================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04550
THE MAINSTAY FUNDS
(Exact name of Registrant as specified in charter)
51 Madison Avenue, New York, NY 10010
(Address of principal executive offices) (Zip code)
Marguerite E.H. Morrison, Esq.
169 Lackawanna Avenue
Parsippany, NJ 07054
(Name and address of agent for service)
Registrant's telephone number, including area code: (973) 394-4437
Date of fiscal year end: October 31
Date of reporting period: October 31, 2009
================================================================================
ITEM 1. REPORTS TO STOCKHOLDERS.
(MAINSTAY LOGO)
MAINSTAY
COMMON STOCK FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY LOGO)
MAINSTAY
COMMON STOCK FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 18
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 25
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 32
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT 33
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 37
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 37
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 37
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 38
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 -0.66% -2.08% -2.43%
Excluding sales charges 5.12 -0.96 -1.88
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY COMMON S&P 500(R) RUSSELL 1000(R)
STOCK FUND INDEX INDEX
--------------- ---------- ---------------
10/31/99 9450.00 10000.00 10000.00
10930.00 10609.00 10906.00
8025.00 7967.00 8066.00
6673.00 6764.00 6888.00
7687.00 8170.00 8425.00
8205.00 8940.00 9212.00
9075.00 9720.00 10176.00
10566.00 11308.00 11807.00
11860.00 12954.00 13582.00
7437.00 8278.00 8584.00
10/31/09 7818.00 9090.00 9545.00
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges -0.02% -1.93% -2.36%
Excluding sales charges 5.80 -0.81 -1.80
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY COMMON S&P 500(R) RUSSELL 1000(R)
STOCK FUND INDEX INDEX
--------------- ---------- ---------------
10/31/99 23625.00 25000.00 25000.00
27324.00 26523.00 27264.00
20063.00 19918.00 20165.00
16683.00 16909.00 17221.00
19218.00 20426.00 21064.00
20513.00 22350.00 23029.00
22688.00 24299.00 25440.00
26415.00 28270.00 29516.00
29649.00 32386.00 33954.00
18614.00 20696.00 21459.00
10/31/09 19693.00 22725.00 23862.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges -0.70% -2.05% -2.61%
Excluding sales charges 4.30 -1.70 -2.61
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY COMMON S&P 500(R) RUSSELL 1000(R)
STOCK FUND INDEX INDEX
--------------- ---------- ---------------
10/31/99 10000.00 10000.00 10000.00
11476.00 10609.00 10906.00
8362.00 7967.00 8066.00
6900.00 6764.00 6888.00
7893.00 8170.00 8425.00
8362.00 8940.00 9212.00
9185.00 9720.00 10176.00
10616.00 11308.00 11807.00
11825.00 12954.00 13582.00
7359.00 8278.00 8584.00
10/31/09 7676.00 9090.00 9545.00
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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. Effective August 1, 2009, the Fund's prior contractual expense
limitation agreement terminated and the Fund now has a voluntary agreement in
place for certain classes. This voluntary fee agreement may be discontinued
at any time.
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--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 3.42% -1.70% -2.61%
Excluding sales charges 4.42 -1.70 -2.61
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY COMMON S&P 500(R) RUSSELL 1000(R)
STOCK FUND INDEX INDEX
--------------- ---------- ---------------
10/31/99 10000.00 10000.00 10000.00
11476.00 10609.00 10906.00
8362.00 7967.00 8066.00
6900.00 6764.00 6888.00
7885.00 8170.00 8425.00
8362.00 8940.00 9212.00
9185.00 9720.00 10176.00
10608.00 11308.00 11807.00
11825.00 12954.00 13582.00
7351.00 8278.00 8584.00
10/31/09 7676.00 9090.00 9545.00
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
5.99% -0.32% -1.43%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY COMMON S&P 500(R) RUSSELL 1000(R)
STOCK FUND INDEX INDEX
--------------- ---------- ---------------
10/31/99 10000.00 10000.00 10000.00
11594.00 10609.00 10906.00
8534.00 7967.00 8066.00
7115.00 6764.00 6888.00
8218.00 8170.00 8425.00
8796.00 8940.00 9212.00
9775.00 9720.00 10176.00
11456.00 11308.00 11807.00
12949.00 12954.00 13582.00
8168.00 8278.00 8584.00
10/31/09 8657.00 9090.00 9545.00
</Table>
CLASS R2 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
5.69% -0.91% -1.90%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
S&P 500(R) RUSSELL 1000(R)
0 INDEX INDEX
- ---------- ---------------
10/31/99 10000.00 10000.00 10000.00
11554.00 10609.00 10906.00
8475.00 7967.00 8066.00
7041.00 6764.00 6888.00
8102.00 8170.00 8425.00
8639.00 8940.00 9212.00
9546.00 9720.00 10176.00
11103.00 11308.00 11807.00
12450.00 12954.00 13582.00
7808.00 8278.00 8584.00
10/31/09 8253.00 9090.00 9545.00
</Table>
2. Investor Class shares were first offered to the public on February 28, 2008.
Performance figures for Investor Class shares 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 the Investor Class shares might have been lower.
3. Performance figures for Class I shares, first offered on December 28, 2004,
include historical performance of Class A shares through December 27, 2004,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. Performance figures for Class R2 shares, first offered to the public on
December 14, 2007, include the historical performance of Class A shares
through December 13, 2007, adjusted for differences in certain contractual
fees and expenses. Unadjusted, the performance shown for Class R2 shares
might have been lower. As of October 31, 2009, Class R2 shares had yet to
commence investment operations.
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 Common Stock Fund
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ----------------------------------------------------------------------
S&P 500(R) Index(5) 9.80% 0.33% -0.95%
Russell 1000(R) Index(6) 11.20 0.71 -0.46
Average Lipper large-cap core fund(7) 10.85 0.51 -0.36
</Table>
5. "S&P 500(R)" is a trademark of the McGraw-Hill Companies, Inc. The S&P 500(R)
Index is widely regarded as the standard index for measuring large-cap U.S.
stock market performance. Results assume reinvestment of all dividends and
capital gains. The S&P 500(R) Index is the Fund's broad-based securities
market index for comparison purposes. An investment cannot be made directly
in an index.
6. The Russell 1000(R) Index measures the performance of the 1,000 largest
companies in the Russell 3000(R) Index, which represents approximately 92% of
the total market capitalization of the Russell 3000(R) Index. The Russell
3000(R) Index measures the performance of the 3,000 largest U.S. companies
based on total market capitalization, which represents approximately 98% of
the investable U.S. equity market. Total returns assume reinvestment of all
dividends and capital gains. An investment cannot be made directly in an
index.
7. The average Lipper large-cap core fund is representative of funds that, by
portfolio practice, invest at least 75% of their equity assets in companies
with market capitalization (on a three-year weighted basis) above Lipper's
U.S. Diversified Equity large-cap floor. Large-cap core funds have more
latitude in the companies in which they invest. These funds typically have an
average price-to-earning ratio, price-to-book ratio, and three-year sales-
per-share growth value, compared to the S&P 500(R) Index. This benchmark is a
product of Lipper Inc. 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 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 COMMON STOCK FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,159.10 $ 8.22 $1,017.60 $ 7.68
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,161.70 $ 5.23 $1,020.40 $ 4.89
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,154.40 $12.27 $1,013.80 $11.47
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,154.40 $12.27 $1,013.80 $11.47
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,162.70 $ 3.76 $1,021.70 $ 3.52
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.51% for Investor Class, 0.96% for Class A, 2.26% for Class B and Class C
and 0.69% for Class I) multiplied by the average account value over the
period, divided by 365 and multiplied by 184 (to reflect the one-half year
period). The table above represents the actual expenses incurred during the
one-half year period.
8 MainStay Common Stock Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Oil, Gas & Consumable Fuels 10.9%
Computers & Peripherals 8.8
Software 5.1
Pharmaceuticals 5.0
Diversified Financial Services 4.1
Media 4.1
Specialty Retail 3.9
Capital Markets 3.8
Health Care Providers & Services 3.7
Diversified Telecommunication
Services 3.4
Communications Equipment 3.2
Energy Equipment & Services 2.5
Insurance 2.5
Internet Software & Services 2.4
Multiline Retail 2.2
Food & Staples Retailing 2.1
Household Products 2.1
Semiconductors & Semiconductor
Equipment 1.9
Aerospace & Defense 1.7
Beverages 1.7
Chemicals 1.6
Metals & Mining 1.6
Biotechnology 1.5
Commercial Banks 1.5
Tobacco 1.5
IT Services 1.4
Industrial Conglomerates 1.3
Food Products 1.2
Air Freight & Logistics 1.1
Exchange Traded Funds 1.1
Hotels, Restaurants & Leisure 0.9
Household Durables 0.9
Machinery 0.9
Electric Utilities 0.8
Electronic Equipment & Instruments 0.8
Health Care Equipment & Supplies 0.8
Consumer Finance 0.7
Textiles, Apparel & Luxury Goods 0.7
Paper & Forest Products 0.6
Real Estate Investment Trusts 0.6
Electrical Equipment 0.5
Wireless Telecommunication Services 0.5
Commercial Services & Supplies 0.4
Diversified Consumer Services 0.3
Internet & Catalog Retail 0.3
Professional Services 0.3
Trading Companies & Distributors 0.3
Automobiles 0.2
Construction & Engineering 0.2
Gas Utilities 0.1
Road & Rail 0.1
Distributors 0.0++
Life Sciences Tools & Services 0.0++
Multi-Utilities 0.0++
Short-Term Investment 0.3
Liabilities in Excess of Other
Assets -0.1
-----
100.0%
=====
</Table>
See Portfolio of Investments beginning on page 12 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. ExxonMobil Corp.
2. Microsoft Corp.
3. Apple, Inc.
4. JPMorgan Chase & Co.
5. International Business Machines Corp.
6. AT&T, Inc.
7. Pfizer, Inc.
8. Procter & Gamble Co. (The)
9. Cisco Systems, Inc.
10. Hewlett-Packard Co.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS HARVEY FRAM, CFA, AND MIGENE KIM, CFA,
OF MADISON SQUARE INVESTORS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY COMMON STOCK FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Common Stock Fund returned 5.12% for
Investor Class shares, 5.80% for Class A shares, 4.30% for Class B shares and
4.42% for Class C shares for the 12 months ended October 31, 2009. Over the same
period, the Fund's Class I shares returned 5.99% and Class R2 shares returned
5.69%. All share classes underperformed the 10.85% return of the average
Lipper(1) large-cap core fund and the 9.80% return of the S&P 500(R) Index(2)
for the 12 months ended October 31, 2009. The S&P 500(R) Index is the Fund's
broad-based securities-market index. See pages 5 and 6 for Fund returns with
sales charges.
WHAT ACCOUNTED FOR THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD?
During the 12-month reporting period, the Fund significantly underperformed the
S&P 500(R) Index because of the Fund's positioning when the market rally began
on March 9, 2009. Fueled by the hope of an economic recovery, the rally brought
strong advances to stocks whose earnings had suffered the most from the
recession. At the time, however, the Fund was underweight in those stocks, many
of which had low or negative earnings.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO
THE FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS MADE THE WEAKEST
CONTRIBUTIONS?
Relative to the S&P 500(R) Index, the strongest-
contributing sectors to the Fund's relative performance were information
technology, materials and utilities. An overweight position in information
technology helped the Fund's relative performance when many technology stocks
reported stronger-than-expected sales and earnings. Examples included computer
and digital device manufacturer Apple and hard drive manufacturer Western
Digital. The economically sensitive materials sector rallied when investors
began to anticipate an economic recovery. Steel company Cliffs Natural Resources
and paper manufacturer International Paper both showed positive performance.
During the reporting period, the sectors that detracted
the most from the Fund's performance were financials, industrials and energy. In
all three cases, many of the Fund's underweight stocks underperformed as the
market rallied. Going into March 2009, the Fund maintained a "safety-first"
orientation, as our model responded to concerns about a deep recession by
recommending stocks with positive and consistent earnings. As conditions
appeared to stabilize, however, many other investors became less risk averse.
Within financials, companies that had avoided risky assets associated with the
credit crisis (the type of stocks owned in the Fund) underperformed, while those
with riskier balance sheets, such as Genworth Financial and Hartford Financial
Services, rallied strongly. In the industrials and energy sectors, the Fund was
adversely affected by the poor performance of our momentum factors, or our
assessment of stock trends and analysts' estimates. As our model became more
defensive, the Fund sold its overweight position in railroad company Norfolk
Southern and trimmed its overweight position in energy company Occidental
Petroleum to underweight relative to the benchmark. Beginning in March, these
stocks rallied strongly, and the Fund later repurchased Occidental Petroleum.
WHICH INDIVIDUAL STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S ABSOLUTE
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH STOCKS DETRACTED?
On an absolute basis, information technology companies Microsoft and Apple and
diversified financial services company JPMorgan Chase made the strongest
contributions to the Fund's performance. Microsoft benefited from ongoing
strength in technology spending and from positive reviews of its new operating
system. Apple continued to lead the market with its iPhone and with market share
growth in
the Macintosh personal computer. JPMorgan Chase was generally perceived as one
of the best-run banks
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a rate that is generally higher than the rate
expected for non-growth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings show an absolute
increase. Growth company stocks also typically lack the dividend yield that can
cushion stock prices in market downturns. 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 may experience
a portfolio turnover rate of more than 100% and may generate taxable short-term
capital gains.
1. See footnote on page 7 for more information on Lipper Inc.
2. See footnote on page 7 for more information on the S&P 500(R) Index.
10 MainStay Common Stock Fund
in the country, generating profits and profit growth in a difficult environment.
Wireless telecommunications company Sprint Nextel, industrial conglomerate
General Electric and commercial bank Wells Fargo were among the greatest
detractors from the Fund's absolute performance. Sprint Nextel's stock fell as
the company continued to lose customers. General Electric's financial divisions
faced difficulties in late 2008 and early 2009, and the stock traded as if it
were a financial stock, losing much of its value. Wells Fargo also lost much of
its value, as most financial stocks performed poorly during the reporting
period.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
Among the stocks that the Fund purchased during the reporting period were Apple,
Bank of America and tobacco company Philip Morris International. Apple has been
increasing its market share in both of its major product categories: wireless
phones and computers. Bank of America is becoming profitable again and at the
time we purchased the stock, we believed that the bank could emerge from the
banking crisis as a winner. Philip Morris, aside from being extremely
profitable, benefited from a weaker U.S. dollar.
During the reporting period, the Fund trimmed its positions in oil, gas &
consumable fuels company ExxonMobil and pharmaceutical company Merck.
We trimmed ExxonMobil because we favored energy companies that were more
sensitive to the price of oil. We trimmed the Fund's position in Merck as the
market outlook improved and our strategy became less conservative.
HOW DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
During the reporting period, we increased the Fund's exposure to the materials
and consumer discretionary sectors, as the Fund moved from a conservative to a
slightly aggressive positioning. We reduced the Fund's exposure to the
industrials sector by selling railroad stocks. In addition, the Fund decreased
its weighting in the energy sector, although it still maintained an overweight
position relative to the S&P 500(R) Index
at the end of the reporting period.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund's most substantially overweight sectors
relative to the S&P 500(R) Index were information technology and consumer
discretionary. Many stocks within both sectors have been generating large
amounts of cash from operations and appeared to be undervalued. In addition,
many information technology companies have a large percentage of their sales
overseas and are positioned to benefit from a weak U.S. dollar and strength in
foreign and emerging markets.
On the same date, the Fund's most substantially underweight sectors relative to
the S&P 500(R) Index were consumer staples and utilities. Both sectors are
widely viewed as defensive stock groups that should be owned to protect against
a market pullback. In our opinion, however, many of the stocks in these sectors,
such as Coca-Cola, have been bid up to valuations that are not justified by
their earnings growth prospects.
- ----------
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, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 98.7%+
- ----------------------------------------------------------
AEROSPACE & DEFENSE 1.7%
L-3 Communications Holdings,
Inc. 8,508 $ 615,043
Lockheed Martin Corp. 29,125 2,003,509
Northrop Grumman Corp. 40,373 2,023,899
Raytheon Co. 2,572 116,460
United Technologies Corp. 5,674 348,667
-------------
5,107,578
-------------
AIR FREIGHT & LOGISTICS 1.1%
FedEx Corp. 11,329 823,505
United Parcel Service, Inc.
Class B 45,179 2,425,209
-------------
3,248,714
-------------
AUTOMOBILES 0.2%
Ford Motor Co. (a) 74,259 519,813
-------------
BEVERAGES 1.7%
Coca-Cola Co. (The) 39,981 2,131,387
Coca-Cola Enterprises, Inc. 71,757 1,368,406
Pepsi Bottling Group, Inc.
(The) 1,298 48,597
PepsiCo, Inc. 25,542 1,546,568
-------------
5,094,958
-------------
BIOTECHNOLOGY 1.5%
Amgen, Inc. (a) 56,854 3,054,766
Biogen Idec, Inc. (a) 28,700 1,209,131
Gilead Sciences, Inc. (a) 268 11,403
-------------
4,275,300
-------------
CAPITAL MARKETS 3.8%
Bank of New York Mellon Corp.
(The) 67,340 1,795,284
Charles Schwab Corp. (The) 110,031 1,907,938
Goldman Sachs Group, Inc.
