and
distributions to
shareholders (95,526,129) (58,724,651)
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares 175,720,920 329,366,505
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 88,742,803 54,105,110
Cost of shares redeemed (538,782,912) (452,830,566)
-------------------------------
Decrease in net assets
derived from capital
share transactions (274,319,189) (69,358,951)
-------------------------------
Net decrease in net
assets (634,528,888) (43,777,805)
NET ASSETS:
Beginning of year 1,297,959,376 1,341,737,181
-------------------------------
End of year $ 663,430,488 $1,297,959,376
===============================
Accumulated undistributed
net investment income at
end of year $ 1,192,272 $ 1,187,421
===============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- -----------------------------------------------------------
FEBRUARY 28, JANUARY 2,
2008** 2004**
THROUGH THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31, OCTOBER 31,
---------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 25.29 $ 28.42 $ 27.92 $ 26.90 $ 25.41 $ 24.45
------- -------- -------- -------- -------- --------
Net investment income 0.29 (a) 0.46 (a) 0.49 (a) 0.44 0.35 0.19
Net realized and
unrealized gain (loss)
on investments (5.82) (7.26) 1.25 2.23 1.91 0.96
------- -------- -------- -------- -------- --------
Total from investment
operations (5.53) (6.80) 1.74 2.67 2.26 1.15
------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.35) (0.46) (0.51) (0.40) (0.31) (0.19)
From net realized gain
on investments -- (1.75) (0.73) (1.25) (0.46) --
------- -------- -------- -------- -------- --------
Total dividends and
distributions (0.35) (2.21) (1.24) (1.65) (0.77) (0.19)
------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 19.41 $ 19.41 $ 28.42 $ 27.92 $ 26.90 $ 25.41
======= ======== ======== ======== ======== ========
Total investment return
(b)(d) (22.12%)(c) (25.84%) 6.34% 10.35% 8.96% 4.70%(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.81% ++ 1.87% 1.74% 1.63% 1.32% 0.99%++
Net expenses 1.38% ++ 1.29% 1.28% 1.32% 1.32% 1.34%++#
Expenses (before waiver) 1.38% ++ 1.29% 1.28% 1.32% 1.32% 1.34%++#
Portfolio turnover rate 69% 69% 68% 55% 93% 42%
Net assets at end of
period (in 000's) $49,971 $173,834 $405,912 $420,694 $307,538 $108,204
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 28.33 $ 27.83 $ 26.83 $ 25.37 $ 24.08
------- -------- -------- -------- -------
Net investment income 0.26 (a) 0.28 (a) 0.24 0.17 0.13
Net realized and
unrealized gain (loss)
on investments (7.25) 1.24 2.21 1.89 1.62
------- -------- -------- -------- -------
Total from investment
operations (6.99) 1.52 2.45 2.06 1.75
------- -------- -------- -------- -------
Less dividends and
distributions:
From net investment
income (0.25) (0.29) (0.20) (0.14) (0.14)
From net realized gain
on investments (1.75) (0.73) (1.25) (0.46) (0.32)
------- -------- -------- -------- -------
Total dividends and
distributions (2.00) (1.02) (1.45) (0.60) (0.46)
------- -------- -------- -------- -------
Net asset value at end of
period $ 19.34 $ 28.33 $ 27.83 $ 26.83 $ 25.37
======= ======== ======== ======== =======
Total investment return
(b)(d) (26.48%) 5.56% 9.49% 8.15% 7.30%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.06% 0.99% 0.89% 0.57% 0.24%
Net expenses 2.10% 2.03% 2.07% 2.07% 2.09%#
Expenses (before waiver) 2.10% 2.03% 2.07% 2.07% 2.09%#
Portfolio turnover rate 69% 68% 55% 93% 42%
Net assets at end of
period (in 000's) $79,423 $161,163 $169,609 $141,279 $29,301
</Table>
<Table>
** Commencement of operations.
++ Annualized.
# Includes transfer agent fees paid indirectly which amounted to 0.02% of
average net assets for the period ended October 31, 2004.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestments of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(c) Total return is not annualized.
(d) Total Investment returns may reflect adjustments to conform to generally
accepted accounting principals.
</Table>
22 MainStay Balanced 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 2,
2004**
THROUGH
OCTOBER
YEAR ENDED OCTOBER 31, 31,
- ----------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 28.34 $ 27.84 $ 26.84 $ 25.37 $ 24.46
------- -------- -------- -------- -------
0.26 (a) 0.28 (a) 0.23 0.18 0.08
(7.25) 1.24 2.22 1.89 0.93
------- -------- -------- -------- -------
(6.99) 1.52 2.45 2.07 1.01
------- -------- -------- -------- -------
(0.25) (0.29) (0.20) (0.14) (0.10)
(1.75) (0.73) (1.25) (0.46) --
------- -------- -------- -------- -------
(2.00) (1.02) (1.45) (0.60) (0.10)
------- -------- -------- -------- -------
$ 19.35 $ 28.34 $ 27.84 $ 26.84 $ 25.37
======= ======== ======== ======== =======
(26.47%) 5.56% 9.49% 8.19% 4.13%(c)
1.06% 0.99% 0.94% 0.57% 0.24%++
2.10% 2.03% 2.07% 2.07% 2.09%++#
2.10% 2.03% 2.07% 2.07% 2.09%++#
69% 68% 55% 93% 42%
$81,144 $145,919 $156,284 $206,074 $62,931
</Table>
<Table>
<Caption>
CLASS I
----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
2008 2007 2006 2005 2004
$ 28.47 $ 27.96 $ 26.94 $ 25.43 $ 24.07
-------- -------- -------- -------- --------
0.55 (a) 0.60 (a) 0.53 0.45 0.34
(7.28) 1.25 2.27 1.94 1.68
-------- -------- -------- -------- --------
(6.73) 1.85 2.80 2.39 2.02
-------- -------- -------- -------- --------
(0.55) (0.61) (0.53) (0.42) (0.34)
(1.75) (0.73) (1.25) (0.46) (0.32)
-------- -------- -------- -------- --------
(2.30) (1.34) (1.78) (0.88) (0.66)
-------- -------- -------- -------- --------
$ 19.44 $ 28.47 $ 27.96 $ 26.94 $ 25.43
======== ======== ======== ======== ========
(25.62%) 6.77% 10.84% 9.46% 8.45%
2.22% 2.10% 2.11% 1.77% 1.42%
0.94% 0.91% 0.85% 0.86% 0.91%#
1.01% 0.95% 0.85% 0.86% 0.91%#
69% 68% 55% 93% 42%
$199,126 $410,355 $376,763 $269,652 $180,262
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
23
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
Class R1
------------------------------------------------------------------
January 2,
2004**
through
October
Year ended October 31, 31,
------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 28.44 $ 27.94 $ 26.93 $ 25.43 $ 24.45
------- ------- -------- ------- -------
Net investment income 0.53 (a) 0.57 (a) 0.53 0.43 0.23
Net realized and
unrealized gain (loss)
on investments (7.28) 1.25 2.23 1.93 0.98
------- ------- -------- ------- -------
Total from investment
operations (6.75) 1.82 2.76 2.36 1.21
------- ------- -------- ------- -------
Less dividends and
distributions:
From net investment
income (0.52) (0.59) (0.50) (0.40) (0.23)
From net realized gain
on investments (1.75) (0.73) (1.25) (0.46) --
------- ------- -------- ------- -------
Total dividends and
distributions (2.27) (1.32) (1.75) (0.86) (0.23)
------- ------- -------- ------- -------
Net asset value at end of
period $ 19.42 $ 28.44 $ 27.94 $ 26.93 $ 25.43
======= ======= ======== ======= =======
Total investment return
(b)(d) (25.69%) 6.64% 10.70% 9.33% 4.96%(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 2.13% 2.02% 1.99% 1.68% 1.32%++
Net expenses 1.04% 1.01% 0.95% 0.96% 1.01%++#
Expenses (before waiver) 1.11% 1.05% 0.95% 0.96% 1.01%++#
Portfolio turnover rate 69% 68% 55% 93% 42%
Net assets at end of
period (in 000's) $25,038 $69,474 $108,739 $77,397 $30,394
</Table>
<Table>
<Caption>
Class R3
-------------------------------------------
April 28,
2006**
through
October
Year ended October 31, 31,
-------------------------------------------
2008 2007 2006
Net asset value at
beginning of period $ 28.41 $27.91 $27.25
------- ------ ------
Net investment income 0.40 (a) 0.41 (a) 0.20
Net realized and
unrealized gain (loss)
on investments (7.26) 1.26 0.66
------- ------ ------
Total from investment
operations (6.86) 1.67 0.86
------- ------ ------
Less dividends and
distributions:
From net investment
income (0.39) (0.44) (0.20)
From net realized gain
on investments (1.75) (0.73) --
------- ------ ------
Total dividends and
distributions (2.14) (1.17) (0.20)
------- ------ ------
Net asset value at end of
period $ 19.41 $28.41 $27.91
======= ====== ======
Total investment return
(b)(d) (26.02%) 6.10% 3.18%(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.62% 1.46% 1.36%++
Net expenses 1.54% 1.52% 1.48%++
Expenses (before waiver) 1.61% 1.56% 1.48%++
Portfolio turnover rate 69% 68% 55%
Net assets at end of
period (in 000's) $ 45 $ 37 $ 10
</Table>
<Table>
** Commencement of operations.
++ Annualized.
# Includes transfer agent fees paid indirectly which amounted to 0.02% of
average net assets for the years or periods ended October 31, 2004.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestments of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(c) Total return is not annualized.
(d) Total Investment returns may reflect adjustments to conform to generally
accepted accounting principals.