(The) 15,932 2,711,148
Morgan Stanley 32,537 1,045,088
Northern Trust Corp. 32,524 1,634,331
Raymond James Financial,
Inc. 15,960 376,816
State Street Corp. 44,262 1,858,119
-------------
11,328,724
-------------
CHEMICALS 1.6%
Ashland, Inc. 11,276 389,473
CF Industries Holdings, Inc. 11,651 969,946
Dow Chemical Co. (The) 48,701 1,143,500
Eastman Chemical Co. 16,471 864,892
Lubrizol Corp. (The) 8,157 542,930
Monsanto Co. 289 19,415
RPM International, Inc. 10,391 183,089
Terra Industries, Inc. 15,247 484,397
-------------
4,597,642
-------------
COMMERCIAL BANKS 1.5%
PNC Financial Services Group,
Inc. 6,087 297,898
U.S. Bancorp 16,480 382,666
Wells Fargo & Co. 136,849 3,766,084
-------------
4,446,648
-------------
COMMERCIAL SERVICES & SUPPLIES 0.4%
R.R. Donnelley & Sons Co. 40,555 814,344
Waste Management, Inc. 15,967 477,094
-------------
1,291,438
-------------
COMMUNICATIONS EQUIPMENT 3.2%
3Com Corp. (a) 15,605 80,210
V Cisco Systems, Inc. (a) 234,655 5,361,867
CommScope, Inc. (a) 11,292 305,110
JDS Uniphase Corp. (a) 21,433 119,810
QUALCOMM, Inc. 82,827 3,429,866
-------------
9,296,863
-------------
COMPUTERS & PERIPHERALS 8.8%
V Apple, Inc. (a) 37,396 7,049,146
Dell, Inc. (a) 28,524 413,313
Diebold, Inc. 5,348 161,723
EMC Corp. (a) 157,096 2,587,371
V Hewlett-Packard Co. 109,740 5,208,260
V International Business
Machines Corp. 54,901 6,621,610
NetApp, Inc. (a) 37,573 1,016,350
QLogic Corp. (a) 13,624 238,965
Sun Microsystems, Inc. (a) 6,416 52,483
Teradata Corp. (a) 39,017 1,087,794
Western Digital Corp. (a) 49,828 1,678,207
-------------
26,115,222
-------------
CONSTRUCTION & ENGINEERING 0.2%
Jacobs Engineering Group,
Inc. (a) 3,522 148,946
Shaw Group, Inc. (The) (a) 13,529 347,154
URS Corp. (a) 1,707 66,334
-------------
562,434
-------------
CONSUMER FINANCE 0.7%
American Express Co. 10,628 370,280
Discover Financial Services 118,200 1,671,348
-------------
2,041,628
-------------
DISTRIBUTORS 0.0%++
Genuine Parts Co. 3,139 109,834
-------------
DIVERSIFIED CONSUMER SERVICES 0.3%
Apollo Group, Inc. Class A
(a) 9,883 564,319
H&R Block, Inc. 19,329 354,494
-------------
918,813
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding
short-term investment. May be subject to change daily.
12 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 4.1%
Bank of America Corp. 346,677 $ 5,054,551
Citigroup, Inc. 49,284 201,571
V JPMorgan Chase & Co. 161,122 6,730,066
-------------
11,986,188
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.4%
V AT&T, Inc. 246,783 6,334,920
Verizon Communications, Inc. 129,358 3,827,703
-------------
10,162,623
-------------
ELECTRIC UTILITIES 0.8%
Entergy Corp. 1,529 117,305
Exelon Corp. 50,052 2,350,442
-------------
2,467,747
-------------
ELECTRICAL EQUIPMENT 0.5%
Cooper Industries PLC Class A 5,814 224,944
Emerson Electric Co. 22,683 856,283
Hubbel, Inc. Class B 9,129 388,256
-------------
1,469,483
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.8%
Arrow Electronics, Inc. (a) 19,339 490,050
Avnet, Inc. (a) 24,434 605,474
Ingram Micro, Inc. Class A
(a) 26,227 462,907
Jabil Circuit, Inc. 16,520 221,038
Molex, Inc. 15,860 296,106
Tech Data Corp. (a) 5,058 194,379
-------------
2,269,954
-------------
ENERGY EQUIPMENT & SERVICES 2.5%
Cameron International Corp.
(a) 7,961 294,318
Diamond Offshore Drilling,
Inc. 4,002 381,191
ENSCO International, Inc. 32,150 1,472,149
Helmerich & Payne, Inc. 4,329 164,589
Nabors Industries, Ltd. (a) 64,153 1,336,307
NATCO Group, Inc. Class A (a) 3,877 169,347
National Oilwell Varco, Inc.
(a) 44,202 1,811,840
Patterson-UTI Energy, Inc. 24,848 387,132
Pride International, Inc. (a) 7,038 208,043
Rowan Cos., Inc. 12,900 299,925
Schlumberger, Ltd. 13,657 849,465
Tidewater, Inc. 2,076 86,507
-------------
7,460,813
-------------
FOOD & STAPLES RETAILING 2.1%
CVS Caremark Corp. 5,991 211,482
Sysco Corp. 12,722 336,497
Wal-Mart Stores, Inc. 88,045 4,374,075
Walgreen Co. 22,154 838,086
Whole Foods Market, Inc. (a) 15,846 508,023
-------------
6,268,163
-------------
FOOD PRODUCTS 1.2%
Archer-Daniels-Midland Co. 61,843 1,862,711
Dean Foods Co. (a) 24,039 438,231
Kraft Foods, Inc. Class A 21,931 603,541
Tyson Foods, Inc. Class A 59,936 750,399
-------------
3,654,882
-------------
GAS UTILITIES 0.1%
UGI Corp. 13,130 313,544
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.8%
Beckman Coulter, Inc. 1,308 84,144
CareFusion Corp. (a) 1,816 40,624
Kinetic Concepts, Inc. (a) 3,729 123,765
Medtronic, Inc. 57,583 2,055,713
-------------
2,304,246
-------------
HEALTH CARE PROVIDERS & SERVICES 3.7%
Aetna, Inc. 29,498 767,833
AmerisourceBergen Corp. 50,566 1,120,037
CIGNA Corp. 16,394 456,409
Community Health Systems,
Inc. (a) 13,094 409,580
Coventry Health Care, Inc.
(a) 33,686 667,993
Humana, Inc. (a) 12,908 485,083
Lincare Holdings, Inc. (a) 4,097 128,687
McKesson Corp. 25,759 1,512,826
Medco Health Solutions, Inc.
(a) 42,420 2,380,610
UnitedHealth Group, Inc. 57,534 1,493,007
WellPoint, Inc. (a) 33,281 1,556,220
-------------
10,978,285
-------------
HOTELS, RESTAURANTS & LEISURE 0.9%
Chipotle Mexican Grill, Inc.
Class A (a) 663 54,028
Darden Restaurants, Inc. 19,510 591,348
McDonald's Corp. 10,037 588,269
Starbucks Corp. (a) 28,790 546,434
WMS Industries, Inc. (a) 5,544 221,649
Wyndham Worldwide Corp. 30,120 513,546
Wynn Resorts, Ltd. (a) 3,770 204,409
-------------
2,719,683
-------------
HOUSEHOLD DURABLES 0.9%
D.R. Horton, Inc. 62,427 684,200
Fortune Brands, Inc. 8,401 327,219
Leggett & Platt, Inc. 35,458 685,403
Mohawk Industries, Inc. (a) 7,935 339,856
Newell Rubbermaid, Inc. 6,587 95,577
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HOUSEHOLD DURABLES (CONTINUED)
NVR, Inc. (a) 477 $ 315,903
Pulte Homes, Inc. 34,181 307,971
-------------
2,756,129
-------------
HOUSEHOLD PRODUCTS 2.1%
Kimberly-Clark Corp. 8,905 544,630
V Procter & Gamble Co. (The) 95,210 5,522,180
-------------
6,066,810
-------------
INDUSTRIAL CONGLOMERATES 1.3%
3M Co. 2,173 159,868
Carlisle Cos., Inc. 8,663 268,899
General Electric Co. 242,586 3,459,276
-------------
3,888,043
-------------
INSURANCE 2.5%
Aflac, Inc. 37,827 1,569,442
Aon Corp. 16,387 631,063
Chubb Corp. (The) 30,901 1,499,316
Everest Re Group, Ltd. 1,161 101,576
HCC Insurance Holdings, Inc. 15,899 419,575
Principal Financial Group,
Inc. 8,867 222,030
Torchmark Corp. 5,248 213,069
Travelers Cos., Inc. (The) 49,705 2,474,812
Unum Group 9,117 181,884
-------------
7,312,767
-------------
INTERNET & CATALOG RETAIL 0.3%
Amazon.com, Inc. (a) 861 102,295
Expedia, Inc. (a) 29,180 661,511
NetFlix, Inc. (a) 846 45,219
Priceline.com, Inc. (a) 860 135,699
-------------
944,724
-------------
INTERNET SOFTWARE & SERVICES 2.4%
eBay, Inc. (a) 101,127 2,252,098
Google, Inc. Class A (a) 8,567 4,592,940
VeriSign, Inc. (a) 12,942 295,207
-------------
7,140,245
-------------
IT SERVICES 1.4%
Affiliated Computer Services,
Inc. Class A (a) 2,945 153,405
Alliance Data Systems Corp.
(a) 3,576 196,608
Broadridge Financial
Solutions LLC 22,664 471,638
Computer Sciences Corp. (a) 34,111 1,729,769
Convergys Corp. (a) 10,641 115,455
DST Systems, Inc. (a) 872 36,371
Global Payments, Inc. 13,029 641,418
Hewitt Associates, Inc. Class
A (a) 13,472 478,525
SAIC, Inc. (a) 16,665 295,137
Total System Services, Inc. 4,879 77,918
Western Union Co. (The) 1,618 29,399
-------------
4,225,643
-------------
LIFE SCIENCES TOOLS & SERVICES 0.0%++
Charles River Laboratories
International, Inc. (a) 1,393 50,872
-------------
MACHINERY 0.9%
Cummins, Inc. 3,472 149,504
Dover Corp. 42,118 1,587,006
Harsco Corp. 6,446 202,985
Illinois Tool Works, Inc. 5,604 257,336
Oshkosh Corp. 13,746 429,700
-------------
2,626,531
-------------
MEDIA 4.1%
Comcast Corp. Class A 187,435 2,717,807
DIRECTV Group, Inc. (The) (a) 72,525 1,907,408
Interpublic Group of Cos.,
Inc. (The) (a) 95,044 572,165
Marvel Entertainment, Inc.
(a) 806 40,276
McGraw-Hill Cos., Inc. (The) 22,752 654,803
Omnicom Group, Inc. 50,517 1,731,723
Scripps Networks Interactive
Class A 4,919 185,741
Time Warner Cable, Inc. 38,451 1,516,507
Time Warner, Inc. 73,760 2,221,651
Viacom, Inc. Class B (a) 9,839 271,458
Walt Disney Co. (The) 5,876 160,826
-------------
11,980,365
-------------
METALS & MINING 1.6%
Allegheny Technologies, Inc. 2,828 87,272
Cliffs Natural Resources,
Inc. 17,427 619,878
Commercial Metals Co. 13,733 203,798
Freeport-McMoRan Copper &
Gold, Inc. (a) 27,447 2,013,512
Nucor Corp. 21,259 847,171
Reliance Steel & Aluminum
Co. 10,335 377,021
Steel Dynamics, Inc. 18,178 243,403
United States Steel Corp. 7,279 251,053
-------------
4,643,108
-------------
MULTI-UTILITIES 0.0%++
MDU Resources Group, Inc. 3,838 79,639
-------------
MULTILINE RETAIL 2.2%
Big Lots, Inc. (a) 9,271 232,238
Dollar Tree, Inc. (a) 9,186 414,564
Family Dollar Stores, Inc. 20,582 582,471
J.C. Penney Co., Inc. 52,315 1,733,196
Kohl's Corp. (a) 13,685 783,056
Macy's, Inc. 82,741 1,453,759
</Table>
14 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MULTILINE RETAIL (CONTINUED)
Nordstrom, Inc. 26,631 $ 846,333
Sears Holdings Corp. (a) 6,188 419,918
-------------
6,465,535
-------------
OIL, GAS & CONSUMABLE FUELS 10.9%
Anadarko Petroleum Corp. 5,242 319,395
Apache Corp. 24,306 2,287,681
Chesapeake Energy Corp. 15,232 373,184
Chevron Corp. 44,947 3,440,243
Cimarex Energy Co. 3,427 134,201
ConocoPhillips 31,680 1,589,702
Devon Energy Corp. 18,740 1,212,665
Encore Acquisition Co. (a) 4,431 164,257
EOG Resources, Inc. 17,263 1,409,697
V ExxonMobil Corp. 151,176 10,834,784
Hess Corp. 8,943 489,540
Marathon Oil Corp. 66,112 2,113,601
Murphy Oil Corp. 26,725 1,633,966
Newfield Exploration Co. (a) 16,197 664,401
Occidental Petroleum Corp. 34,217 2,596,386
Peabody Energy Corp. 1,930 76,409
Tesoro Corp. 7,961 112,569
Williams Cos., Inc. 24,359 459,167
XTO Energy, Inc. 54,552 2,267,181
-------------
32,179,029
-------------
PAPER & FOREST PRODUCTS 0.6%
International Paper Co. 73,492 1,639,607
MeadWestvaco Corp. 9,387 214,305
-------------
1,853,912
-------------
PHARMACEUTICALS 5.0%
Abbott Laboratories 21,463 1,085,384
Eli Lilly & Co. 13,659 464,543
Endo Pharmaceuticals
Holdings, Inc. (a) 18,813 421,411
Forest Laboratories, Inc. (a) 62,028 1,716,315
Johnson & Johnson 72,076 4,256,088
King Pharmaceuticals, Inc.
(a) 21,317 215,941
Merck & Co., Inc. 21,648 669,573
V Pfizer, Inc. 343,682 5,852,904
Schering-Plough Corp. 297 8,375
Valeant Pharmaceuticals
International (a) 3,332 97,961
Watson Pharmaceuticals, Inc.
(a) 3,038 104,568
-------------
14,893,063
-------------
PROFESSIONAL SERVICES 0.3%
Manpower, Inc. 12,672 600,779
Robert Half International,
Inc. 8,798 204,114
-------------
804,893
-------------
REAL ESTATE INVESTMENT TRUSTS 0.6%
Host Hotels & Resorts, Inc. 16,121 162,984
Public Storage 20,912 1,539,123
-------------
1,702,107
-------------
ROAD & RAIL 0.1%
Burlington Northern Santa Fe
Corp. 304 22,897
Con-Way, Inc. 979 32,297
Ryder System, Inc. 4,837 196,141
-------------
251,335
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.9%
Broadcom Corp. Class A (a) 794 21,128
Intel Corp. 111,673 2,134,071
Micron Technology, Inc. (a) 143,121 971,792
Novellus Systems, Inc. (a) 5,682 116,935
Texas Instruments, Inc. 102,737 2,409,183
-------------
5,653,109
-------------
SOFTWARE 5.1%
BMC Software, Inc. (a) 5,164 191,894
CA, Inc. 59,575 1,246,309
Compuware Corp. (a) 54,463 384,509
V Microsoft Corp. 307,289 8,521,124
Oracle Corp. 124,603 2,629,123
Sybase, Inc. (a) 10,785 426,655
Symantec Corp. (a) 82,884 1,457,101
Synopsys, Inc. (a) 9,755 214,610
-------------
15,071,325
-------------
SPECIALTY RETAIL 3.9%
Abercrombie & Fitch Co. Class
A 15,155 497,387
Advance Auto Parts, Inc. 13,389 498,874
Aeropostale, Inc. (a) 4,124 154,774
AutoNation, Inc. (a) 23,296 401,623
Best Buy Co., Inc. 5,511 210,410
Gap, Inc. (The) 77,278 1,649,113
Home Depot, Inc. (The) 97,581 2,448,307
Limited Brands, Inc. 60,897 1,071,787
Office Depot, Inc. (a) 62,282 376,806
PetSmart, Inc. 20,321 478,153
RadioShack Corp. 28,380 479,338
Ross Stores, Inc. 20,402 897,892
Sherwin-Williams Co. (The) 19,392 1,106,120
Staples, Inc. 55,443 1,203,113
Williams-Sonoma, Inc. 4,223 79,308
-------------
11,553,005
-------------
TEXTILES, APPAREL & LUXURY GOODS 0.7%
Coach, Inc. 29,649 977,527
Phillips-Van Heusen Corp. 4,137 166,101
Polo Ralph Lauren Corp. 12,916 961,209
-------------
2,104,837
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
TOBACCO 1.5%
Philip Morris International,
Inc. 74,203 $ 3,514,254
Reynolds American, Inc. 19,596 950,014
-------------
4,464,268
-------------
TRADING COMPANIES & DISTRIBUTORS 0.3%
W.W. Grainger, Inc. 10,600 993,538
-------------
WIRELESS TELECOMMUNICATION SERVICES 0.5%
Sprint Nextel Corp. (a) 375,496 1,111,468
Telephone and Data Systems,
Inc. 12,090 358,106
-------------
1,469,574
-------------
Total Common Stocks
(Cost $282,297,370) 292,185,626
-------------
EXCHANGE TRADED FUND 1.1% (B)
- ----------------------------------------------------------
S&P 500 Index --SPDR Trust
Series 1 31,941 3,307,810
-------------
Total Exchange Traded Fund
(Cost $3,471,054) 3,307,810
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 0.3%
- ----------------------------------------------------------
REPURCHASE AGREEMENT 0.3%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$831,393 (Collateralized by
a United States Treasury
Bill with a rate of 0.066%
and a maturity date of
2/18/10, with a Principal
Amount of $850,000 and a
Market Value of $849,830) $831,393 831,393
-------------
Total Short-Term Investment
(Cost $831,393) 831,393
-------------
Total Investments
(Cost $286,599,817) (c) 100.1% 296,324,829
Liabilities in Excess of
Other Assets (0.1) (185,875)
----- ------------
Net Assets 100.0% $ 296,138,954
===== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Non-income producing security.
(b) Exchange Traded Fund -- represents a
basket of securities that is traded on an
exchange.
(c) At October 31, 2009, cost is $299,375,024
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 11,010,616
Gross unrealized depreciation (14,060,811)
------------
Net unrealized depreciation $ (3,050,195)
============
</Table>
16 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $292,185,626 $ -- $ -- $292,185,626
Exchange Traded Fund 3,307,810 -- -- 3,307,810
Short-Term Investment
Repurchase Agreement -- 831,393 -- 831,393
------------ -------- -------- ------------
Total Investments in Securities $295,493,436 $831,393 $-- $296,324,829
============ ======== ======== ============
</Table>
At October 31, 2009, the Fund did not hold any investments with significant
unobservable inputs (Level 3).