</Table>
24 MainStay Balanced 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 R2
----------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
OCTOBER
YEAR ENDED OCTOBER 31, 31,
- ----------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 28.42 $ 27.91 $ 26.90 $ 25.41 $ 24.45
------- -------- -------- ------- -------
0.46 (a) 0.50 (a) 0.46 0.39 0.18
(7.26) 1.25 2.23 1.90 0.97
------- -------- -------- ------- -------
(6.80) 1.75 2.69 2.29 1.15
------- -------- -------- ------- -------
(0.46) (0.51) (0.43) (0.34) (0.19)
(1.75) (0.73) (1.25) (0.46) --
------- -------- -------- ------- -------
(2.21) (1.24) (1.68) (0.80) (0.19)
------- -------- -------- ------- -------
$ 19.41 $ 28.42 $ 27.91 $ 26.90 $ 25.41
======= ======== ======== ======= =======
(25.86%) 6.40% 10.44% 9.05% 4.71%(c)
1.87% 1.76% 1.75% 1.43% 1.07%++
1.29% 1.26% 1.20% 1.21% 1.26%++#
1.36% 1.30% 1.20% 1.21% 1.26%++#
69% 68% 55% 93% 42%
$54,849 $105,100 $109,637 $70,872 $19,324
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
25
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
Eclipse Funds (the "Trust") was organized on July 30, 1986 as a Massachusetts
business trust. The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company,
and is comprised of three funds (collectively referred to as the "Funds"). These
financial statements and notes relate only to the MainStay Balanced Fund (the
"Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class I shares commenced on
May 1, 1989. Class C shares commenced on December 30, 2002. Class A shares,
Class B shares, Class R1 shares and Class R2 shares commenced on January 2,
2004. Class R3 shares commenced on April 28, 2006. Investor Class shares
commenced on February 28, 2008. Investor Class and 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
Investor Class and 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. Depending upon eligibility, Class B
shares convert to either Investor Class or Class A shares eight years after the
date they were purchased. Additionally, depending upon eligibility, Investor
Class shares may convert to Class A shares and Class A shares may convert to
Investor Class shares. The eight classes of shares have the same voting (except
for issues that relate solely to one class), dividend, liquidation and other
rights and bear the same conditions except that Class B and Class C shares are
subject to higher distribution fee rates than Investor Class, 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 the
Manager, as defined in Note 3, 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 high total return.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic 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 broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, 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) on
each day the Fund is open for business ("valuation date").
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each valuation date. Securities
that are 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. Futures contracts are valued at the last posted
settlement price on the market where such futures are primarily traded.
Investments in other mutual funds are valued at their net asset values as of the
close of the New York Stock Exchange on the date of valuation.
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 which mature in 60 days or less are valued at 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 the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's 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: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) 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 Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when,
26 Mainstay Balanced Fund
under normal conditions, it would be open. At October 31, 2008, the Fund held
securities with a value of $18 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. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income quarterly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(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 pro rata 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 fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3(B)) are
allocated to separate classes of shares pro rata 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 amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such 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
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 objectives. The Fund's investment in futures contracts and other
derivatives may increase the volatility of the Fund's net asset value and may
result in a loss to the Fund.
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
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. 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 may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. 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.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(J) 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 may 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 5.)
(K) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, 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
York Life Insurance Company ("New York Life"), serves as the Fund's Manager,
pursuant to an Amended and Restated Management Agreement ("Management
Agreement"). 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 NYLIM directly, without a subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.70% on assets up to $1 billion, 0.65% on assets from $1
billion to $2 billion and 0.60% on assets in excess of $2 billion. Prior to May
1, 2008, the Fund paid the Manager a monthly fee for services performed and
facilities furnished at an annual rate of the Fund's average daily net assets as
follows: 0.75% on assets up to $1 billion and 0.70% on assets in excess of $1
billion.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating
28 Mainstay Balanced Fund
expenses excludes taxes, interest, litigation, extraordinary expenses,
brokerage, other transaction expenses relating to the purchase or sale of
portfolio investments, and the fees and expenses of any other funds in which the
Fund invests) do not exceed the following percentages of average daily net
assets: Investor Class, 1.50%; Class A, 1.28%; Class B, 2.25%; Class C, 2.25%;
Class I, 0.94%; Class R1, 1.04%; Class R2, 1.29%; and Class R3, 1.54%. This
expense limitation may be modified or terminated only with the approval of the
Board of Trustees. NYLIM may recoup the amount of certain management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed the existing expense limitation and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $7,265,795 and waived its fees in the amount of $324,453.
As of October 31, 2008, 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,
2010 2011 TOTAL
$274,906 $324,453 $599,359
- ---------------------------------
</Table>
Between May 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.40%; Class B,
2.15%; Class C, 2.15%; Class I, 0.94%; Class R1, 1.04%; Class R2, 1.29%; and
Class R3, 1.54%. Prior to May 1, 2007, NYLIM had a different expense limitation
agreement in place with respect to the Fund.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, 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, State Street Bank and Trust Company 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 Investor Class, 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 Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, 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 distribution 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 distribution 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 and 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.
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the 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 Investor Class and Class A shares were
$19,419 and $46,535, respectively, for the year ended October 31, 2008. 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 $8,671, $271,609 and
$14,857, respectively, for the year ended October 31, 2008.
(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
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
responsible. Transfer agent expenses incurred by the Fund for the year ended
October 31, 2008 amounted to $2,575,893.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $1,190 0.0%++
- -----------------------------------------------
Class B 955 0.0++
- -----------------------------------------------
Class C 1,284 0.0++
- -----------------------------------------------
Class R1 1,000 0.0++
- -----------------------------------------------
Class R2 990 0.0++
- -----------------------------------------------
Class R3 8,098 17.9
- -----------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the 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, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $61,142.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,192,272 $(67,358,459) $-- $(147,330,953) $(213,497,140)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals and futures contracts mark to market.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(295,919) $295,920 $(1)
</Table>
The reclassifications for the Fund are primarily due to paydowns gain (loss),
reclassifications of distributions and real estate investment trust gain (loss).
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $31,529,550 $29,801,713
Long-Term Capital Gains 63,996,579 28,922,938
- -----------------------------------------------------
$95,526,129 $58,724,651
- -----------------------------------------------------
</Table>
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $67,358,168 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
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $67,358
</Table>
NOTE 5--RESTRICTED SECURITIES:
As of October 31, 2008, the Fund held the following restricted securities:
<Table>
<Caption>
SHARES/ PERCENTAGE
DATE(S) OF PRINCIPAL 10/31/08 OF NET
SECURITY ACQUISITION AMOUNT COST VALUE ASSETS
At Home Corp.
Convertible Bond 7/25/01 117,810 $13,325 $18 0.0%++
- ----------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
30 Mainstay Balanced 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. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. 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
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of U.S. Government
securities were $49,292 and $9,781, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $633,541 and $1,038,415, respectively.
NOTE 9--CAPITAL SHARES TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 561,659 $ 14,100,622
Shares issued to
shareholders in
reinvestment of dividends
and distributions 25,309 599,017
Shares redeemed (423,337) (10,030,595)
---------------------------
Net increase in shares
outstanding before
conversion 163,631 4,669,044
Shares converted into
Investor Class (See Note
1) 2,608,564 63,301,198
Shares converted from
Investor Class (See Note
1) (198,285) (4,567,256)
---------------------------
Net increase 2,573,910 $ 63,402,986
===========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,090,955 $ 27,182,393
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,017,956 26,715,124
Shares redeemed (5,344,353) (132,030,445)
---------------------------
Net decrease in shares
outstanding before
conversion (3,235,442) (78,132,928)
Shares converted into Class
A
(See Note 1) 423,364 10,227,745
Shares converted from Class
A
(See Note 1) (2,511,567) (60,910,587)
---------------------------
Net decrease (5,323,645) $(128,815,770)
===========================
Year ended October 31,
2007:
Shares sold 2,609,293 $ 73,813,070
Shares issued to
shareholders in
reinvestment of dividends
and distributions 589,422 16,513,533
Shares redeemed (4,380,941) (123,675,336)
---------------------------
Net decrease in shares
outstanding before
conversion (1,182,226) (33,348,733)
Shares converted from Class
B (See Note 1) 393,905 11,105,573
---------------------------
Net decrease (788,321) $ (22,243,160)
===========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 377,899 $ 9,335,509
Shares issued to
shareholders in
reinvestment of dividends
and distributions 338,374 8,885,377
Shares redeemed (1,347,198) (33,052,656)
---------------------------
Net decrease in shares
outstanding before
conversion (630,925) (14,831,770)
Shares converted from Class
B
(See Note 1) (324,289) (8,051,100)
---------------------------
Net decrease (955,214) $ (22,882,870)
===========================
Year ended October 31,
2007:
Shares sold 750,426 $ 20,388,449
Shares issued to
shareholders in
reinvestment of dividends
and distributions 181,392 5,061,119
Shares redeemed (1,002,283) (27,451,180)
---------------------------
Net decrease in shares
outstanding before
conversion (70,465) (2,001,612)
Shares reacquired upon
conversion into Class A
(See Note 1) (394,791) (11,105,573)
---------------------------
Net decrease (465,256) $ (13,107,185)
===========================
</Table>
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 467,635 $ 11,651,098
Shares issued to
shareholders in
reinvestment of dividends
and distributions 307,778 8,086,388
Shares redeemed (2,357,820) (58,125,152)
---------------------------
Net decrease (1,582,407) $ (38,387,666)
===========================
Year ended October 31,
2007:
Shares sold 1,064,789 $ 30,048,316
Shares issued to
shareholders in
reinvestment of dividends
and distributions 161,679 4,510,170
Shares redeemed (1,632,485) (45,862,593)
---------------------------
Net decrease (406,017) $ (11,304,107)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 3,090,704 $ 77,224,830
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,184,298 31,075,554
Shares redeemed (8,447,165) (211,368,875)
---------------------------
Net decrease (4,172,163) $(103,068,491)
===========================
Year ended October 31,
2007:
Shares sold 4,300,868 $ 120,631,976
Shares issued to
shareholders in
reinvestment of dividends
and distributions 645,863 18,129,695
Shares redeemed (4,006,930) (113,095,919)
---------------------------
Net increase 939,801 $ 25,665,752
===========================
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 328,889 $ 8,186,925
Shares issued to
shareholders in
reinvestment of dividends
and distributions 206,769 5,413,394
Shares redeemed (1,689,076) (37,479,589)
---------------------------
Net decrease (1,153,418) $ (23,879,270)
===========================
Year ended October 31,
2007:
Shares sold 1,682,529 $ 47,286,648
Shares issued to
shareholders in
reinvestment of dividends
and distributions 178,586 5,009,022
Shares redeemed (3,309,911) (94,001,240)
---------------------------
Net decrease (1,448,796) $ (41,705,570)
===========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,130,921 $ 28,002,672
Shares issued to
shareholders in
reinvestment of dividends
and distributions 303,929 7,964,832
Shares redeemed (2,307,239) (56,682,663)
---------------------------
Net decrease (872,389) $ (20,715,159)
===========================
Year ended October 31,
2007:
Shares sold 1,318,716 $ 37,172,287
Shares issued to
shareholders in
reinvestment of dividends
and distributions 174,262 4,881,051
Shares redeemed (1,722,315) (48,743,935)
---------------------------
Net decrease (229,337) $ (6,690,597)
===========================
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,511 $ 36,871
Shares issued to
shareholders in
reinvestment of dividends
and distributions 120 3,117
Shares redeemed (588) (12,937)
---------------------------
Net increase 1,043 $ 27,051
===========================
Year ended October 31,
2007:
Shares sold 919 $ 25,759
Shares issued to
shareholders in
reinvestment of dividends
and distributions 19 520
Shares redeemed (13) (363)
---------------------------
Net increase 925 $ 25,916
===========================
</Table>
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, 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 and 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, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain