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, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $286,599,817) $ 296,324,829
Receivables:
Dividends and interest 316,320
Fund shares sold 46,987
Other assets 21,011
-------------
Total assets 296,709,147
-------------
LIABILITIES:
Payables:
Investment securities purchased 228,018
Manager (See Note 3) 150,947
Transfer agent (See Note 3) 56,563
Shareholder communication 40,504
Fund shares redeemed 31,271
Professional fees 31,218
NYLIFE Distributors (See Note 3) 15,751
Custodian 9,884
Trustees 1,007
Accrued expenses 5,030
-------------
Total liabilities 570,193
-------------
Net assets $ 296,138,954
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 305,617
Additional paid-in capital 435,582,656
-------------
435,888,273
Accumulated undistributed net
investment income 4,057,054
Accumulated net realized loss on
investments (153,531,385)
Net unrealized appreciation on
investments 9,725,012
-------------
Net assets $ 296,138,954
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 12,751,655
=============
Shares of beneficial interest
outstanding 1,315,784
=============
Net asset value per share
outstanding $ 9.69
Maximum sales charge (5.50% of
offering price) 0.56
-------------
Maximum offering price per share
outstanding $ 10.25
=============
CLASS A
Net assets applicable to
outstanding shares $ 11,578,730
=============
Shares of beneficial interest
outstanding 1,194,197
=============
Net asset value per share
outstanding $ 9.70
Maximum sales charge (5.50% of
offering price) 0.56
-------------
Maximum offering price per share
outstanding $ 10.26
=============
CLASS B
Net assets applicable to
outstanding shares $ 10,370,571
=============
Shares of beneficial interest
outstanding 1,155,893
=============
Net asset value and offering price
per share outstanding $ 8.97
=============
CLASS C
Net assets applicable to
outstanding shares $ 1,357,298
=============
Shares of beneficial interest
outstanding 151,325
=============
Net asset value and offering price
per share outstanding $ 8.97
=============
CLASS I
Net assets applicable to
outstanding shares $ 260,080,700
=============
Shares of beneficial interest
outstanding 26,744,530
=============
Net asset value and offering price
per share outstanding $ 9.72
=============
</Table>
18 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 7,593,822
Interest 362
-------------
Total income 7,594,184
-------------
EXPENSES:
Manager (See Note 3) 1,843,449
Transfer agent--Investor Class
(See Note 3) 91,042
Transfer agent--Class A (See Note
3) 4,318
Transfer agent--Classes B and C
(See Note 3) 95,979
Transfer agent--Class I (See Note
3) 116,967
Shareholder communication 127,634
Professional fees 108,224
Distribution--Class B (See Note
3) 80,538
Distribution--Class C (See Note
3) 9,884
Registration 90,190
Distribution/Service--Investor
Class (See Note 3) 28,926
Distribution/Service--Class A
(See Note 3) 26,848
Service--Class B (See Note 3) 26,846
Service--Class C (See Note 3) 3,295
Custodian 31,322
Trustees 14,804
Miscellaneous 26,809
-------------
Total expenses before waiver 2,727,075
Expense waiver from Manager (See
Note 3) (297,049)
-------------
Net expenses 2,430,026
-------------
Net investment income 5,164,158
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investments (107,755,855)
Net change in unrealized
depreciation on investments 118,957,834
-------------
Net realized and unrealized gain on
investments 11,201,979
-------------
Net increase in net assets
resulting from operations $ 16,366,137
=============
</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
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 5,164,158 $ 4,546,648
Net realized loss on
investments (107,755,855) (44,369,359)
Net change in unrealized
appreciation
(depreciation) on
investments 118,957,834 (138,553,283)
-----------------------------
Net increase (decrease) in
net assets resulting from
operations 16,366,137 (178,375,994)
-----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (61,370) --
Class A (137,541) (171,686)
Class I (4,956,637) (2,226,407)
-----------------------------
(5,155,548) (2,398,093)
-----------------------------
From net realized gain on
investments:
Class A -- (3,126,114)
Class B -- (2,498,775)
Class C -- (246,790)
Class I -- (15,731,958)
-----------------------------
-- (21,603,637)
-----------------------------
Total dividends and
distributions to
shareholders (5,155,548) (24,001,730)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares 44,912,902 185,061,531
Net asset value of shares
issued in connection with
the acquisition of
McMorgan Equity Investment
Fund -- 199,326,482
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 4,901,112 23,714,447
Cost of shares redeemed (140,577,108) (130,902,856)
-----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions (90,763,094) 277,199,604
-----------------------------
Net increase (decrease)
in net assets (79,552,505) 74,821,880
NET ASSETS:
Beginning of year 375,691,459 300,869,579
-----------------------------
End of year $ 296,138,954 $ 375,691,459
=============================
Accumulated undistributed
net investment income at
end of year $ 4,057,054 $ 4,054,109
=============================
</Table>
20 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
-----------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
-----------------------------
2009 2008
Net asset value at beginning of period $ 9.27 $ 13.17
------- -------
Net investment income (a) 0.07 0.03
Net realized and unrealized gain (loss)
on investments 0.40 (3.93)
------- -------
Total from investment operations 0.47 (3.90)
------- -------
Less dividends and distributions:
From net investment income (0.05) --
From net realized gain on investments -- --
------- -------
Total dividends and distributions (0.05) --
------- -------
Net asset value at end of period $ 9.69 $ 9.27
======= =======
Total investment return (c) 5.12% (29.61%)(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.81% 0.41% ++
Net expenses 1.46% 1.40% ++
Expenses (before waiver/reimbursement) 1.73% 1.58% ++
Portfolio turnover rate 138% 158%
Net assets at end of period (in 000's) $12,752 $11,811
<Caption>
CLASS B
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning of period $ 8.60 $ 15.07 $ 13.80 $ 11.94 $ 10.87
------- ------- ------- ------- -------
Net investment income (loss) (a) 0.01 (0.04) (0.04) (0.01) (0.01)(b)
Net realized and unrealized gain (loss)
on investments 0.36 (5.29) 1.59 1.87 1.08
------- ------- ------- ------- -------
Total from investment operations 0.37 (5.33) 1.55 1.86 1.07
------- ------- ------- ------- -------
Less distributions:
From net realized gain on investments -- (1.14) (0.28) -- --
------- ------- ------- ------- -------
Total distributions -- (1.14) (0.28) -- --
------- ------- ------- ------- -------
Net asset value at end of period $ 8.97 $ 8.60 $ 15.07 $ 13.80 $ 11.94
======= ======= ======= ======= =======
Total investment return (c) 4.30% (37.77%) 11.39% 15.58% 9.84%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.14% (0.30%) (0.31%) (0.05%) (0.08%)(b)
Net expenses 2.20% 2.10% 2.04% 2.05% 2.13%
Expenses (before waiver/reimbursement) 2.49% 2.27% 2.23% 2.35% 2.47%
Portfolio turnover rate 138% 158% 122% 144% 105%
Net assets at end of period (in 000's) $10,371 $13,212 $33,203 $39,024 $50,815
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income and the ratio of net investment income includes $0.03
per share and 0.24%, for Class A, Class B and Class C shares, respectively as
a result of a special one time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Total return is not annualized.
</Table>
22 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 9.28 $ 16.10 $ 14.66 $ 12.62 $ 11.41
------- ------- ------- ------- -------
0.12 0.08 0.06 0.09 0.08(b)
0.40 (5.70) 1.72 1.97 1.13
------- ------- ------- ------- -------
0.52 (5.62) 1.78 2.06 1.21
------- ------- ------- ------- -------
(0.10) (0.06) (0.06) (0.02) --
-- (1.14) (0.28) -- --
------- ------- ------- ------- -------
(0.10) (1.20) (0.34) (0.02) --
------- ------- ------- ------- -------
$ 9.70 $ 9.28 $ 16.10 $ 14.66 $ 12.62
======= ======= ======= ======= =======
5.80% (37.22%) 12.24% 16.43% 10.60%
1.38% 0.65% 0.42% 0.63% 0.67%(b)
0.94% 1.15% 1.29% 1.30% 1.38%
0.98% 1.30% 1.48% 1.60% 1.72%
138% 158% 122% 144% 105%
$11,579 $12,530 $44,874 $38,940 $35,886
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 8.59 $ 15.07 $ 13.79 $ 11.94 $ 10.87
------- ------- ------- ------- -------
0.01 (0.04) (0.05) (0.01) (0.01)(b)
0.37 (5.30) 1.61 1.86 1.08
------- ------- ------- ------- -------
0.38 (5.34) 1.56 1.85 1.07
------- ------- ------- ------- -------
-- (1.14) (0.28) -- --
------- ------- ------- ------- -------
-- (1.14) (0.28) -- --
------- ------- ------- ------- -------
$ 8.97 $ 8.59 $ 15.07 $ 13.79 $ 11.94
======= ======= ======= ======= =======
4.42% (37.84%) 11.47% 15.49% 9.84%
0.12% (0.30%) (0.32%) (0.09%) (0.08%)(b)
2.21% 2.10% 2.04% 2.05% 2.13%
2.49% 2.27% 2.23% 2.35% 2.47%
138% 158% 122% 144% 105%
$ 1,357 $ 1,611 $ 3,334 $ 3,254 $ 3,045
</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 I
--------------------------------------------------------------
DECEMBER 28,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
--------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 9.32 $ 16.19 $ 14.73 $ 12.68 $ 12.25
-------- -------- -------- -------- -------
Net investment income (a) 0.15 0.15 0.16 0.17 0.10
Net realized and
unrealized gain (loss)
on investments 0.39 (5.73) 1.73 1.99 0.33
-------- -------- -------- -------- -------
Total from investment
operations 0.54 (5.58) 1.89 2.16 0.43
-------- -------- -------- -------- -------
Less dividends and
distributions:
From net investment
income (0.14) (0.15) (0.15) (0.11) --
From net realized gain
on investments -- (1.14) (0.28) -- --
-------- -------- -------- -------- -------
Total dividends and
distributions (0.14) (1.29) (0.43) (0.11) --
-------- -------- -------- -------- -------
Net asset value at end of
period $ 9.72 $ 9.32 $ 16.19 $ 14.73 $ 12.68
======== ======== ======== ======== =======
Total investment return
(b) 5.99% (36.92%) 13.03% 17.19% 3.51%(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.69% 1.16% 1.06% 1.24% 0.94%++
Net expenses 0.65% 0.62% 0.62% 0.66% 0.76%++
Expenses (before
waiver/reimbursement) 0.73% 0.80% 0.87% 0.96% 1.10%++
Portfolio turnover rate 138% 158% 122% 144% 105%
Net assets at end of
period (in 000's) $260,081 $336,529 $219,460 $133,818 $69,177
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(c) Total return is not annualized.
</Table>
24 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Common Stock Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares. Class A shares and Class B
shares commenced operations on June 1, 1998. Class C shares commenced operations
on September 1, 1998. Class I shares commenced operations on December 28, 2004.
Class R2 shares commenced operations on December 14, 2007. Investor Class shares
commenced operations on February 28, 2008. Investor Class and Class A shares are
offered at net asset value ("NAV") 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
at NAV 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 1.00% contingent deferred sales charge may be imposed on
redemptions made within one year of purchase of Class C shares. Class I and
Class R2 shares are offered at NAV and 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 and service fee
rates than Investor Class, Class A and Class R2 shares under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a
distribution or service fee. Class R2 shares are authorized to pay a shareholder
service fee 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 R2 shares. There were no investment operations for Class R2 during the
year ended October 31, 2009.
The Fund's investment objective is to seek long-term growth of capital, with
income as a secondary consideration.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). 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. Investments
in other mutual funds are valued at their NAVs as of the close of the New York
Stock Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
risk inherent in a particular valuation technique used to measure fair value
using a pricing model and/or the risk inherent in the inputs for the valuation
technique. Inputs may be observable or unobservable. Observable inputs are
inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of the reporting entity. Unobservable inputs are inputs that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the information
available in the circumstances. The inputs or methodology used for valuing
securities may not be an indication of the risks associated with investing in
those securities. The three-tier hierarchy of inputs is summarized in the three
broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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
investments 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 NAV
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
26 MainStay Common Stock Fund
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate. The Fund had no securities on loan
as of October 31, 2009.
(I) 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 AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. Madison Square Investors LLC ("Madison Square Investors" or "Subadvisor"),
a registered investment adviser and an indirect, wholly-owned subsidiary of New
York Life, serves as Subadvisor to the Fund and is responsible for the day-to-
day portfolio management of the Fund. Pursuant to the terms of an Amended and
Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life
Investments and the Subadvisor, New York Life Investments pays for the services
of the Subadvisor.
Effective August 1, 2008, 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: 0.55% on assets up to $500 million, 0.525% on assets from
$500 million to $1 billion and 0.50% on assets in excess of $1 billion, plus a
fee for fund accounting services previously provided by New York Life
Investments under a separate fund accounting agreement.
Effective August 1, 2009, New York Life Investments agreed to voluntarily waive
or reimburse the expenses of the appropriate class of the Fund so that the total
ordinary
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1.85%; Class
B, 2.60%; and Class C, 2.60%. These voluntary waivers or reimbursements may be
discontinued at any time.
Prior to August 1, 2009, New York Life Investments had a written expense
limitation agreement under which it 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 did not exceed the
following percentages of average daily net assets: Investor Class, 1.40%; Class
A, 1.04%; Class B, 2.15%; Class C, 2.15%; Class I, 0.62%; and Class R2, 0.97%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $1,843,449 and waived its fees in the amount of
$297,049.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV 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.
In accordance with the Shareholder Services Plan for the Class R2 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 R2 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 R2 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 $3,676
and $1,681, respectively, for the year ended October 31, 2009. 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 $56, $16,340 and $50,
respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $308,306.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 213 0.0%++
- ------------------------------------------------
Class C 105 0.0++
- ------------------------------------------------
Class I 1,834 0.0++
- ------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in
28 MainStay Common Stock Fund
professional fees shown on the Statement of Operations, were $15,703.
NOTE 4--FEDERAL INCOME TAX:
As of October 31,2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$4,057,054 $(140,756,178) $-- $(3,050,195) $(139,749,319)
- ---------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation are
primarily due to wash sale deferrals and class action payments 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, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(5,665) $10,200 $(4,535)
- -----------------------------------------------
</Table>
The reclassifications for the Fund is primarily due to capital gain
distributions from real estate investment trusts.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $140,756,178 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $ 37,722
2017 103,034
- -------------------------------------------------
Total $141,756
- -------------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $5,155,548 $11,669,581
Long-Term Capital Gains -- 12,332,149
- ------------------------------------------------------
Total $5,155,548 $24,001,730
- ------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $448,448 and $535,355, respectively.
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 93,575 $ 805,501
Shares issued to shareholders
in reinvestment of
dividends 7,249 60,971
Shares redeemed (242,848) (2,070,771)
-----------------------
Net decrease in shares
outstanding before
conversion (142,024) (1,204,299)
Shares converted into
Investor Class (See Note 1) 246,001 1,996,705
Shares converted from
Investor Class (See Note 1) (62,571) (608,108)
-----------------------
Net increase 41,406 $ 184,298
=======================
Period ended October 31, 2008
(a):
Shares sold 342,116 $ 4,510,559
Shares redeemed (201,860) (2,437,748)
-----------------------
Net increase in shares
outstanding before
conversion 140,256 2,072,811
Shares converted into
Investor Class (See Note 1) 1,229,687 15,419,969
Shares converted from
Investor Class (See Note 1) (95,565) (1,112,371)
-----------------------
Net increase 1,274,378 $16,380,409
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 152,731 $ 1,289,321
Shares issued to
shareholders in
reinvestment of dividends 15,031 125,963
Shares redeemed (363,744) (3,078,312)
-------------------------
Net decrease in shares
outstanding before
conversion (195,982) (1,663,028)
Shares converted into Class
A (See Note 1) 138,763 1,250,027
Shares converted from Class
A (See Note 1) (98,151) (775,732)
-------------------------
Net decrease (155,370) $ (1,188,733)
=========================
Year ended October 31, 2008:
Shares sold 356,197 $ 4,154,902
Shares issued to
shareholders in
reinvestment of dividends
and distributions 234,231 3,166,810
Shares redeemed (1,328,534) (16,819,357)
-------------------------
Net decrease in shares
outstanding before
conversion (738,106) (9,497,645)
Shares converted into Class
A (See Note 1) 338,378 4,348,759
Shares converted from Class
A (See Note 1) (1,037,546) (12,990,210)
-------------------------
Net decrease (1,437,274) $(18,139,096)
=========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 144,659 $ 1,152,489
Shares redeemed (284,200) (2,238,643)
----------------------
Net decrease in shares
outstanding before
conversion (139,541) (1,086,154)
Shares converted from Class B
(See Note 1) (241,611) (1,862,892)
----------------------
Net decrease (381,152) $(2,949,046)
======================
Year ended October 31, 2008:
Shares sold 161,297 $ 1,873,691
Shares issued to shareholders
in reinvestment of
distributions 189,788 2,398,897
Shares redeemed (549,285) (6,440,645)
----------------------
Net decrease in shares
outstanding before
conversion (198,200) (2,168,057)
Shares converted from Class B
(See Note 1) (467,311) (5,666,147)
----------------------
Net decrease (665,511) $(7,834,204)
======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 29,401 $ 239,798
Shares redeemed (65,475) (515,915)
---------------------
Net decrease (36,074) $ (276,117)
=====================
Year ended October 31, 2008:
Shares sold 36,057 $ 448,663
Shares issued to shareholders
in reinvestment of
distributions 15,134 191,158
Shares redeemed (85,016) (1,008,279)
---------------------
Net decrease (33,825) $ (368,458)
=====================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 5,079,800 $ 41,425,793
Shares issued to
shareholders in
reinvestment of dividends 562,551 4,714,178
Shares redeemed (14,988,512) (132,673,467)
---------------------------
Net decrease (9,346,161) $ (86,533,496)
===========================
Year ended October 31,
2008:
Shares sold 14,609,539 $ 174,073,716
Shares issued in connection
with the acquisition of
McMorgan Equity
Investment Fund 14,658,946 199,326,482
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,326,247 17,957,582
Shares redeemed (8,061,915) (104,196,827)
---------------------------
Net increase 22,532,817 $ 287,160,953
===========================
</Table>
30 MainStay Common Stock Fund
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust (a) nd is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Common Stock Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Common Stock Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
32 MainStay Common Stock Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Common Stock Fund ("Fund") and New
York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and Madison Square
Investors LLC ("MSI") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MSI as subadviser to the Fund, and responses to
several comprehensive lists of questions encompassing a variety of topics
prepared on behalf of the Board by independent legal counsel to the Board.