32 Mainstay Balanced Fund
measurements reported in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 11--SUBSEQUENT EVENT:
As of January 1, 2009, the portfolio managers who manage the day-to-day
investment operations of a portion of the Fund will transition from a division
within NYLIM, currently referred to as NYLIM Equity Investors or Equity
Investors Group, into a wholly-owned subsidiary of NYLIM Holdings LLC. The new
legal entity will be named Madison Square Investors LLC ("MSI"). The creation of
MSI will not impact the portfolio management team or investment strategy of the
Fund. The Fund's Board of Trustees (the "Board") approved the appointment of MSI
as a subadvisor to the Fund at a meeting on September 25, 2008. The Board also
approved a new Subadvisory Agreement between NYLIM and MSI. There will be no
change in the management fees paid by the Fund as a result of this transition.
The day-to-day investment operations for the remainder of the Fund will continue
to be the responsibility of NYLIM.
mainstayinvestments.com 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
Eclipse Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Balanced Fund ("the Fund"), one of
the funds constituting Eclipse Funds as of October 31, 2008, 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 the
financial highlights for each of the years in the five-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.
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, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. 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 Balanced Fund of Eclipse Funds as of October 31, 2008, 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 the financial highlights for
each of the years in the five-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
34 Mainstay Balanced Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the Balanced Fund (the "Fund"), which was comprised solely of
Independent Trustees, unanimously approved the Management Agreement (the
"Agreement") for the Fund for one year.
In reaching its decision to approve the Agreement, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund, prepared by the Investment Consulting Group at New York
Life Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management fee and
ordinary operating expenses. The Board also requested and received information
on the profitability of the Fund to NYLIM and its affiliates, discussed in
greater detail below, and responses to a comprehensive list of questions
encompassing a variety of topics prepared on behalf of the Board by independent
legal counsel to the Board. In addition, the Board considered information
provided to it by NYLIM and independent legal counsel concerning the Agreement,
which was amended and restated to more completely reflect the services provided
to the Fund, but did not result in a material amendment to the Fund's prior
contractual arrangements.
In determining to approve the Agreement for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM as adviser to the
Fund; (ii) the investment performance of the Fund; (iii) the cost of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreement was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreement were based also
on the Board's consideration of the Agreement in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreement is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM
In considering the approval of the Agreement, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds and serves a variety of other investment
advisory clients, including other pooled investment vehicles. The Board
considered NYLIM's performance in fulfilling its responsibilities for overseeing
the Fund's legal and compliance environment, and for implementing Board
directives as they relate to the Fund. The Board considered the scope and
quality of NYLIM's services provided to the Fund's shareholders (including
services provided through its affiliate, NYLIM Service Company LLC), such as the
more extensive servicing needs of New York Life agents and reputation as a high-
quality provider of shareholder services, which has been recognized by
independent third-parties on numerous occasions. The Board noted the role that
the MainStay Family of Funds historically has played in serving the investment
needs of New York Life Insurance Company policyholders, who
mainstayinvestments.com 35
often maintain smaller account balances than other retail investors. The Board
acknowledged that it had approved NYLIM's recommendation to create a new
"Investor Class" of shares designed principally to address the higher
shareholder-servicing costs typically associated with smaller shareholder
accounts. The Board considered the experience of senior personnel at NYLIM
providing management and administrative services to the Fund, as well as NYLIM's
reputation and financial condition. The Board also reviewed NYLIM's willingness
to invest in personnel designed to benefit the Fund, including recent
enhancements to investment teams at NYLIM's Equity Investors Group. In addition,
the Board noted that NYLIM also is responsible for paying all of the salaries
and expenses for the Fund's officers. The Board further considered NYLIM's track
record and experience in providing investment advisory services to the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
management team, the number of accounts managed by the portfolio managers and
NYLIM's method for compensating portfolio managers. In addition, the Board
considered the benefits to shareholders of being part of the MainStay Family of
Funds, including the privilege of exchanging investments between the same class
of shares without the imposition of a sales charge, as described more fully in
the Fund's prospectus. Based on these considerations, the Board concluded,
within the context of its overall determinations regarding the Agreement, that
the Fund is likely to continue to benefit from the nature, extent and quality of
these services as a result of NYLIM's experience, personnel, operations and
resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM concerning Fund investment
performance, as well as discussions between the Fund's portfolio managers and
the Board that occurred at meetings from time to time throughout the year and in
previous years. The Board considered specific actions that NYLIM had taken, or
had agreed with the Board to take, to improve investment performance, and any
results of those actions. In considering the Fund's investment performance, the
Board focused principally on the Fund's long-term performance track record, as
opposed to the Fund's short-term investment performance.
As part of its evaluation of the Fund's investment performance, the Board noted
the Fund's more recent disappointing investment performance relative to its
benchmark and peer funds, but acknowledged the Fund's relatively strong longer-
term investment performance track record. The Board also took into account
NYLIM's agreement to take specific steps designed to mitigate the impact of the
Fund's fees and expenses on the Fund's investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that NYLIM is taking appropriate
and reasonable actions to address the Board's concerns about the Fund's
investment performance. The Fund discloses more information about its
performance in the Manager Discussions and Financial Highlights sections of this
Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreement and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund. The Board acknowledged that NYLIM must be in a position to pay
and retain experienced professional personnel to provide services to the Fund,
and that NYLIM's ability to maintain a strong financial position is important in
order for NYLIM to continue to provide high-quality ongoing services to the Fund
and its shareholders. The Board noted, for example, increased costs borne by
NYLIM and its affiliates due to new and ongoing regulatory and compliance
requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages,
36 Mainstay Balanced Fund
and the manager's capital structure and costs of capital. While recognizing the
difficulty in evaluating a manager's profitability with respect to the Fund, and
noting that other profitability methodologies may also be reasonable, the Board
concluded that the profitability methodology presented by NYLIM to the Board
with respect to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM from legally permitted "soft-dollar" arrangements
by which brokers provide research and other services to NYLIM in exchange for
commissions paid by the Fund with respect to trades on the Fund's portfolio
securities. The Board also considered that, in addition to fees earned by NYLIM
for managing the Fund, NYLIM affiliates also earn revenues from serving the Fund
in various other capacities, including as transfer agent and distributor. The
information provided to the Board indicated that the profitability to NYLIM and
its affiliates arising directly from these other arrangements was not excessive.
The Board noted that, although it assessed the overall profitability of the Fund
to NYLIM and its affiliates as part of the annual contract review process, when
considering the reasonableness of the fees to be paid to NYLIM and its
affiliates under the Agreement, the Board considered the profitability of
NYLIM's relationship with the Fund on a pre-tax basis, and without regard to
distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreement, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through contractual breakpoints, expense
waivers and reimbursements. While recognizing that any precise determination of
future economies of scale is necessarily refutable, the Board considered the
extent to which NYLIM may realize a larger profit margin as the Fund's assets
grow over time. The Board also observed that NYLIM subsidizes many of the Fund's
overall expenses through the operation of contractual and voluntary expense
limitations that may be lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT FEE AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fee to be paid under the Agreement
and the Fund's total ordinary operating expenses.
The Board considered information provided by NYLIM on the fees that NYLIM
charges to other investment advisory clients, including institutional separate
accounts and other funds with similar investment objectives as the Fund. In this
regard, the Board took into account the relative scope of services provided to
the Fund as opposed to NYLIM's other investment advisory clients. The Board also
considered comparative data provided by Strategic Insight on the fees and
expense ratios charged by similar mutual funds managed by other investment
advisers. This comparative information assisted the Board in evaluating the
reasonableness of the Fund's management fee when compared to similar fees
charged by NYLIM to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
The Board considered that NYLIM, after discussions with the Board, recently had
agreed to lower the Fund's management fee at both the initial and $1 billion
asset levels, and to impose a new contractual breakpoint on the Fund's
management fee at the $2 billion asset level.
In assessing the reasonableness of the Fund's management fee and total ordinary
operating expenses, the Board took note of any fee and expense arrangements that
had been negotiated by the Board with NYLIM in recent years and observed that
NYLIM has subsidized the total ordinary operating expenses of the Fund and Fund
share classes through the imposition of expense limitation arrangements that may
be modified only with the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
fee and total ordinary operating expenses were within a range that is
competitive and, within the context of the Board's overall conclusions regarding
the Agreement, supports the conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreement for one year.
mainstayinvestments.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, 2008) 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 $63,996,579.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$8,286,517 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 35.13% for qualified interest income and 42.7% for the
corporate dividends received deduction.
In January 2009, 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 2008. 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, 2008.