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 Investments. 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 legal and compliance matters, portfolio turnover, and sales and
marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MSI; (ii)
the investment performance of the Fund, New York Life Investments and MSI; (iii)
the costs of the services to be provided, and profits to be realized, by New
York Life Investments and its affiliates, including MSI as subadviser to the
Fund, from their 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 and subadvisory fee levels and overall total ordinary operating
expenses, particularly as compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MSI
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MSI's compliance with
the Fund's policies and investment objectives, and for implementing Board
directives as they relate to the Fund. In addition, the Board noted that New
York Life Investments also is responsible for paying all of the salaries and
expenses for the Fund's officers. The Board also considered the benefits to
shareholders of being part of the MainStay Group of Funds, including the
privilege of exchanging investments between the same class of shares
mainstayinvestments.com 33
without the imposition of a sales charge, as described more fully in the Fund's
prospectus.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that MSI
proposed to provide to the Fund. The Board evaluated MSI's experience in serving
as subadviser to the Fund and managing other portfolios. It examined MSI's track
record and experience in providing investment advisory services, the experience
of investment advisory, senior management and administrative personnel at MSI,
and MSI's overall legal and compliance environment. The Board also reviewed
MSI's willingness to invest in personnel designed to benefit the Fund. In this
regard, the Board considered the experience of the Fund's portfolio managers,
the number of accounts managed by the portfolio managers and the method for
compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MSI'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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MSI
The Board considered the costs of the services provided by New York Life
Investments and MSI under the Agreements, and the profits expected to be
realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MSI is an affiliate of New York Life
Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MSI in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MSI, due to their relationships with the Fund, the Board
considered, among other things, each party's investments in personnel, systems,
equipment and other resources necessary to manage the Fund, and the fact that
New York Life Investments is responsible for paying the subadvisory fees for the
Fund. The Board acknowledged that New York Life Investments and MSI must be in a
position to pay and retain experienced professional personnel to provide
services to the Fund, and that New York Life Investments' ability to maintain a
strong financial position is important in order for New York Life Investments to
continue to provide high-quality ongoing services to the Fund. The Board noted,
for example, increased costs borne by New York Life Investments and its
affiliates due to new and ongoing regulatory and compliance requirements. The
Board also noted that
34 MainStay Common Stock Fund
the Fund benefits from the allocation of certain fixed costs across the MainStay
Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MSI, the Board
considered information illustrating the revenues and expenses allocated to the
Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to MSI from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to MSI
in exchange for commissions paid by the Fund with respect to trades on the
Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MSI) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MSI may realize a larger profit margin as the Fund's assets grow
over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MSI are paid
by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MSI on fees charged 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 explanations from New York Life Investments and MSI about the
different scope of services provided to retail mutual funds as compared with
other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most
mainstayinvestments.com 35
significant "other expenses" are transfer agent fees. Transfer agent fees are
charged to the Fund based on the number of shareholder accounts (a "per-account"
fee) as compared with certain other fees (e.g., management fees), which are
charged based on the Fund's average net assets. The Board took into account
information from New York Life Investments showing that the Fund's transfer
agent fee schedule is reasonable, including industry data showing that the per-
account fees that NYLIM Service Company ("NSC"), the Fund's transfer agent,
charges the Fund are within the range of per-account fees charged by transfer
agents to other mutual funds. In addition, the Board particularly considered
representations from New York Life Investments that the MainStay Group of Funds'
transfer agent fee structure is designed to allow NSC to provide transfer agent
services to the Funds essentially "at cost," and that NSC historically has
realized only very modest profitability from providing transfer agent services
to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to
eliminate the expense limitation arrangements on the Fund's share classes. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
eliminate the expense limitations on the Fund's share classes. The Board
acknowledged that New York Life Investments may determine voluntarily to waive
expenses of Fund share classes without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
36 MainStay Common Stock Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$7,312,271 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, 2009,
should be multiplied by 52.5% arrive at the amount eligible for the corporate
dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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 37
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
38 MainStay Common Stock Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
40 MainStay Common Stock Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 41
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
42 MainStay Common Stock Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017130 (RECYCLE LOGO) MS283-09 MSCS11-12/09
21
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts of Congress, the Treasury
Department, the Federal Deposit Insurance Corporation, the Federal Reserve and
other central banks to address the credit crisis. The turning point for the U.S.
stock market came in March 2009, when investors became convinced that the worst
was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 16
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 23
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 31
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 32
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 36
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 36
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 36
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 37
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 24.52% 3.61% 4.42%
Excluding sales charges 31.77 4.79 5.01
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
MainStay Convertible Fund Merrill Lynch All Convertible Securities Index
10/31/99 9450.00 10000.00
11822.00 11826.00
10459.00 9854.00
9891.00 8876.00
11716.00 11467.00
12197.00 12398.00
13564.00 12955.00
14998.00 14656.00
18013.00 16519.00
11696.00 10160.00
10/31/09 15412.00 13946.00
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 24.84% 3.69% 4.46%
Excluding sales charges 32.11 4.87 5.05
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
MainStay Convertible Fund Merrill Lynch All Convertible Securities Index
10/31/99 23625.00 25000.00
29554.00 29565.00
26147.00 24636.00
24727.00 22190.00
29290.00 28666.00
30493.00 30996.00
33910.00 32386.00
37495.00 36639.00
45032.00 41298.00
29272.00 25399.00
10/31/09 38671.00 34864.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 25.83% 3.69% 4.24%
Excluding sales charges 30.83 4.03 4.24
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
MainStay Convertible Fund Merrill Lynch All Convertible Securities Index
10/31/99 10000.00 10000.00
12418.00 11826.00
10907.00 9854.00
10234.00 8876.00
12030.00 11467.00
12430.00 12398.00
13716.00 12955.00
15062.00 14656.00
17962.00 16519.00
11576.00 10160.00
10/31/09 15144.00 13946.00
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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%. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be
modified or terminated only with the approval of the Board of Trustees. The
Manager may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does
not cause the Fund to exceed existing expense limitations and the recoupment
is made within the term of the agreement. Any recoupment amount is generally
applied within a fiscal year. This agreement expires on July 31, 2010.
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--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 29.73% 4.01% 4.23%
Excluding sales charges 30.73 4.01 4.23
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
MainStay Convertible Fund Merrill Lynch All Convertible Securities Index
10/31/99 10000.00 10000.00
12418.00 11826.00
10907.00 9854.00
10234.00 8876.00
12030.00 11467.00
12430.00 12398.00
13716.00 12955.00
15051.00 14656.00
17951.00 16519.00
11577.00 10160.00
10/31/09 15134.00 13946.00
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
32.35% 5.11% 5.30%
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
MainStay Convertible Fund Merrill Lynch All Convertible Securities Index
10/31/99 10000.00 10000.00
12543.00 11826.00
11128.00 9854.00
10546.00 8876.00
12521.00 11467.00
13068.00 12398.00
14565.00 12955.00
16155.00 14656.00
19458.00 16519.00
12667.00 10160.00
10/31/09 16765.00 13946.00
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ----------------------------------------------------------------------------------
Merrill Lynch All Convertible Securities Index(4) 37.27% 2.38% 3.38%
Average Lipper convertible securities fund(5) 31.95 2.57 4.16
</Table>
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 I shares, first offered on November 28, 2008,
include the historical performance of Class A shares through November 27,
2008, adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Class I shares might have been lower.
4. The Merrill Lynch All Convertible Securities Index is a market-capitalization
weighted index of domestic corporate convertible securities. In order to be
included in this index, bonds and preferred stocks must be convertible only
to common stock and have a market value or original par value of at least $50
million. Total returns assume reinvestment of all income, dividends and
capital gains. The Merrill Lynch All Convertible Securities Index is the
Fund's broad-based securities market index for comparison purposes. An
investment cannot be made directly in an index.
5. The average Lipper convertible securities fund is representative of funds
that invest primarily in convertible bonds and/or convertible preferred
stock. This benchmark is a product of Lipper Inc. 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 Convertible Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CONVERTIBLE FUND (UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,193.40 $ 7.24 $1,018.60 $ 6.67
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,195.50 $ 6.09 $1,019.70 $ 5.60
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,188.60 $11.36 $1,014.80 $10.46
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,188.80 $11.36 $1,014.80 $10.46
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,195.70 $ 4.76 $1,020.90 $ 4.38
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.31% for Investor Class, 1.10% for Class A, 2.06% for Class B and Class C
and 0.86% for Class I) multiplied by the average account value over the
period, divided by 365 and multiplied by 184 (to reflect the one-half year
period). The table above represents the actual expenses incurred during the
one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Convertible Bonds 77.8
Convertible Preferred Stocks 10.5
Common Stocks 8.2
Short-Term Investment 3.7
Liabilities in Excess of Other Assets (0.2)
</Table>
See Portfolio of Investments beginning on page 11 for specific holdings within
these categories.
TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM
INVESTMENT)
<Table>
1. Schlumberger, Ltd., Series B, 2.125%,
due 6/1/23
2. Core Laboratories, L.P., 0.25%, due
10/31/11
3. Bank of America Corp., Series L, 7.25%
4. Teva Pharmaceutical Finance Co. B.V.,
Series D, 1.75%, due 2/1/26
5. Chesapeake Energy Corp., 2.50%, due
5/15/37
6. Medtronic, Inc., 1.625%, due 4/15/13
7. Transocean, Inc., Series C, 1.50%, due
12/15/37
8. Covanta Holding Corp., 1.00%, due 2/1/27
9. Peabody Energy Corp., 4.75%, due
12/15/66
10. Intel Corp., 3.25%, due 8/1/39
</Table>
8 MainStay Convertible Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGER EDWARD SILVERSTEIN, CFA, OF MACKAY
SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY CONVERTIBLE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Convertible Fund returned 31.77% for
Investor Class shares, 32.11% for Class A shares, 30.83% for Class B shares and
30.73% for Class C shares for the 12 months ended October 31, 2009. Over the
same period, Class I shares(1) returned 32.35%. Class A and Class I shares
outperformed--and Investor Class, Class B and Class C shares underperformed--the
31.95% return of the average Lipper(2) convertible securities fund. All share
classes underperformed the 37.27% return of the Merrill Lynch All Convertible
Securities Index(3) for the 12 months ended October 31, 2009. The Merrill Lynch
All Convertible Securities Index is the Fund's broad-based securities-market
index. See pages 5 and 6 for Fund returns with sales charges.
WHAT KEY FACTORS AFFECTED THE MARKET FOR CONVERTIBLE SECURITIES DURING THE
REPORTING PERIOD?
The convertible market's strong performance during the reporting period resulted
from a number of factors. We believe the largest factor was a strong rebound in
the performance of speculative-grade bonds, which constitute nearly 60% of the
Merrill Lynch All Convertible Securities Index. These bonds suffered
dramatically when risk-aversion was high in 2008. Speculative-grade convertible-
bond total returns increased 56.80% during the 12-month reporting period.
Investment-grade convertible bonds rose 24.75% during the same period.
Speculative-grade securities performed well because they offered very high
yields relative to investment-grade convertible bonds. Barring massive defaults,
they also offered potential for compelling total returns. The under-lying-stock
performance of companies with convertible bonds also supported the convertible-
bond market's advance.
WHAT MAJOR FACTORS AFFECTED THE FUND'S PERFORMANCE RELATIVE TO ITS BENCHMARK
DURING THE REPORTING PERIOD?
The Fund underperformed the Merrill Lynch All Convertible Securities Index
during the reporting period primarily because non-investment-grade
bonds--particularly the most speculative issues--were generally the strongest
performers. We expected this market segment to perform well after its weak
results in 2008, and we invested 5% of the Fund's net assets in these
securities, the maximum amount permitted by the Fund's investment strategy.
However, the Fund maintained a more conservative posture than the benchmark, and
as a result, the Fund was unable to participate in some of the convertible
market's best-performing securities.
DURING THE REPORTING PERIOD, WHICH SECTORS OF THE FUND WERE STRONG PERFORMERS,
AND WHICH SECTORS WERE WEAK?
During the reporting period, the sector that provided the best absolute
performance for the Fund was wireless communications, supported by strong
performance by cell-phone tower operators SBA Communications and Crown Castle
International. Energy and industrials were also strong sectors for the Fund in
absolute terms. Convertible bonds of oil-services company Schlumberger performed
well. Among industrials, convertible bonds of electrical components & equipment
company General Cable and distribution & wholesale company WESCO International
provided solid performance as the economy stabilized and spreads narrowed.
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. Convertible
securities tend to be subordinate to other debt securities issued by the same
company. Also, issuers of convertible securities are often not as strong
financially as those issuing securities with higher credit ratings and thus may
be more vulnerable to changes in the economy. If an issuer stops making interest
payments and/or principal payments on its convertible securities, these
securities may become worthless and the Fund could lose its entire investment.
The values of debt securities fluctuate depending on various factors including
interest rates, issuer creditworthiness, liquidity, market conditions and
maturities. High-yield debt securities ("junk bonds") are generally considered
speculative because they present a greater risk of loss, including default, than
higher-quality debt securities and may be subject to greater price volatility.
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets. The Fund
may experience a portfolio turnover rate of more than 100% and may generate
taxable short-term capital gains.
1. Performance for Class I shares, first offered November 28, 2008, includes the
historical performance of Class B shares through November 27, 2008, adjusted
to reflect the differences in certain contractual fees and expenses for such
shares. Unadjusted, the performance shown for Class I shares might have been
lower.
2. See footnote on page 6 for more information about Lipper Inc.
3. See footnote on page 6 for more information on the Merrill Lynch All
Convertible Securities Index.
mainstayinvestments.com 9
The sectors that detracted the most from the Fund's absolute performance were
airlines, retail and health care. Airline holding company UAL was hurt by rising
fuel prices and falling demand. Retailer Spartan Stores suffered from weak
consumer spending. And the Fund's health care holdings suffered when investors
moved away from defensive sectors into ones that were likely to be more
responsive to an economic upturn.
WHICH INDIVIDUAL FUND HOLDINGS WERE THE STRONGEST ABSOLUTE PERFORMERS DURING THE
REPORTING PERIOD?
The Fund benefited most from its significant position in the convertible
preferred shares of pharmaceutical giant Schering-Plough. Schering-Plough saw
its share price rise sharply after Merck announced plans to acquire the company.
In energy, the Fund's Chesapeake Energy convertible bonds rose sharply as the
price of natural gas rebounded from multiyear lows and investors became more
comfortable with the company's liquidity position. The convertible bonds of
Transocean also rose during the reporting period as the price of oil partially
recovered from its steep sell-off at the end of 2008. With the price of oil well
above $50 per barrel, investors surmised that the level of exploration activity
would not decline as much as some had envisioned.
IN ABSOLUTE TERMS, WHICH OF THE FUND'S HOLDINGS WERE WEAK PERFORMERS DURING THE
REPORTING PERIOD?
The convertible bonds and common stock of communications equipment company
Comtech Telecommunications weighed on the Fund's performance after the company
reported disappointing first-quarter earnings. The Fund later sold this holding.
The Fund's position in Johnson & Johnson detracted from performance as health
care holdings generally underperformed the market. During the reporting period,
investors shunned relatively defensive sectors, such as health care, and favored
companies they felt would be more closely tied to an economic recovery. Johnson
& Johnson was eliminated from the portfolio in April. The convertible bonds of
Western Refining performed poorly during the reporting period. Demand for
refined fuel products declined because of the recession and continued to weigh
on all refining companies.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES AND SALES DURING THE REPORTING
PERIOD?
We initiated a sizeable position in the convertible bonds of Core Laboratories,
an energy-service company. Its main business is analyzing oil and gas reservoirs
to assess their economic viability and determine the best method to extract
their resources. We felt that the company's convertible bonds offered
significant upside potential and downside protection. We also purchased the
convertible bonds of Lions Gate Entertainment to take advantage of their very
high yield to maturity. The company has significant asset value, which in our
opinion offered a measure of downside support.
We sold convertible bonds of auction house Sotheby's following significant
appreciation of the bonds and the underlying common shares. As previously
discussed, we also eliminated the Fund's position in Comtech Telecommunications.
WERE THERE ANY CHANGES IN THE FUND'S SECTOR WEIGHTINGS DURING THE REPORTING
PERIOD?
The Fund slightly increased its weightings in the energy and basic materials
sectors. During the reporting period, the Fund decreased its weighting in the
financials sector.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund was overweight relative to the Merrill Lynch
All Convertible Securities Index in the energy sector and modestly overweight in
the health care sector. On the same date, the Fund was underweight relative to
its benchmark in financials 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 Convertible Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES 88.3%+
CONVERTIBLE BONDS 77.8%
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 2.4%
L-3 Communications Corp.
3.00%, due 8/1/35 (a) $ 6,455,000 $ 6,559,894
3.00%, due 8/1/35 516,000 524,385
Triumph Group, Inc.
2.625%, due 10/1/26 7,273,000 7,845,748
-------------
14,930,027
-------------
AIRLINES 1.5%
AMR Corp.
6.25%, due 10/15/14 1,256,000 1,026,780
UAL Corp.
4.50%, due 6/30/21 9,289,000 6,989,973
6.00%, due 10/15/29 1,568,000 1,462,160
-------------
9,478,913
-------------
AUTO PARTS & EQUIPMENT 1.0%
ArvinMeritor, Inc.
4.00%, due 2/15/27
(zero coupon), beginning
2/15/19 (a) 1,732,000 1,112,810
4.00%, due 2/15/27 139,000 89,308
BorgWarner, Inc.
3.50%, due 4/15/12 4,000,000 4,840,000
-------------
6,042,118
-------------
BIOTECHNOLOGY 4.2%
Amgen, Inc.
0.125%, due 2/1/11 (a) 1,337,000 1,321,959
0.125%, due 2/1/11 6,067,000 5,998,746
Enzon Pharmaceuticals, Inc.
4.00%, due 6/1/13 8,485,000 8,994,100
Gilead Sciences, Inc.
0.625%, due 5/1/13 2,251,000 2,760,289
Incyte Corp., Ltd.
4.75%, due 10/1/15 (a) 7,535,000 7,421,975
-------------
26,497,069
-------------
CHEMICALS 0.6%
Ferro Corp.
6.50%, due 8/15/13 4,428,000 3,946,455
-------------
COAL 3.5%
Alpha Natural Resources, Inc.
2.375%, due 4/15/15 5,952,000 5,594,880
Patriot Coal Corp.
3.25%, due 5/31/13 (a) 4,398,000 3,408,450
V Peabody Energy Corp.
4.75%, due 12/15/66 13,794,000 12,776,692
-------------
21,780,022
-------------
COMMERCIAL SERVICES 2.9%
Alliance Data Systems Corp.
1.75%, due 8/1/13 9,330,000 8,863,500
Coinstar, Inc.
4.00%, due 9/1/14 1,046,000 1,110,068
Kendle International, Inc.
3.375%, due 7/15/12 3,334,000 2,954,757
PHH Corp.
4.00%, due 9/1/14 (a) 5,729,000 5,335,131
-------------
18,263,456
-------------
COMPUTERS 2.2%
EMC Corp.
1.75%, due 12/1/11 (a) 1,461,000 1,725,806
1.75%, due 12/1/11 8,288,000 9,790,200
Mentor Graphics Corp.
6.25%, due 3/1/26 2,529,000 2,412,034
-------------
13,928,040
-------------
DISTRIBUTION & WHOLESALE 1.2%
WESCO International, Inc.
6.00%, due 9/15/29 6,144,000 7,388,160
-------------
DIVERSIFIED FINANCIAL SERVICES 0.6%
Janus Capital Group, Inc.
3.25%, due 7/15/14 3,169,000 3,782,994
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.9%
General Cable Corp.
0.875%, due 11/15/13 6,226,000 5,595,618
-------------
ELECTRONICS 3.5%
Fisher Scientific
International, Inc.
3.25%, due 3/1/24 9,643,000 12,234,556
Merix Corp.
4.00%, due 5/15/13 5,231,000 4,139,029
TTM Technologies, Inc.
3.25%, due 5/15/15 6,115,000 5,725,169
-------------
22,098,754
-------------
ENERGY--ALTERNATE SOURCES 2.2%
V Covanta Holding Corp.
1.00%, due 2/1/27 15,110,000 13,731,212
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings or issuers held as of October 31, 2009,
excluding
short-term investment. 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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
ENTERTAINMENT 1.2%
Lions Gate Entertainment
Corp.
2.938%, due 10/15/24 $ 2,595,000 $ 2,345,231
3.625%, due 3/15/25 5,967,000 5,385,218
-------------
7,730,449
-------------
ENVIRONMENTAL CONTROLS 0.9%
Waste Connections, Inc.
3.75%, due 4/1/26 5,459,000 5,738,774
-------------
FOOD 2.1%
Great Atlantic & Pacific Tea
Co.
6.75%, due 12/15/12 9,664,000 8,661,360
Spartan Stores, Inc.
3.375%, due 5/15/27 (a) 5,749,000 4,520,151
3.375%, due 5/15/27 462,000 363,248
-------------
13,544,759
-------------
HEALTH CARE--PRODUCTS 5.0%
China Medical Technologies,
Inc.
4.00%, due 8/15/13 15,605,000 11,450,169
Conmed Corp.
2.50%, due 11/15/24 5,092,000 4,741,925
V Medtronic, Inc.
1.625%, due 4/15/13 (a) 2,230,000 2,179,825
1.625%, due 4/15/13 13,741,000 13,431,827
-------------
31,803,746
-------------
INTERNET 0.9%
At Home Corp.
4.75%, due 12/31/49
(b)(c)(d)(e) 9,147,056 915
VeriSign, Inc.
3.25%, due 8/15/37 6,962,000 5,943,807
-------------
5,944,722
-------------
IRON & STEEL 3.5%
Allegheny Technologies
4.25%, due 6/1/14 5,298,000 5,887,402
ArcelorMittal
5.00%, due 5/15/14 3,942,000 5,380,830
Steel Dynamics, Inc.
5.125%, due 6/15/14 5,134,000 5,576,808
United States Steel Corp.
4.00%, due 5/15/14 4,015,000 5,339,950
-------------
22,184,990
-------------
MEDIA 0.8%
Central European Media
Enterprises, Ltd.
3.50%, due 3/15/13 (a) 6,351,000 4,898,209
-------------
MINING 1.1%
Alcoa, Inc.
5.25%, due 3/15/14 1,856,000 3,892,960
Sterlite Industries India,
Ltd.
4.00%, due 10/30/14 3,036,000 3,028,410
-------------
6,921,370
-------------
MISCELLANEOUS--MANUFACTURING 0.8%
Eastman Kodak Co.
7.00%, due 4/1/17 (a) 1,256,000 1,025,210
Ingersoll-Rand Co.
4.50%, due 4/15/12 2,103,000 3,914,209
-------------
4,939,419
-------------
OIL & GAS 6.6%
V Chesapeake Energy Corp.
2.50%, due 5/15/37 18,115,000 16,054,419
St. Mary Land & Exploration
Co.
3.50%, due 4/1/27 5,229,000 5,137,492
V Transocean, Inc.
Series C
1.50%, due 12/15/37 15,967,000 15,408,155
Western Refining, Inc.
5.75%, due 6/15/14 5,700,000 5,008,875
-------------
41,608,941
-------------
OIL & GAS SERVICES 8.6%
Cameron International Corp.
2.50%, due 6/15/26 9,543,000 11,964,536
V Core Laboratories, L.P.
0.25%, due 10/31/11 16,179,000 19,475,471
V Schlumberger, Ltd.
Series B
2.125%, due 6/1/23 14,340,000 22,926,075
-------------
54,366,082
-------------
PHARMACEUTICALS 5.3%
BioMarin Pharmaceutical, Inc.
1.875%, due 4/23/17 9,753,000 9,277,541
Isis Pharmaceuticals, Inc.
2.625%, due 2/15/27 6,592,000 7,119,360
V Teva Pharmaceutical
Finance Co. B.V. Series D
1.75%, due 2/1/26 14,407,000 16,874,199
-------------
33,271,100
-------------
REAL ESTATE INVESTMENT TRUSTS 0.5%
Macerich Co. (The)
3.25%, due 3/15/12 (a) 3,563,000 3,300,229
-------------
SEMICONDUCTORS 6.0%
V Intel Corp.
3.25%, due 8/1/39 (a) 11,693,000 12,657,672
</Table>
12 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
SEMICONDUCTORS (CONTINUED)
Microchip Technology, Inc.
2.125%, due 12/15/37 $ 6,672,000 $ 5,704,560
Micron Technology, Inc.
4.25%, due 10/15/13 1,835,000 2,802,963
ON Semiconductor Corp.
2.625%, due 12/15/26 8,617,000 8,207,692
Teradyne, Inc.
4.50%, due 3/15/14 1,358,000 2,335,760
Verigy, Ltd.
5.25%, due 7/15/14 (a) 5,968,000 6,236,560
-------------
37,945,207
-------------
SOFTWARE 2.5%
Sybase, Inc.
3.50%, due 8/15/29 (a) 10,860,000 12,136,050
SYNNEX Corp.
4.00%, due 5/15/18 (a) 2,993,000 3,337,195
-------------
15,473,245
-------------
TELECOMMUNICATIONS 5.3%
Anixter International, Inc.
1.00%, due 2/15/13 8,293,000 7,639,926
CommScope, Inc.
3.25%, due 7/1/15 7,618,000 9,189,212
SBA Communications Corp.
1.875%, due 5/1/13 8,226,000 7,794,135
Virgin Media, Inc.
6.50%, due 11/15/16 (a) 8,295,000 8,813,438
-------------
33,436,711
-------------
Total Convertible Bonds
(Cost $475,611,538) 490,570,791
-------------
<Caption>
SHARES
CONVERTIBLE PREFERRED STOCKS 10.5%
- ----------------------------------------------------------------
BANKS 3.9%
V Bank of America Corp.
7.25% Series L 20,608 17,255,903
Wells Fargo & Co.
7.50% Series L 8,350 7,473,250
-------------
24,729,153
-------------
CHEMICALS 0.9%
Celanese Corp.
4.25% 168,710 5,930,156
-------------
LEISURE TIME 0.4%
Callaway Golf Co.
7.50% (a) 20,400 2,366,400
-------------
MINING 1.9%
Freeport-McMoRan Copper &
Gold, Inc.
6.75% 40,375 4,320,125
Vale Capital II
6.75% 43,200 3,263,760
Vale Capital, Ltd.
5.50% 95,500 4,684,275
-------------
12,268,160
-------------
OIL & GAS 0.4%
Whiting Petroleum Corp.
6.25% 15,800 2,405,866
-------------
PHARMACEUTICALS 1.7%
Schering-Plough Corp.
6.00% 43,300 10,446,125
-------------
TELECOMMUNICATIONS 1.3%
Crown Castle International
Corp.
6.25% 150,000 7,950,000
-------------
Total Convertible Preferred
Stocks
(Cost $65,653,497) 66,095,860
-------------
Total Convertible Securities
(Cost $541,265,035) 556,666,651
-------------
COMMON STOCKS 8.2%
- ----------------------------------------------------------------
APPAREL 0.6%
Iconix Brand Group, Inc. (f) 296,600 3,458,356
-------------
COMPUTERS 1.0%
Hewlett-Packard Co. 135,800 6,445,068
-------------
COSMETICS & PERSONAL CARE 0.7%
Procter & Gamble Co. (The) 71,700 4,158,600
-------------
DIVERSIFIED FINANCIAL SERVICES 0.2%
Morgan Stanley 34,800 1,117,776
-------------
ENGINEERING & CONSTRUCTION 0.3%
Foster Wheeler A.G. (f) 4,000 111,960
McDermott International, Inc.
(f) 84,100 1,869,543
-------------
1,981,503
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HEALTH CARE--PRODUCTS 0.4%
Boston Scientific Corp. (f) 284,600 $ 2,310,952
-------------
OIL & GAS 1.1%
Forest Oil Corp. (f) 83,100 1,628,760
Frontier Oil Corp. 187,700 2,601,522
Transocean, Ltd. (f) 35,100 2,945,241
-------------
7,175,523
-------------
OIL & GAS SERVICES 2.0%
Baker Hughes, Inc. 124,900 5,254,543
Gulf Island Fabrication,
Inc. 16,900 323,128
Halliburton Co. 195,626 5,714,235
ION Geophysical Corp. (f) 371,100 1,421,313
-------------
12,713,219
-------------
RETAIL 0.7%
Costco Wholesale Corp. 77,203 4,388,991
-------------
SOFTWARE 0.8%
Microsoft Corp. 191,600 5,313,068
-------------
TRANSPORTATION 0.4%
Tidewater, Inc. 65,800 2,741,886
-------------
Total Common Stocks
(Cost $63,947,065) 51,804,942
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 3.7%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 3.7%
State Street Bank and Trust
Co. 0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$23,664,673 (Collateralized
by a United States Treasury
Bill with a rate 0.105% and
a maturity date of 3/18/10,
with a Principal Amount of
$24,150,000 and a Market
Value of $24,140,340) $23,664,653 $ 23,664,653
-------------
Total Short-Term Investment
(Cost $23,664,653) 23,664,653
-------------
Total Investments
(Cost $628,876,753) (g) 100.2% 632,136,246
Liabilities in Excess of
Other Assets (0.2) (1,556,049)
----- ------------
Net Assets 100.0% $ 630,580,197
===== ============
</Table>
<Table>
(a) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Issue in default.
(c) Fair valued security. The total market
value of this security at October 31,
2009 is $915, which represents less than
one-tenth of a percent of the Fund's net
assets.
(d) Restricted security.
(e) Illiquid security. The total market
value of this security at October 31,
2009 is $915, which represents less than
one-tenth of a percent of the Fund's net
assets.
(f) Non-income producing security.
(g) At October 31, 2009, cost is $630,301,783
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 51,959,786
Gross unrealized depreciation (50,125,323)
------------
Net unrealized appreciation $ 1,834,463
============
</Table>
14 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Convertible Securities
Convertible Bonds (a) $ -- $490,569,876 $915 $490,570,791
Convertible Preferred Stocks 66,095,860 -- -- 66,095,860
------------ ------------ ---- ------------
Total Convertible Securities 66,095,860 490,569,876 915 556,666,651
------------ ------------ ---- ------------
Common Stocks 51,804,942 -- -- 51,804,942
------------ ------------ ---- ------------
Short-Term Investment
Repurchase Agreement -- 23,664,653 -- 23,664,653
------------ ------------ ---- ------------
Total Investments in Securities $117,900,802 $514,234,529 $915 $632,136,246
============ ============ ==== ============
</Table>
(a) The level 3 security valued at $915 is held in Internet within the
Convertible Bonds Section of the Portfolio of Investments.
Following is a reconciliation of investments in which significant unobservable
inputs (Level 3) were used in determining value:
<Table>
<Caption>
BALANCE CHANGE IN NET NET BALANCE
AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS AS OF
INVESTMENTS OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET NET IN TO OUT OCTOBER 31,
IN SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 OF LEVEL 3 2009
Convertible Bonds $915 $-- $-- $-- $-- $-- $-- $-- $915
---- --- --- --- --- --- --- --- ----
Total $915 $-- $-- $-- $-- $-- $-- $-- $915
==== === === === === === === === ====
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
INVESTMENTS
STILL
HELD AT
INVESTMENTS OCTOBER 31,
IN SECURITIES 2009
Convertible Bonds $--
---
Total $--
===
</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
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $628,876,753) $632,136,246
Receivables:
Dividends and interest 4,722,735
Fund shares sold 2,929,073
Investment securities sold 1,412,754
Other assets 31,810
------------
Total assets 641,232,618
------------
LIABILITIES:
Payables:
Investment securities purchased 7,283,081
Fund shares redeemed 2,469,766
Manager (See Note 3) 326,769
Transfer agent (See Note 3) 240,106
NYLIFE Distributors (See Note 3) 207,836
Shareholder communication 63,296
Professional fees 47,965
Custodian 5,788
Trustees 1,825
Accrued expenses 5,989
------------
Total liabilities 10,652,421
------------
Net assets $630,580,197
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 483,888
Additional paid-in capital 663,366,252
------------
663,850,140
Accumulated undistributed net
investment
income 1,385,659
Accumulated net realized loss on
investments (37,915,095)
Net unrealized appreciation on
investments 3,259,493
------------
Net assets $630,580,197
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 78,733,521
============
Shares of beneficial interest
outstanding 6,047,133
============
Net asset value per share
outstanding $ 13.02
Maximum sales charge (5.50% of
offering price) 0.76
------------
Maximum offering price per share
outstanding $ 13.78
============
CLASS A
Net assets applicable to
outstanding shares $355,311,443
============
Shares of beneficial interest
outstanding 27,277,125
============
Net asset value per share
outstanding $ 13.03
Maximum sales charge (5.50% of
offering price) 0.76
------------
Maximum offering price per share
outstanding $ 13.79
============
CLASS B
Net assets applicable to
outstanding shares $ 59,041,351
============
Shares of beneficial interest
outstanding 4,523,058
============
Net asset value and offering price
per share outstanding $ 13.05
============
CLASS C
Net assets applicable to
outstanding shares $ 72,563,020
============
Shares of beneficial interest
outstanding 5,562,843
============
Net asset value and offering price
per share outstanding $ 13.04
============
CLASS I
Net assets applicable to
outstanding shares $ 64,930,862
============
Shares of beneficial interest
outstanding 4,978,659
============
Net asset value and offering price
per share outstanding $ 13.04
============
</Table>
16 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 14,965,864
Dividends 5,580,020
------------
Total income 20,545,884
------------
EXPENSES:
Manager (See Note 3) 2,838,357
Transfer agent--Investor Class
(See Note 3) 317,584
Transfer agent--Class A (See Note
3) 481,526
Transfer agent--Classes B and C
(See Note 3) 503,045
Transfer agent--Class I (See Note
3) 39,047
Distribution/Service--Investor
Class (See Note 3) 171,127
Distribution/Service--Class A
(See Note 3) 658,082
Service--Class B (See Note 3) 140,680
Service--Class C (See Note 3) 130,785
Distribution--Class B (See Note
3) 422,040
Distribution--Class C (See Note
3) 392,356
Shareholder communication 184,596
Professional fees 138,916
Registration 93,612
Trustees 21,914
Custodian 20,869
Miscellaneous 33,126
------------
Total expenses before waiver 6,587,662
Expense waiver from Manager (See
Note 3) (383,155)
------------
Net expenses 6,204,507
------------
Net investment income 14,341,377
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investments (30,902,005)
------------
Net change in unrealized
depreciation on investments 147,377,618
------------
Net realized and unrealized gain on
investments 116,475,613
------------
Net increase in net assets
resulting from operations $130,816,990
============
</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
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 14,341,377 $ 6,991,771
Net realized loss on
investments (30,902,005) (6,280,597)
Net change in unrealized
appreciation
(depreciation) on
investments 147,377,618 (208,809,560)
-----------------------------
Net increase (decrease) in
net assets resulting from
operations 130,816,990 (208,098,386)
-----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (1,912,086) (659,697)
Class A (7,910,870) (5,407,854)
Class B (1,113,905) (712,437)
Class C (1,088,046) (353,154)
Class I (773,228) --
-----------------------------
(12,798,135) (7,133,142)
-----------------------------
From net realized gain on investments:
Class A -- (28,302,421)
Class B -- (8,663,095)
Class C -- (2,495,346)
-----------------------------
-- (39,460,862)
-----------------------------
Total dividends and
distributions to
shareholders (12,798,135) (46,594,004)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares 232,485,675 195,945,346
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 10,407,877 42,258,636
Cost of shares redeemed (108,368,572) (132,717,575)
-----------------------------
Increase in net assets
derived from capital
share transactions 134,524,980 105,486,407
-----------------------------
Net increase (decrease)
in net assets 252,543,835 (149,205,983)
NET ASSETS:
Beginning of year 378,036,362 527,242,345
-----------------------------
End of year $ 630,580,197 $ 378,036,362
=============================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of year $ 1,385,659 $ (158,259)
=============================
</Table>
18 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
--------------------------
2009 2008
Net asset value at
beginning of period $ 10.16 $ 15.00
------- -------
Net investment income 0.35 (a) 0.16 (a)
Net realized and
unrealized gain (loss)
on investments 2.82 (4.85)
------- -------
Total from investment
operations 3.17 (4.69)
------- -------
Less dividends and
distributions:
From net investment
income (0.31) (0.15)
From net realized gain
on investments -- --
------- -------
Total dividends and
distributions (0.31) (0.15)
------- -------
Net asset value at end of
period $ 13.02 $ 10.16
======= =======
Total investment return
(d) 31.77% (31.51%)(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 3.16% 1.69% ++
Net expenses 1.30% 1.28% ++
Expenses (before
waiver/reimbursement) 1.43% 1.34% ++
Portfolio turnover rate 68% 103%
Net assets at end of
period (in 000's) $78,734 $61,439
</Table>
<Table>
<Caption>
CLASS B
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 10.18 $ 17.21 $ 14.54 $ 13.29 $ 12.11
------- ------- -------- -------- --------
Net investment income 0.27 (a) 0.11 (a) 0.05 (a) 0.09 (a) 0.08 (b)
Net realized and
unrealized gain (loss)
on investments 2.83 (5.75) 2.73 1.21 1.17
------- ------- -------- -------- --------
Total from investment
operations 3.10 (5.64) 2.78 1.30 1.25
------- ------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.23) (0.11) (0.11) (0.05) (0.07)
From net realized gain
on investments -- (1.28) -- -- --
------- ------- -------- -------- --------
Total dividends and
distributions (0.23) (1.39) (0.11) (0.05) (0.07)
------- ------- -------- -------- --------
Net asset value at end of
period $ 13.05 $ 10.18 $ 17.21 $ 14.54 $ 13.29
======= ======= ======== ======== ========
Total investment return
(d) 30.83% (35.55%) 19.25% 9.81% 10.35%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 2.42% 0.72% 0.31% 0.68% 0.63%(b)
Net expenses 2.05% 1.98% 1.94% 1.95% 1.95%
Expenses (before
waiver/reimbursement) 2.19% 2.01% 2.04% 2.14% 2.13%
Portfolio turnover rate 68% 103% 113% 72% 93%
Net assets at end of
period (in 000's) $59,041 $59,071 $116,937 $121,274 $390,163
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income and the ratio of net investment income includes $0.01
per share and 0.07%, respectively, as a result of a special one time dividend
from Microsoft Corp.