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 Funds's website at mainstayinvestments.com; and (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 by calling 800-MAINSTAY (624-6782);
visiting the Funds' website at mainstayinvestments.com; or on the SEC's website
at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
Each 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 Funds' Form N-Q
is available without charge, on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (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 Balanced Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund and the Manager. Each Trustee serves until his or
her successor is elected and qualified or until his or her resignation, death or
removal. The Retirement Policy provides that a Trustee shall tender his or her
resignation upon reaching age 72. A Trustee reaching the age of 72 may continue
for additional one-year periods with the approval of the Board's Nominating and
Governance Committee, except that no Trustee shall serve on the Board past his
or her 75th birthday. Officers serve a term of one year and are elected annually
by the Trustees. The business address of each Trustee and officer listed below
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 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Director, Eclipse Funds
KIM Trustee since Managers and President and Inc. since September 2008,
9/24/60 September Chief Executive Officer (22 funds); Trustee, The
2008 (since April 2008) of New MainStay Funds since
York Life Investment September 2008 (21 funds);
Management LLC and New York Director, ICAP Funds, Inc.,
Life Investment Management since September 2008 (4
Holdings LLC; Member of the funds); Director, MainStay
Board of Managers, MacKay VP Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 39
<Table>
<Caption>
TERM OF
OFFICE,
POSITIONS(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman Management Advisors LLC Director since 1990,
8/12/51 since 2005 (since 1990) Eclipse Funds Inc. (22
and Trustee funds); Chairman and
since 2000 Trustee, The MainStay Funds
since 2007 (21 funds);
Chairman and Director, ICAP
Funds, Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc., since
1991 (68 portfolios)
- ---------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Director, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); Inc. since 2007 (22 funds);
3/27/51 Audit Partner, Arthur Andersen Trustee, The MainStay Funds
Committee LLP (1989 to 2002); since 2006 (21 funds);
Financial Consultant to the Audit and Director, ICAP Funds, Inc.,
Expert since Compliance Committee (2004 since 2007 (4 funds);
2007 to 2006) Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, State Farm
Associates Funds Trusts
since 2005 (4 portfolios);
Trustee, State Farm Mutual
Fund Trust since 2005 (16
portfolios); Trustee, State
Farm Variable Product Trust
since 2005 (9 portfolios)
- ---------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Director, Eclipse Funds
MEENAN Trustee since President and Chief Inc. since 2002 (22 funds);
12/5/41 2002 Executive Officer, Babson- Trustee, The MainStay Funds
United, Inc. (financial since 2007 (21 funds);
services firm) (2000 to Director, ICAP Funds, Inc.,
2004); Independent since 2006 (4 funds);
Consultant (1999 to 2000); Director, MainStay VP
Head of Global Funds, Series Fund, Inc., since
Citicorp (1995 to 1999) 2007 (23 portfolios)
- ---------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Director, Eclipse Funds
H. Trustee since Capital Management; Inc. since 2007 (22 funds);
NOLAN, 2007 President--Shields/ Trustee, The MainStay Funds
JR. Alliance, Alliance Capital since 2007 (21 funds);
11/16/46 Management (1994 to 2004) Director, ICAP Funds, Inc.,
since 2007 (4 funds);
Director, MainStay VP
Series Fund, Inc., since
2006 (23 portfolios)
- ---------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Director, Eclipse Funds
S. Trustee since Chief Executive Officer Inc. since 2007 (22 funds);
TRUTANIC 2007 (1990 to 1999 and since Trustee, The MainStay Funds
2/13/52 2004), Somerset & Company since 1994 (21 funds);
(financial advisory firm); Director, ICAP Funds, Inc.,
Managing Director and since 2007 (4 funds);
Advisor, The Carlyle Group Director, MainStay VP
(private investment firm) Series Fund, Inc., since
(2002 to 2004); Senior 2007 (23 portfolios)
Managing Director, Partner
and Member of the Board,
Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- ---------------------------------------------------------------------------------------------------
</Table>
40 Mainstay Balanced Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITIONS(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Director, Eclipse Funds
WEIL Trustee and Accounting, Graduate School Inc. since 2007 (22 funds);
5/22/40 Audit of Business, University of Trustee, The MainStay Funds
Committee Chicago; President, Roman since 2007 (21 funds);
Financial L. Weil Associates, Inc. Director, ICAP Funds, Inc.,
Expert since (consulting firm); Board since 2007 (4 funds);
2007 Member and Chairman of the Director, MainStay VP
Board, Ygomi LLC Series Fund, Inc., since
(information and 1994 (23 portfolios)
communications company)
- ---------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Director, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. Inc. since 2007 (22 funds);
10/22/41 2007 (1971 to 1995) Trustee, The MainStay Funds
since 2007 (21 funds);
Director, ICAP Funds, Inc.,
since 2007 (4 funds);
Director, MainStay VP
Series Fund, Inc., since
1997 (23 portfolios);
Trustee, Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- ---------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST AND
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds Inc., The MainStay
2007 Funds, MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since 2007); Vice President, Prudential
Investments (2000 to 2007); Assistant Treasurer,
JennisonDryden Family of Funds, Target Portfolio
Trust, The Prudential Series Fund and American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior
2/22/59 Managing Director and Chief Marketing Officer, New
York Life Investment Management LLC (since 2005);
Chairman of the Board, NYLIM Service Company (since
January 2008); Managing Director--Retail Marketing,
New York Life Investment Management LLC (2003 to
2005); President, Eclipse Funds Inc., The MainStay
Funds, MainStay VP Series Fund, Inc., and ICAP Funds,
Inc. (since 2007); Managing Director, UBS Global
Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds
Inc., The MainStay Funds and MainStay VP Series Fund,
Inc. (since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 41
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST AND
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and
12/16/65 Chief Chief Compliance Officer (since 2006) and Managing
Compliance Director and Chief Compliance Officer (2003 to 2006),
Officer since New York Life Investment Management LLC and New York
2006 Life Investment Management Holdings LLC; Senior
Managing Director, Compliance (since 2006) and
Managing Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds Inc., The MainStay
Funds, MainStay VP Series Fund, Inc., and ICAP Funds,
Inc. (since 2006); Vice President--Compliance,
Eclipse Funds Inc., The MainStay Funds and MainStay
VP Series Fund, Inc. (2004 to 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)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January
2008); Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds Inc., The MainStay Funds
and MainStay VP Series Fund, Inc. (since 2004) and
ICAP Funds, Inc. (since 2006); Chief Legal
Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company
of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
42 Mainstay Balanced 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 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH 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 MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
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 INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION 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 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL 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
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
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.