(c) Total return is not annualized.
(d) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
</Table>
20 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 10.16 $ 17.18 $ 14.51 $ 13.28 $ 12.10
-------- -------- -------- -------- -------
0.38 (a) 0.23 (a) 0.16 (a) 0.16 (a) 0.18 (b)
2.82 (5.74) 2.74 1.23 1.17
-------- -------- -------- -------- -------
3.20 (5.51) 2.90 1.39 1.35
-------- -------- -------- -------- -------
(0.33) (0.23) (0.23) (0.16) (0.17)
-- (1.28) -- -- --
-------- -------- -------- -------- -------
(0.33) (1.51) (0.23) (0.16) (0.17)
-------- -------- -------- -------- -------
$ 13.03 $ 10.16 $ 17.18 $ 14.51 $ 13.28
======== ======== ======== ======== =======
32.11% (35.00%) 20.10% 10.57% 11.21%
3.34% 1.57% 1.05% 1.14% 1.38%(b)
1.10% 1.13% 1.19% 1.20% 1.20%
1.15% 1.13% 1.29% 1.39% 1.38%
68% 103% 113% 72% 93%
$355,311 $217,028 $379,148 $340,331 $93,996
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
$ 10.18 $ 17.20 $ 14.53 $ 13.29 $ 12.11
-------- -------- -------- -------- --------
0.27 (a) 0.11 (a) 0.05 (a) 0.07 (a) 0.08 (b)
2.82 (5.74) 2.73 1.22 1.17
-------- -------- -------- -------- --------
3.09 (5.63) 2.78 1.29 1.25
-------- -------- -------- -------- --------
(0.23) (0.11) (0.11) (0.05) (0.07)
-- (1.28) -- -- --
-------- -------- -------- -------- --------
(0.23) (1.39) (0.11) (0.05) (0.07)
-------- -------- -------- -------- --------
$ 13.04 $ 10.18 $ 17.20 $ 14.53 $ 13.29
======== ======== ======== ======== ========
30.73% (35.51%) 19.27% 9.73% 10.35%
2.39% 0.75% 0.30% 0.49% 0.63%(b)
2.05% 2.00% 1.94% 1.95% 1.95%
2.18% 2.04% 2.04% 2.14% 2.13%
68% 103% 113% 72% 93%
$72,563 $40,498 $31,158 $24,640 $23,992
</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>
CLASS I
------------
NOVEMBER 28,
2008**
THROUGH
OCTOBER 31,
------------
2009
Net asset value at beginning of
period $ 9.55
-------
Net investment income 0.38 (a)
Net realized and unrealized gain on
investments 3.44
-------
Total from investment operations 3.82
-------
Less dividends and distributions:
From net investment income (0.33)
From net realized gain on
investments --
-------
Total dividends and distributions (0.33)
-------
Net asset value at end of period $ 13.04
=======
Total investment return (b) 40.46%(c)(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.33%++
Net expenses 0.86%++
Expenses (before
waiver/reimbursement) 0.89%++
Portfolio turnover rate 68%
Net assets at end of period (in
000's) $64,931
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment 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>
22 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Convertible Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on May 1,
1986. Class C shares commenced operations on September 1, 1998. Investor Class
shares commenced operations on February 28, 2008. Class I shares commenced
operations on November 28, 2008. Investor Class and Class A shares are offered
at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred sales charge may be imposed on
redemptions made within one year of purchase of Class C shares. Class I shares
are offered at NAV and 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 and service 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 capital appreciation together with
current income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. 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 (as defined in Note 3(A)),
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.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund held
securities with a value of $915 that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issuer in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3(A), conclude that such events may
have affected the accuracy
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of the last price reported on the local foreign market, the Manager or
Subadvisor may, pursuant to procedures adopted by the Fund's Board of Trustees,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures. At October 31, 2009, foreign securities held by the
Fund were not fair valued.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2009, maximized the use of observable inputs and minimized the
use of unobservable inputs. The Fund may have utilized some of the following
fair value techniques: multi-dimensional relational pricing models, option
adjusted spread pricing and estimating the price that would have prevailed in a
liquid market for an international equity security given information available
at the time of evaluation, when there are significant events after the close of
local foreign markets. For the year ended October 31, 2009, there have been no
changes to the fair value methodologies.
Generally, a security is considered illiquid if it cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued. Its illiquidity might prevent the sale of such security at a time when
the Manager or Subadvisor, if any, as defined might wish to sell, and these
securities could have the effect of decreasing the overall level of a Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, requiring a Fund to rely on judgments
that may be somewhat subjective in determining value, which could vary from the
amount that a Fund could realize upon disposition. Difficulty in selling
illiquid securities may result in a loss or may be costly to the Fund. Under the
supervision of the Board of Trustees, the Manager or Subadvisor, if any,
determines the liquidity of a Fund's investments; in doing so, the Manager or
Subadvisor, if any, may consider various factors, including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective purchasers, (3)
the dealer undertakings to make a market, and (4) the nature of the security and
the market in which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Illiquid
securities generally will be valued in such manner, as the Board of Trustees in
good faith deems appropriate to reflect their fair market value.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is
24 MainStay Convertible Fund
required in the Fund's financial statements. The Fund's federal and state income
and federal excise tax returns for tax years for which the applicable statutes
of limitations have not expired are subject to examination by the Internal
Revenue Service and state departments of revenue.
(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 NAV, 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 securities
purchased, other than short-term investments, 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
investments are accreted and amortized, respectively, on the straight-line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares 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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(I) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The 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.)
(J) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes
called "junk bonds"), which are generally considered speculative because they
present a greater risk of loss, including default, than higher quality debt
securities. These securities pay investors a premium--a high interest rate or
yield--because of the increased risk of loss. These securities can also be
subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific country, industry or region.
(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 AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and
an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to
the Fund and is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between New York Life Investments and the Subadvisor,
New York Life Investments pays for the services of the Subadvisor.
Effective August 1, 2008, the Fund pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of Fund's average daily net
assets as follows: 0.60% on assets up to $500 million; 0.55% on assets from $500
million to $1 billion; and 0.50% on assets in excess of $1 billion, plus a fee
for fund accounting services previously provided by New York Life Investments
under a separate accounting agreement.
Effective August 1, 2009, New York Life Investments has entered into a written
expense limitation agreement under which it has agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses (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) for the
Fund's Class A shares do not exceed 1.18% of its average net assets. New York
Life Investments will apply an equivalent waiver or reimbursement, in an equal
amount of basis points, to the other share classes of the Fund. The expense
limitation agreement may be modified or terminated only with the approval of the
Board of Trustees. Under the expense limitation agreement, New York Life
Investments 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 existing expense limitations and the recoupment is made
within the term of the agreement. Any recoupment amount is generally applied
within a fiscal year. This agreement expires on July 31, 2010.
Prior to August 1, 2009, New York Life Investments had a written expense
limitation agreement under which it agreed to waive a portion of the management
fee or reimburse expenses to the extent necessary to ensure that the total
ordinary operating expenses for the appropriate class of shares did not exceed
the following percentages of average
26 MainStay Convertible Fund
daily net assets: Investor Class, 1.28%; Class A, 1.09%; Class B, 2.03%; Class
C, 2.03%; and Class I, 0.84%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $2,838,357 and waived its fees in the amount of
$383,155.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has
entered into a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund
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 Investor Class and Class A shares at an annual
rate of 0.25% of the average daily net assets of the Investor Class and Class A
shares for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, Class B and Class C shares of the
Fund pay the Distributor a monthly distribution fee at an 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 an annual rate of 0.25% of the average daily net assets 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
$18,179 and $106,646, respectively, for the year ended October 31, 2009. 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
$23, $14,617, $75,557 and $22,459, respectively, for the year ended October 31,
2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $1,341,202.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Investor Class $ 35,114 0.0%++
- -------------------------------------------------
Class A 249,059 0.1
- -------------------------------------------------
Class C 126 0.0++
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $20,881.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,543,918 $(36,490,065) $(158,259) $1,834,463 $(33,269,943)
- --------------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation
(depreciation) is primarily due to wash sales deferrals.
The other temporary differences are primarily due to securities lending
adjustments and open defaulted bonds.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and additional paid-in capital
arising from permanent differences; net assets at October 31, 2009 are not
affected.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$676 $-- $(676)
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to non-deductible excise
tax.
At October 31, 2009, for federal income tax purposes capital loss carryforwards
of $36,490,065 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $ 5,424
2017 31,066
- ------------------------------------
Total $36,490
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $12,798,135 $ 7,097,615
Long-Term Capital Gains -- 39,460,677
- -------------------------------------------------------
Total $12,798,135 $46,558,292
- -------------------------------------------------------
</Table>
NOTE 5--RESTRICTED SECURITY:
As of October 31, 2009, the Fund held the following restricted security:
<Table>
<Caption>
DATE OF PRINCIPAL 10/31/09 PERCENTAGE OF
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
At Home Corp.
Convertible Bond
4.75%, due 12/31/49 7/25/01 $9,147,056 $674,023 $915 0.0%++
- ------------------------------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
NOTE 6--CUSTODIAN:
State Street is the custodian of the cash and the securities of the Fund.
Custodial fees are charged to the Fund based on the market value of securities
in the Fund and the number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $427,799 and $298,707, respectively.
28 MainStay Convertible Fund
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 486,648 $ 5,523,780
Shares issued to
shareholders in
reinvestment of dividends 168,292 1,887,980
Shares redeemed (870,647) (9,452,523)
-------------------------
Net decrease in shares
outstanding before
conversion (215,707) (2,040,763)
Shares converted into
Investor Class (See Note
1) 657,340 7,071,266
Shares converted from
Investor Class (See Note
1) (443,007) (5,490,758)
-------------------------
Net decrease (1,374) $ (460,255)
=========================
Period ended October 31,
2008 (a):
Shares sold 718,275 $ 10,567,454
Shares issued to
shareholders in
reinvestment of dividends 47,888 650,798
Shares redeemed (698,022) (9,549,768)
-------------------------
Net increase in shares
outstanding before
conversion 68,141 1,668,484
Shares converted into
Investor Class (See Note
1) 6,379,816 90,330,631
Shares converted from
Investor Class (See Note
1) (399,450) (5,314,641)
-------------------------
Net increase 6,048,507 $ 86,684,474
=========================
(a) Investor Class shares were first offered on
February 28, 2008.
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 11,227,318 $128,952,895
Shares issued to
shareholders in
reinvestment of dividends 594,747 6,744,912
Shares redeemed (6,520,158) (71,863,020)
-------------------------
Net increase in shares
outstanding before
conversion 5,301,907 63,834,787
Shares converted into Class
A (See Note 1) 876,044 10,313,860
Shares converted from Class
A (See Note 1) (260,625) (2,823,866)
-------------------------
Net increase 5,917,326 $ 71,324,781
=========================
Year ended October 31, 2008:
Shares sold 8,957,662 $130,210,367
Shares issued to
shareholders in
reinvestment of dividends
and distributions 2,000,947 30,968,040
Shares redeemed (6,679,538) (92,103,096)
-------------------------
Net increase in shares
outstanding before
conversion 4,279,071 69,075,311
Shares converted into Class
A (See Note 1) 1,071,012 15,308,015
Shares converted from Class
A (See Note 1) (6,060,816) (85,873,196)
-------------------------
Net decrease (710,733) $ (1,489,870)
=========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 662,215 $ 7,464,429
Shares issued to
shareholders in
reinvestment of dividends 88,806 1,001,533
Shares redeemed (1,200,221) (13,043,546)
-------------------------
Net decrease in shares
outstanding before
conversion (449,200) (4,577,584)
Shares converted from Class
B (See Note 1) (828,204) (9,070,502)
-------------------------
Net decrease (1,277,404) $(13,648,086)
=========================
Year ended October 31, 2008:
Shares sold 972,993 $ 14,307,984
Shares issued to
shareholders in
reinvestment of dividends
and distributions 544,914 8,513,326
Shares redeemed (1,514,802) (21,445,907)
-------------------------
Net increase in shares
outstanding before
conversion 3,105 1,375,403
Shares converted from Class
B (See Note 1) (995,524) (14,450,809)
-------------------------
Net decrease (992,419) $(13,075,406)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 2,620,107 $ 29,894,911
Shares issued to
shareholders in
reinvestment of dividends 65,257 745,091
Shares redeemed (1,102,186) (11,999,790)
-------------------------
Net increase 1,583,178 $ 18,640,212
=========================
Year ended October 31, 2008:
Shares sold 2,776,117 $ 40,859,541
Shares issued to
shareholders in
reinvestment of dividends
and distributions 137,289 2,126,472
Shares redeemed (745,131) (9,618,804)
-------------------------
Net increase 2,168,275 $ 33,367,209
=========================
<Caption>
CLASS I SHARES AMOUNT
Period ended October 31, 2009 (b):
Shares sold 5,137,499 $ 60,649,660
Shares issued to
shareholders in
reinvestment of dividends 2,235 28,361
Shares redeemed (161,075) (2,009,693)
-------------------------
Net increase 4,978,659 $ 58,668,328
=========================
</Table>
(b) Class I shares commenced investment operation on November 28, 2008
NOTE 10--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
was closed to new investors and new investments. The Equity Index Fund is a
series of the Trust and is managed by New York Life Investments. The settlement
relates to the period from March 12, 2002 through June 30, 2004, during which
time the SEC alleged that New York Life Investments failed to provide the Equity
Index Fund's board with information necessary to evaluate the cost of a
guarantee provided to shareholders of the Equity Index Fund, and that prospectus
and other disclosures misrepresented that there was no charge to the Equity
Index Fund or its shareholders for the guarantee. New York Life Investments,
without admitting or denying the allegations, consented to the entry of an
administrative cease and desist order finding violations of Sections 15(c) and
34(b) of the 1940 Act, Section 206(2) of the Investment Advisers Act of 1940, as
amended, and requiring a civil penalty of $800,000, disgorgement of $3,950,075
(which represents a portion of its management fees relating to the Equity Index
Fund for the relevant period) as well as interest of $1,350,709. These amounts,
totaling approximately $6.101 million, are being distributed to shareholders who
held shares of the Equity Index Fund between March 2002 and June 2004, without
any material financial impact to New York Life Investments.