mainstayinvestments.com Eclipse Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04847
NYLIM-AO14621 (RECYCLE LOGO) MS308-08 MSBL11-12/08
B7
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the Registrant has
adopted a code of ethics (the "Code") that applies to the Registrant's principal
executive officer ("PEO") and principal financial officer ("PFO"). The Code was
amended during the period covered by the report to designate new individuals as
the PEO and PFO; a copy of the amended Code is filed herewith. The Registrant
did not grant any waivers, including implicit waivers, from any provisions of
the Code to the PEO or PFO during the period covered by this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees has determined that the Registrant has two audit
committee financial experts serving on its Audit Committee. The Audit Committee
financial experts are Alan R. Latshaw and Roman L. Weil. Messrs. Latshaw and
Weil are "independent" within the meaning of that term under the Investment
Company Act of 1940.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for the fiscal year ended October 31, 2008 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 $ 94,510. The aggregate fees billed for the fiscal year
ended October 31, 2007 for professional services rendered by KPMG for the audit
of the Registrant's annual financial statements or services that were normally
provided by the KPMG in connection with the statutory and regulatory filings or
engagements for that fiscal year were $70,659.
(b) Audit Related Fees
The aggregate fees billed for the fiscal year ended October 31, 2008 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 $ 0. The aggregate fees billed
for the fiscal year ended October 31, 2007 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 $0. These audit-related services include review of financial
highlights for the Registrant's registration statements and issuance of consents
to use KPMG'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) $12,400 during the fiscal
year ended October 31, 2008, and
(ii) $14,633 during the fiscal year ended October 31, 2007. These services
included preparation of and advice relating to 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 the fiscal year ended October 31, 2008 for
products and services provided by KPMG, other than the services reported in
paragraphs (a) through (c) of this Item were $ 0. The aggregate fees billed for
the fiscal year ended October 31, 2007 for products and services provided by
KPMG, other than the services reported in paragraphs (a) through (c) of this
Item were $0.
(e) Pre-Approval Policies and Procedures
(1) The Registrant's Audit Committee has adopted pre-approval policies and
procedures (the "Procedures") to govern the Committee's pre-approval of (i)
all audit services and permissible non-audit services to be provided to the
Registrant by its independent accountant, and (ii) all permissible
non-audit services to be provided by such independent accountant to the
Registrant's investment adviser and to any entity controlling, controlled
by or under common control with the investment adviser that provides
ongoing services to the Registrant (collectively, the "Service Affiliates")
if the services directly relate to the Registrant's operations and
financial reporting. In accordance with the Procedures, the Audit Committee
is responsible for the engagement of the independent accountant to certify
the Registrant's financial statements for each fiscal year. With respect to
the pre-approval of non-audit services provided to the Registrant and its
Service Affiliates, the Procedures provide that the Audit Committee may
annually pre-approve a list of the types of services that may be provided
to the Registrant or its Service Affiliates, or the Audit Committee may
pre-approve such services on a project-by-project basis as they arise.
Unless a type of service has received general pre-approval, it will require
specific pre-approval by the Audit Committee if it is to be provided by the
independent accountant. The Procedures also permit the Audit Committee to
delegate authority to one or more of its members to pre-approve any
proposed non-audit services that have not been previously pre-approved by
the Audit Committee, subject to the ratification by the full Audit
Committee no later than its next scheduled meeting. To date, the Audit
Committee has not delegated such authority.
(2) With respect to the services described in paragraphs (b) through (d) of
this Item 4, no amount was approved by the Audit Committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) There were zero hours expended on KPMG's engagement to audit the
Registrant's financial statements for the most recent fiscal year were that
attributed 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, 2008 and October 31, 2007
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) $ 0 for the fiscal year ended October
31, 2008 and (ii) $6,000 for the fiscal year ended October 31, 2007.
(h) The Registrant's Audit Committee of the Board of Trustees has
considered whether the provision of non-audit services that were 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 investment adviser that
provides ongoing services to the Registrant that were not pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is
compatible with maintaining KPMG's independence.
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 Registrant's 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)(1) Code of Ethics
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of 1940.
(b) 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.
ECLIPSE FUNDS
By: /s/ Stephen P. Fisher
----------------------------------
STEPHEN P. FISHER
President and Principal Executive
Officer
Date: January 8, 2009
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/ Stephen P. Fisher
----------------------------------
STEPHEN P. FISHER
President and Principal Executive
Officer
Date: January 8, 2009
By: /s/ Jack R. Benintende
----------------------------------
JACK R. BENINTENDE
Treasurer and Principal Financial
and Accounting Officer
Date: January 8, 2009
EXHIBIT INDEX
(a)(1) Code of Ethics
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of 1940.
(b) Certification of principal executive officer and principal financial officer
as required by Section 906 of the Sarbanes-Oxley Act of 2002.