NOTE 11--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
30 MainStay Convertible Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Convertible Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Convertible Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
mainstayinvestments.com 31
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Convertible Fund ("Fund") and New
York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and MacKay Shields LLC
("MacKay Shields") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group of Funds, including
the privilege of
32 MainStay Convertible Fund
exchanging investments between the same class of shares without the imposition
of a sales charge, as described more fully in the Fund's prospectus.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for
mainstayinvestments.com 33
example, increased costs borne by New York Life Investments and its affiliates
due to new and ongoing regulatory and compliance requirements. The Board also
noted that the Fund benefits from the allocation of certain fixed costs across
the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to MacKay Shields from legally
permitted "soft-dollar" arrangements by which brokers provide research and other
services to MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MacKay Shields on fees charged 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 explanations from New York Life Investments and MacKay
Shields about the different scope of services provided to retail mutual funds as
compared with other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most
34 MainStay Convertible Fund
significant "other expenses" are transfer agent fees. Transfer agent fees are
charged to the Fund based on the number of shareholder accounts (a "per-account"
fee) as compared with certain other fees (e.g., management fees), which are
charged based on the Fund's average net assets. The Board took into account
information from New York Life Investments showing that the Fund's transfer
agent fee schedule is reasonable, including industry data showing that the per-
account fees that NYLIM Service Company ("NSC"), the Fund's transfer agent,
charges the Fund are within the range of per-account fees charged by transfer
agents to other mutual funds. In addition, the Board particularly considered
representations from New York Life Investments that the MainStay Group of Funds'
transfer agent fee structure is designed to allow NSC to provide transfer agent
services to the Funds essentially "at cost," and that NSC historically has
realized only very modest profitability from providing transfer agent services
to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to modify
the expense limitation arrangements on the Fund's share classes to decrease the
amount of New York Life Investments' subsidization of class expenses. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
modify the expense limitations on the Fund's share classes in order to reduce
the amount of class expenses subsidized by New York Life Investments. The Board
acknowledged that New York Life Investments may recoup amounts waived or
reimbursed under contractual expense limitations if such action does not cause a
share class to exceed an expense limitation, and the recoupment is made during
the term of the agreement. The Board further acknowledged that New York Life
Investments may determine voluntarily to waive expenses of Fund share classes
without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
mainstayinvestments.com 35
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$4,404,525 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, 2009,
should be multiplied by 81.7% to arrive at the amount eligible for qualified
interest income and 31.1% for the corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments at 800-MAINSTAY (624-6782). You can obtain and review
copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
36 MainStay Convertible Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Convertible Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
40 MainStay Convertible Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 41
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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017051 (RECYCLE LOGO) MS283-09 MSC11-12/09
05
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 30
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 37
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 50
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 51
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 55
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 55
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 55
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 56
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 4.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 22.58% 3.68% 5.31%
Excluding sales charges 28.35 4.64 5.79
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY DIVERSIFIED U.S. AGGREGATE DIVERSIFIED INCOME
INCOME FUND BOND INDEX INDEX
-------------------- ---------------- ------------------
10/31/99 9550 10000 10000
9540 10730 10362
10039 12292 11129
9978 13016 11802
12329 13654 14442
13370 14410 16139
13652 14573 16832
14562 15329 18366
15601 16154 19863
13065 16203 16656
10/31/09 16769 18438 22345
</Table>
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 22.77% 3.71% 5.32%
Excluding sales charges 28.56 4.67 5.81
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY DIVERSIFIED U.S. AGGREGATE DIVERSIFIED INCOME
INCOME FUND BOND INDEX INDEX
-------------------- ---------------- ------------------
10/31/99 23875 25000 25000
23850 26826 25904
25097 30731 27822
24946 32540 29506
30824 34136 36106
33424 36024 40348
34129 36433 42079
36405 38323 45915
39003 40386 49658
32658 40509 41639
10/31/09 41985 46094 55861
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 22.35% 3.51% 4.99%
Excluding sales charges 27.35 3.83 4.99
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY DIVERSIFIED U.S. AGGREGATE DIVERSIFIED INCOME
INCOME FUND BOND INDEX INDEX
-------------------- ---------------- ------------------
10/31/99 10000 10000 10000
9900 10730 10362
10352 12292 11129
10204 13016 11802
12522 13654 14442
13484 14410 16139
13650 14573 16832
14470 15329 18366
15372 16154 19863
12776 16203 16656
10/31/09 16271 18438 22345
</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.
Class A shares generally have a $25,000 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, the minimum initial investment is $15,000. Investor Class
shares and Class A shares are sold with a maximum initial sales charge of
4.50% 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--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 26.36% 3.83% 4.99%
Excluding sales charges 27.36 3.83 4.99
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY DIVERSIFIED U.S. AGGREGATE DIVERSIFIED INCOME
INCOME FUND BOND INDEX INDEX
-------------------- ---------------- ------------------
10/31/99 10000 10000 10000
9900 10730 10362
10352 12292 11129
10204 13016 11802
12522 13654 14442
13484 14410 16139
13650 14573 16832
14470 15329 18366
15372 16154 19863
12776 16203 16656
10/31/09 16272 18438 22345
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
28.78% 5.00% 6.12%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY DIVERSIFIED U.S. AGGREGATE DIVERSIFIED INCOME
INCOME FUND BOND INDEX INDEX
-------------------- ---------------- ------------------
10/31/99 10000 10000 10000
10016 10730 10362
10566 12292 11129
10530 13016 11802
13042 13654 14442
14192 14410 16139
14522 14573 16832
15551 15329 18366
16717 16154 19863
14067 16203 16656
10/31/09 18115 18438 22345
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Barclays Capital U.S. Aggregate Bond Index(4) 13.79% 5.05% 6.31%
Diversified Income Index(5) 34.16 6.72 8.37
Average Lipper multi-sector income fund(6) 26.58 4.80 5.86
</Table>
The Manager 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 existing expense limitations and the
recoupment is made within the term of the agreement. Any recoupment amount is
generally applied within a fiscal year. This agreement expires on February
28, 2011.
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 I shares, first offered on January 2, 2004,
include the historical performance of Class A shares through December 31,
2003, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. The Barclays Capital U.S. Aggregate Bond Index consists of the following
other unmanaged Barclays Capital U.S. indices: the Government Bond Index,
Corporate Bond Index, MBS Index, and ABS Index. To qualify for inclusion in
the Barclays Capital U.S. Aggregate Bond Index, securities must be U.S.
dollar denominated and investment grade and have a fixed rate coupon, a
remaining maturity of at least one year, and a par amount outstanding of at
least $250 million. Results assume reinvestment of all dividends and capital
gains. An investment cannot be made directly in an index. The Barclays
Capital U.S. Aggregate Bond Index is the Fund's broad-based securities market
index for comparison purposes.
5. The Diversified Income Index is a composite, which assumes equal investments,
with all interest and capital gains reinvested, in (i) the Barclays Capital
Global Aggregate Bond Index, (ii) the Credit Suisse High Yield Index, and
(iii) the JPM EMBI Global Diversified Index. These indices represent the
global investment grade sector, the U.S. high-yield sector, and the global
emerging market sector, respectively. Previously, the Fund utilized a similar
three-index composite, which included (i) the Barclays Capital U.S. Aggregate
Bond Index, (ii) the Credit Suisse High Yield Index, and (iii) the Citigroup
Non-U.S. Dollar World Government Bond Index. The composition of the
Diversified Income index utilizes the JPM EMBI Global Diversified Index
instead of the Citigroup Non-U.S. Dollar World Government Bond Index because
this composition of indices is more reflective of the portfolio manager's
approach in managing the Fund. Total returns assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index
or this composite.
6. The average Lipper multi-sector income fund is representative of funds that
seek current income by allocating assets among several different fixed income
securities sectors (with no more than 65% in any one sector except for
defensive purposes), including U.S. government and foreign governments, with
a significant portion of assets in securities rated below investment-grade.
This benchmark is a product of Lipper Inc. 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 Diversified Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY DIVERSIFIED INCOME FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,164.60 $ 7.86 $1,017.90 $ 7.32
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,165.30 $ 6.77 $1,019.00 $ 6.31
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,158.90 $11.92 $1,014.20 $11.12
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,160.50 $11.93 $1,014.20 $11.12
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,167.00 $ 5.19 $1,020.40 $ 4.84
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.44% for Investor Class, 1.24% for Class A, 2.19% for Class B and Class C
and 0.95% for Class I) multiplied by the average account value over the
period, divided by 365 and multiplied by 184 (to reflect the one-half year
period). The table above represents the actual expenses incurred during the
one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(COMPOSITION PIE CHART)
<Table>
Corporate Bonds 30.40
Foreign Bonds 24.00
Yankee Bonds 24.00
U.S. Government & Federal Agencies 6.60
Short-Term Investment 5.20
Convertible Bonds 3.20
Cash and Other Assets, Less Liabilities 1.90
Municipal Bonds 1.40
Loan Assignments & Participations 1.30
Convertible Preferred Stocks 0.90
Asset-Backed Securities 1.60
Mortgage-Backed Securities 0.40
Common Stocks 0.10
Preferred Stock 0.00
Warrants 0.00
Futures Contracts Long 0.00
Futures Contracts Short (0.00)
</Table>
See Portfolio of Investments beginning on page 12 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM
INVESTMENT)
<Table>
1. Republic of Germany, 3.75%-4.25%,
due 7/4/14-1/4/17
2. Republic of Indonesia, 10.375%-11.625%,
due 5/4/14-3/4/19
3. Petroleum Co. of Trinidad & Tobago,
Ltd., 9.75%, due 8/14/19
4. Australia Government Bond, 6.25%, due
6/15/14
5. Agribank FCB, 9.125%, due 7/15/19
6. United Mexican States, 7.25%, due
12/15/16
7. Federal National Mortgage Association
(Mortgage Pass-Through Securities),
5.50%-6.00%, due 9/1/34-10/1/38
8. Gaz Capital S.A., 8.125%, due 7/31/14
9. Brazil Notas do Tesouro Nacional,
10.00%, due 1/1/14
10. Republic of Argentina, 2.50%, due
12/31/38
</Table>
8 MainStay Diversified Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS GARY GOODENOUGH, J. MATTHEW PHILO, CFA,
JAMES RAMSAY, CFA, AND HOWARD BOOTH OF MACKAY SHIELDS LLC, THE FUND'S
SUBADVISOR.
HOW DID MAINSTAY DIVERSIFIED INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Diversified Income Fund returned 28.35%
for Investor Class shares, 28.56% for Class A shares, 27.35% for Class B shares
and 27.36% for Class C shares for the 12 months ended October 31, 2009. Over the
same period, the Fund's Class I shares returned 28.78%. All share classes
outperformed the 26.58% return of the average Lipper(1) multi-sector income fund
and the 13.79% return of the Barclays Capital U.S. Aggregate Bond Index(2) for
the 12-month reporting period. All share classes underperformed the 34.16%
return of the Diversified Income Index(3) for the 12 months ended October 31,
2009. The Barclays Capital U.S. Aggregate Bond Index is the Fund's broad-based
securities-market index. The Diversified Income Index is a secondary benchmark
of the Fund. See pages 5 and 6 for Fund returns with sales charges.
WHAT KEY FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund benefited from its overweight positions
in emerging-market debt and convertible bonds as credit-related spreads(4)
tightened. The Fund also benefited from favorable issue selection in investment-
grade bonds, including a bias toward securities rated BBB,(5) nimble use of the
new-issue calendar and several well-timed sales. The Fund's bias toward a
flatter Treasury yield-curve(6) was not rewarded, because the yield curve
remained relatively steep during the reporting period.
HOW DID YOU POSITION THE FUND IN THE HIGH-YIELD MARKET?
The high-yield bond market generated very strong results during the reporting
period. This performance was driven by a combination of attractive valuations,
increased perception of reduced systemic risk and the growing belief that the
recession was over. Riskier high-yield bonds significantly outperformed higher-
quality high-yield issues and high-grade fixed-income securities. While the Fund
did have some exposure to CCC-rated securities, we generally maintained a
conservative risk profile. We felt that the current economic weakness would be
more prolonged than market spreads reflected.
The Fund's high-yield investments in the health care, energy and transportation
industries were the most significant contributors to performance. The Fund also
benefited from investments in the communications
- ----------
The values of debt securities fluctuate depending on various factors, including
interest rates, issuer creditworthiness, market conditions and maturities.
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 such changes that
can adversely affect the value of the Fund's holdings. Foreign securities may be
subject to greater risks than U.S. investments, including currency fluctuations,
less-liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets. High-yield debt securities ("junk bonds") are
generally considered speculative because they present a greater risk of loss
than higher-quality debt securities and may be subject to greater price
volatility. The principal risk of mortgage dollar rolls is that the security the
Fund receives at the end of the transaction may be worth less than the security
the Fund sold to the same counterparty at the beginning of the transaction. The
principal risk of mortgage-related and asset-backed securities is that the
underlying debt may be prepaid ahead of schedule if interest rates fall, thereby
reducing the value of the Fund's investments. If interest rates rise, there may
be fewer prepayments, which would cause the average bond maturity to rise and
increase the potential for the Fund to lose money. The principal risks of to be
announced (TBA) securities transactions are increased credit risk and increased
overall investment exposure. The Fund may experience a portfolio turnover of
more than 100% and may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Barclays Capital U.S.
Aggregate Bond Index.
3. See footnote on page 6 for more information on the Diversified Income Index.
4. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
5. Debt rated BBB by Standard & Poor's is deemed by Standard & Poor's to exhibit
adequate protection parameters. It is the opinion of Standard & Poor's,
however, that adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation than would be the case for debt in higher-rated
categories. Debt rated CCC by Standard & Poor's is deemed by Standard &
Poor's to be currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor. It is
the opinion of Standard & Poor's that in the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation. When applied to
Fund holdings, ratings are based solely on the creditworthiness of the bonds
in the portfolio and are not meant to represent the security or safety of the
Fund.
6. The yield curve is a line that plots the yields of various securities of
similar quality--typically U.S. Treasury issues--across a range of
maturities. The U.S. Treasury yield curve serves as a benchmark for other
debt and is used in economic forecasting. The yield curve is said to flatten
when the difference in yield between short- and long-term securities
decreases.
mainstayinvestments.com 9
industry. Our investment in telecommunications company Centennial Cellular
increased in value when the company agreed to be acquired by AT&T. Gaming
operator Penn National Gaming and paper and forest products company Georgia-
Pacific were also strong performers in the high-yield portion of the Fund.
On the other hand, investments in the aerospace, media and information
technology industries detracted from the Fund's performance during the reporting
period. Fund positions in telecommunications company Nortel Networks,
semiconductor manufacturer NXP and automobile components manufacturer Lear
weakened the Fund's returns.
During the reporting period, the high-yield portion
of the Fund reduced its exposure in health care, media and information
technology and increased its weighting in the transportation industry. We added
positions in diversified financial services company Harley-Davidson Funding and
insurance company Willis North America, which are both large, high-quality
companies whose bonds, in our opinion, were trading at attractive valuations. In
addition, the Fund purchased bonds of Tyson Foods, one of the nation's largest
meat processors. All of these purchases had a positive impact on the Fund's
performance. Our position in the bank debt of wireless telecommunications
services provider Alltel was retired by the company following Alltel's
acquisition by Verizon Wireless. The Fund sold its holdings in aerospace
manufacturing company Hawker Beechcraft at a loss.
WHAT FACTORS SUPPORTED EMERGING-MARKET DEBT'S STRONG PERFORMANCE DURING THE
REPORTING PERIOD?
When the reporting period began, emerging-market debt was still reeling from the
fallout of the September 2008 bankruptcy of Lehman Brothers. That bankruptcy
resulted in a virtual halt of lending and trading in many financial markets
because of concerns about counterparty risk. Fortunately, the emergency measures
to boost liquidity initiated by the U.S. Congress, Federal Reserve Board,
Federal Deposit Insurance Corporation (FDIC) and the U.S. Department of the
Treasury steadily improved investor confidence.
As new issuance returned, sovereign and corporate borrowers faced lower
refinancing risks, which led to tighter spreads. The International Monetary Fund
proved innovative as it developed Flexible Currency Lines to successfully serve
as a backstop for many otherwise-solid sovereign borrowers. In addition to the
monetary expansion of the G-10,(7) China also bolstered market confidence by
extending swap lines to various emerging-market countries and providing huge
stimulus to its own economy. With China's growth reaccelerating, the commodity
markets rebounded. This provided a valuable chain reaction to many commodity
producers in the developing world.
HOW DID YOU MANAGE THE FUND'S ALLOCATION TO EMERGING-MARKET DEBT DURING THE
REPORTING PERIOD?
As investors became less risk-averse, we increased the beta--or volatility in
relation to the market as a whole--of the emerging-market portion of the Fund.
We maintained overweight positions in countries with solid prospects and
increased the Fund's currency exposure. These strategies contributed positively
to the Fund's performance.
We increased credit duration,(8) which allowed the Fund to benefit from a steep
yield curve and from rapidly narrowing spreads. Increasing the Fund's foreign-
exchange exposure added significant value when lower volatility reduced demand
for the low-yielding U.S. dollar.
In the second and third quarters of 2009, the Fund added to its holdings of
higher-yielding quasi- sovereign and corporate bonds. Concessions from
the new-issue market were generous and provided excellent opportunities to add
value. As we saw in 2008, issuance from Indonesia was unusually attractive.
Sensing a near-term U.S. dollar peak, the Fund bought the Brazilian real seeking
to take advantage of high real rates and improving terms of trade as commodity
exports remained strong. The real made up for recent losses, and during the
reporting period, the real was one of the world's best-performing currencies.
The Fund also benefitted from core holdings of the Norwegian krone, which
returned 18% during the reporting period. The rand's terms of trade were
improving, because gold exports remained strong while oil imports fell
dramatically. In the ensuing period, the rand was the world's best-performing
currency, rallying nearly 20%. The Fund also benefited from core holdings of the
Brazilian real and the
- ----------
7. The Group of Ten, or G-10, now consists of the wealthiest eleven member
nations of the International Monetary Fund (Belgium, Canada, France, Germany,
Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom and the
United States). Although Switzerland became the eleventh member in 1994, the
original name remains.
8. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
10 MainStay Diversified Income Fund
Norwegian krone, which returned 32% and 18%, respectively, since the end of
March 2009.
While the Fund was aggressive in its holdings of solid sovereign and corporate
credits, performance would have been enhanced by greater emphasis on
economically challenged countries such as Argentina and Ukraine (where the Fund
held positions) and Ecuador and Iraq (which advanced but were absent from the
Fund). The election calendars in several of these countries added an element of
political and
economic uncertainty during the reporting period. We believe that the Fund's
positions in Korea, the United Arab Emirates and the United States have helped
position the Fund appropriately should the expected correction materialize.
HOW DID YOU POSITION THE U.S. INVESTMENT-GRADE PORTION OF THE FUND?
The Federal Reserve formally adopted and implemented quantitative easing--or
direct purchases of securities--during the reporting period. Policy makers were
prepared to purchase $300 billion of longer-term Treasurys, $1.25 trillion of
agency mortgage-backed securities and $200 billion of agency debt. The Treasury
also expanded its liquidity facilities, such as the Term Asset-Backed Securities
Loan Facility (TALF), to support the secondary markets that were crucial to
consumer and business lending. The size of these initiatives and the liquidity
they introduced to the financial system were catalysts for narrower investment-
grade bond spreads.
To take advantage of the government's actions, the Fund maintained healthy
exposures to spread, or non-Treasury, sectors with the advantage of a government
seal. These included agency mortgage pass-throughs and federally guaranteed bank
debentures. We suspected, however, that the market's sudden appetite for higher-
risk securities might wane if an economic recovery didn't materialize as quickly
as anticipated. With that view, we positioned the Fund for a flatter yield
curve.
Federal Open Market Committee's resolve to keep the federal funds target rate
close to zero helped calm interest-rate volatility. This gave us the confidence
to emphasize mortgage-backed securities that offered better yield than the
sector average. In the investment-grade bond market, we purchased industrials
and utilities with durable cash flows. We also remained alert to dislocations
along the yield curves of liquid issuers and benefited as the dislocations
evaporated and the issuers' yield curves normalized. Finally, in an environment
where liquidity premiums receded, we benefited by raising the Fund's exposure to
corporate issuers with profiles that were less mainstream.
The Fund maintained a duration that was rather neutral to that of the benchmark
during the reporting period. Since Treasury yields declined during the reporting
period, the Fund would have benefited from a longer duration.
- ----------
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, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 91.9%+
ASSET-BACKED SECURITIES 0.6%
- -------------------------------------------------------------------
AUTOMOBILE 0.1%
Superior Wholesale
Inventory Financing Trust
Series 2007-AE1, Class A
0.345%, due 1/15/12 (a) $ 50,000 $ 49,989
-------------
CREDIT CARDS 0.1%
Citibank Credit Card
Issuance Trust Series
2006-C4, Class C4
0.464%, due 1/9/12 (a) 140,000 139,444
-------------
DIVERSIFIED FINANCIAL SERVICES 0.1%
Dunkin Securitization
Series 2006-1, Class A2
5.779%, due 6/20/31 (b) 110,000 102,536
USXL Funding LLC
Series 2006-1A, Class A
5.379%, due 4/15/14
(b)(c) 18,698 18,699
-------------
121,235
-------------
HOME EQUITY 0.2%
Citicorp Residential
Mortgage Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (d) 97,937 95,883
Series 2006-1, Class A3
5.706%, due 7/25/36 (d) 120,000 114,628
-------------
210,511
-------------
UTILITIES 0.1%
Atlantic City Electric
Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 75,000 83,948
-------------
Total Asset-Backed
Securities
(Cost $611,576) 605,127
-------------
CONVERTIBLE BONDS 3.2%
- -------------------------------------------------------------------
AEROSPACE & DEFENSE 0.1%
Triumph Group, Inc.
2.625%, due 10/1/26 59,000 63,646
-------------
BIOTECHNOLOGY 0.1%
Enzon Pharmaceuticals, Inc.
4.00%, due 6/1/13 59,000 62,540
Gilead Sciences, Inc.
0.625%, due 5/1/13 19,000 23,299
-------------
85,839
-------------
COAL 0.1%
Alpha Natural Resources,
Inc.
2.375%, due 4/15/15 48,000 45,120
Peabody Energy Corp.
4.75%, due 12/15/66 51,000 47,239
-------------
92,359
-------------
COMMERCIAL SERVICES 0.1%
Alliance Data Systems Corp.
1.75%, due 8/1/13 53,000 50,350
Coinstar, Inc.
4.00%, due 9/1/14 7,000 7,429
-------------
57,779
-------------
COMPUTERS 0.1%
EMC Corp.
1.75%, due 12/1/11 121,000 142,931
Mentor Graphics Corp.
6.25%, due 3/1/26 20,000 19,075
-------------
162,006
-------------
DISTRIBUTION & WHOLESALE 0.1%
WESCO International, Inc.
6.00%, due 9/15/29 55,000 66,138
-------------
DIVERSIFIED FINANCIAL SERVICES 0.0%++
Janus Capital Group, Inc.
3.25%, due 7/15/14 23,000 27,456
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.0%++
General Cable Corp.
0.875%, due 11/15/13 56,000 50,330
-------------
ELECTRONICS 0.1%
Fisher Scientific
International, Inc.
3.25%, due 3/1/24 82,000 104,037
TTM Technologies, Inc.
3.25%, due 5/15/15 54,000 50,558
-------------
154,595
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings or issuers held as of October 31, 2009,
excluding short-term investments. May be subject to change daily.
12 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
ENERGY--ALTERNATE SOURCES 0.1%
Covanta Holding Corp.
1.00%, due 2/1/27 $ 167,000 $ 151,761
-------------
ENTERTAINMENT 0.0%++
Lions Gate Entertainment
Corp.
2.938%, due 10/15/24 23,000 20,786
3.625%, due 3/15/25 17,000 15,343
-------------
36,129
-------------
ENVIRONMENTAL CONTROLS 0.1%
Waste Connections, Inc.
3.75%, due 4/1/26 63,000 66,229
-------------
FOOD 0.2%
Great Atlantic & Pacific
Tea Co.
6.75%, due 12/15/12 62,000 55,568
Spartan Stores, Inc.
3.375%, due 5/15/27 (b) 118,000 92,777
3.375%, due 5/15/27 40,000 31,450
-------------
179,795
-------------
HEALTH CARE--PRODUCTS 0.3%
Medtronic, Inc.
1.625%, due 4/15/13 331,000 323,552
-------------
INTERNET 0.0%++
At Home Corp.
4.75%, due 12/31/49
(c)(e)(f)(g) 504,238 50
-------------
IRON & STEEL 0.2%
Allegheny Technologies
4.25%, due 6/1/14 35,000 38,894
ArcelorMittal
5.00%, due 5/15/14 36,000 49,140
Steel Dynamics, Inc.
5.125%, due 6/15/14 37,000 40,191
United States Steel Corp.
4.00%, due 5/15/14 31,000 41,230
-------------
169,455
-------------
MEDIA 0.0%++
Central European Media
Enterprises, Ltd.
3.50%, due 3/15/13 (b) 35,000 26,994
-------------
MINING 0.0%++
Alcoa, Inc.
5.25%, due 3/15/14 18,000 37,755
-------------
MISCELLANEOUS--MANUFACTURING 0.0%++
Ingersoll-Rand Co.
4.50%, due 4/15/12 10,000 18,613
-------------
OIL & GAS 0.4%
Chesapeake Energy Corp.
2.50%, due 5/15/37 165,000 146,231
St. Mary Land & Exploration
Co.
3.50%, due 4/1/27 53,000 52,073
Transocean, Inc.
Series C
1.50%, due 12/15/37 154,000 148,610
Series A
1.625%, due 12/15/37 44,000 43,285
-------------
390,199
-------------
OIL & GAS SERVICES 0.4%
Cameron International Corp.
2.50%, due 6/15/26 72,000 90,270
Core Laboratories, L.P.
0.25%, due 10/31/11 122,000 146,857
Schlumberger, Ltd.
Series B
2.125%, due 6/1/23 120,000 191,850
-------------
428,977
-------------
PHARMACEUTICALS 0.2%
Teva Pharmaceutical Finance
Co. B.V.
Series D
1.75%, due 2/1/26 149,000 174,516
-------------
REAL ESTATE INVESTMENT TRUSTS 0.2%
Host Hotels & Resorts, L.P.
3.25%, due 4/15/24 (b) 90,000 90,000
Macerich Co. (The)
3.25%, due 3/15/12 (b) 31,000 28,714
Vornado Realty Trust
3.625%, due 11/15/26 85,000 84,043
-------------
202,757
-------------
RETAIL 0.1%
Penske Auto Group, Inc.
3.50%, due 4/1/26 95,000 95,831
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
SEMICONDUCTORS 0.1%
ON Semiconductor Corp.
2.625%, due 12/15/26 $ 37,000 $ 35,243
Teradyne, Inc.
4.50%, due 3/15/14 13,000 22,360
-------------
57,603
-------------
SOFTWARE 0.1%
Sybase, Inc.
3.50%, due 8/15/29 (b) 114,000 127,395
SYNNEX Corp.
4.00%, due 5/15/18 (b) 25,000 27,875
-------------
155,270
-------------
TELECOMMUNICATIONS 0.1%
Anixter International, Inc.
1.00%, due 2/15/13 46,000 42,378
CommScope, Inc.
3.25%, due 7/1/15 24,000 28,950
SBA Communications Corp.
1.875%, due 5/1/13 78,000 73,905
-------------
145,233
-------------
Total Convertible Bonds
(Cost $3,509,628) 3,420,867
-------------
CORPORATE BONDS 30.4%
- -------------------------------------------------------------------
ADVERTISING 0.4%
Interpublic Group of Cos.,
Inc.
6.25%, due 11/15/14 135,000 126,394
Jostens Intermediate
Holding Corp.
7.625%, due 10/1/12 65,000 65,406
Lamar Media Corp.
6.625%, due 8/15/15 120,000 114,600
9.75%, due 4/1/14 60,000 66,000
-------------
372,400
-------------
AEROSPACE & DEFENSE 0.1%
BE Aerospace, Inc.
8.50%, due 7/1/18 60,000 62,400
-------------
AGRICULTURE 0.6%
Alliance One International,
Inc.
10.00%, due 7/15/16 (b) 65,000 67,600
Altria Group, Inc.
9.70%, due 11/10/18 295,000 363,194
Cargill, Inc.
4.375%, due 6/1/13 (b) 85,000 88,441
Reynolds American, Inc.
7.625%, due 6/1/16 65,000 70,015
7.75%, due 6/1/18 55,000 59,424
-------------
648,674
-------------
AIRLINES 0.1%
DAE Aviation Holdings, Inc.
11.25%, due 8/1/15 (b) 110,000 90,200
Delta Air Lines, Inc.
(Escrow Shares)
2.875%, due 2/6/24 (f)(h) 55,000 605
2.875%, due 2/18/49
(b)(f)(h) 30,000 330
8.00%, due 6/3/49 (f)(h) 81,000 891
8.30%, due 12/15/29
(f)(h) 505,000 5,050
9.75%, due 5/15/49 (f)(h) 5,000 50
10.00%, due 8/15/08
(f)(h) 35,000 350
10.375%, due 12/15/22
(f)(h) 10,000 100
Northwest Airlines, Inc.
(Escrow Shares)
7.625%, due 11/15/23
(f)(h) 117,700 288
7.875%, due 12/31/49
(f)(h) 25,000 28
8.70%, due 3/15/49 (f)(h) 5,000 6
8.875%, due 6/1/49 (f)(h) 30,000 33
9.875%, due 3/15/37
(f)(h) 65,000 71
10.00%, due 2/1/49 (f)(h) 168,300 185
-------------
98,187
-------------
APPAREL 0.1%
Unifi, Inc.
11.50%, due 5/15/14 91,000 85,540
-------------
AUTO MANUFACTURERS 1.4%
Ford Holdings LLC
9.30%, due 3/1/30 75,000 64,875
Harley-Davidson Funding
Corp.
6.80%, due 6/15/18 (b) 1,380,000 1,371,714
-------------
1,436,589
-------------
AUTO PARTS & EQUIPMENT 0.8%
Affinia Group, Inc.
9.00%, due 11/30/14 35,000 33,513
10.75%, due 8/15/16 (b) 95,000 104,262
Allison Transmission, Inc.
11.00%, due 11/1/15 (b) 45,000 45,900
American Tire Distributors,
Inc.
6.54%, due 4/1/12 (a) 70,000 59,588
10.75%, due 4/1/13 80,000 74,500
FleetPride Corp.
11.50%, due 10/1/14 (b) 235,000 211,794
Goodyear Tire & Rubber Co.
(The)
5.01%, due 12/1/09 (a) 55,000 55,000
8.625%, due 12/1/11 65,000 67,031
10.50%, due 5/15/16 105,000 113,662
</Table>
14 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
AUTO PARTS & EQUIPMENT (CONTINUED)
Johnson Controls, Inc.
7.70%, due 3/1/15 $ 75,000 $ 83,224
-------------
848,474
-------------
BANKS 2.4%
V Agribank FCB
9.125%, due 7/15/19 1,600,000 1,720,397
Citigroup, Inc.
8.125%, due 7/15/39 140,000 162,913
GMAC LLC
8.00%, due 11/1/31 (b) 507,000 433,485
Morgan Stanley
5.625%, due 9/23/19 100,000 100,628
Zions BanCorp.
7.75%, due 9/23/14 65,000 58,175
-------------
2,475,598
-------------
BEVERAGES 0.1%
Constellation Brands, Inc.
7.25%, due 9/1/16 155,000 155,388
-------------
BUILDING MATERIALS 0.5%
Building Materials Corp. of
America
7.75%, due 8/1/14 70,000 68,950
Compression Polymers Corp.
10.50%, due 7/1/13 55,000 46,750
Texas Industries, Inc.
7.25%, due 7/15/13 410,000 401,800
-------------
517,500
-------------
CHEMICALS 1.8%
Chevron Phillips Chemica
7.00%, due 6/15/14 (b) 95,000 105,039
Dow Chemical Co. (The)
8.55%, due 5/15/19 430,000 490,898
Mosaic Global Holdings,
Inc.
7.625%, due 12/1/16 (b) 40,000 43,062
Nalco Co.
8.25%, due 5/15/17 (b) 55,000 57,750
Phibro Animal Health Corp.
10.00%, due 8/1/13 (b) 70,000 70,000
Rohm & Haas Co.
7.85%, due 7/15/29 933,000 933,759
Tronox Worldwide LLC/
Tronox Finance Corp.
9.50%, due 12/1/12 (f) 230,000 144,325
Westlake Chemical Corp.
6.625%, due 1/15/16 105,000 98,962
-------------
1,943,795
-------------
COAL 0.1%
Peabody Energy Corp.
7.375%, due 11/1/16 70,000 70,700
7.875%, due 11/1/26 60,000 58,500
-------------
129,200
-------------
COMMERCIAL SERVICES 0.6%
Cardtronics, Inc.
9.25%, due 8/15/13 65,000 65,975
Great Lakes Dredge & Dock
Corp.
7.75%, due 12/15/13 100,000 97,500
iPayment, Inc.
9.75%, due 5/15/14 180,000 131,400
Language Line, Inc.
11.125%, due 6/15/12 125,000 128,594
Lender Processing Services,
Inc.
8.125%, due 7/1/16 85,000 89,462
Quebecor World, Inc.
(Litigation Recovery
Trust-Escrow Shares)
6.50%, due 8/1/49
(c)(e)(h) 5,000 260
9.75%, due 1/15/49
(b)(c)(e)(h) 160,000 8,320
Service Corp. International
7.625%, due 10/1/18 90,000 89,325
-------------
610,836
-------------
COMPUTERS 0.2%
SunGard Data Systems, Inc.
4.875%, due 1/15/14 40,000 36,000
10.625%, due 5/15/15 (b) 115,000 123,913
-------------
159,913
-------------
DISTRIBUTION & WHOLESALE 0.1%
ACE Hardware Corp.
9.125%, due 6/1/16 (b) 110,000 117,150
-------------
DIVERSIFIED FINANCIAL SERVICES 0.4%
AmeriCredit Corp.
8.50%, due 7/1/15 160,000 151,200
Citigroup, Inc.
8.50%, due 5/22/19 45,000 52,601
Janus Capital Group, Inc.
6.95%, due 6/15/17 140,000 133,084
LaBranche & Co., Inc.
11.00%, due 5/15/12 75,000 72,094
-------------
408,979
-------------
ELECTRIC 2.0%
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 282,605 276,953
Calpine Construction
Finance Co., L.P./ CCFC
Finance Corp.
8.00%, due 6/1/16 (b) 300,000 304,500
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
ELECTRIC (CONTINUED)
Calpine Corp.
7.25%, due 10/15/17 (b) $ 278,000 $ 262,015
Energy Future Holdings
Corp.
10.875%, due 11/1/17 145,000 100,775
Ipalco Enterprises, Inc.
7.25%, due 4/1/16 (b) 160,000 161,200
Majapahit Holding B.V.
7.75%, due 1/20/20 (b) 300,000 297,456
NRG Energy, Inc.
7.25%, due 2/1/14 70,000 69,475
7.375%, due 2/1/16 120,000 119,250
PNM Resources, Inc.
9.25%, due 5/15/15 75,000 77,437
Reliant Energy Mid-Atlantic
Power Holdings LLC
Series C
9.681%, due 7/2/26 145,000 152,250
Reliant Energy, Inc.
7.625%, due 6/15/14 35,000 34,125
7.875%, due 6/15/17 210,000 205,800
-------------
2,061,236
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.2%
Belden, Inc.
7.00%, due 3/15/17 250,000 241,250
-------------
ENTERTAINMENT 1.1%
American Casino &
Entertainment Properties
LLC
11.00%, due 6/15/14 (b) 105,000 92,400
Chukchansi Economic
Development Authority
8.00%, due 11/15/13 (b) 45,000 29,250
Isle of Capri Casinos, Inc.
7.00%, due 3/1/14 82,000 73,185
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 115,000 104,650
Mohegan Tribal Gaming
Authority
6.875%, due 2/15/15 10,000 6,600
Peninsula Gaming LLC
8.375%, due 8/15/15 (b) 155,000 153,837
Penn National Gaming, Inc.
6.75%, due 3/1/15 110,000 105,050
6.875%, due 12/1/11 135,000 134,663
Pinnacle Entertainment,
Inc.
8.25%, due 3/15/12 98,000 98,000
Speedway Motorsports, Inc.
6.75%, due 6/1/13 290,000 285,650
United Artists Theatre
Circuit, Inc.
Series BA7
9.30%, due 7/1/15 (c)(e) 65,831 39,498
Vail Resorts, Inc.
6.75%, due 2/15/14 45,000 44,719
-------------
1,167,502
-------------
ENVIRONMENTAL CONTROLS 0.3%
Allied Waste North America,
Inc.
6.125%, due 2/15/14 90,000 92,286
Geo Sub Corp.
11.00%, due 5/15/12 260,000 237,900
-------------
330,186
-------------
FINANCE--AUTO LOANS 0.5%
Ford Motor Credit Co. LLC
7.25%, due 10/25/11 230,000 225,583
7.875%, due 6/15/10 5,000 5,049
8.00%, due 6/1/14 300,000 291,688
-------------
522,320
-------------
FINANCE--OTHER SERVICES 0.5%
American Real Estate
Partners, L.P./
American Real Estate
Finance Corp.
8.125%, due 6/1/12 530,000 530,000
-------------
FOOD 0.2%
American Stores Co.
8.00%, due 6/1/26 55,000 49,500
ASG Consolidated LLC/ASG
Finance, Inc.
11.50%, due 11/1/11 95,000 92,863
Tyson Foods, Inc.
10.50%, due 3/1/14 80,000 91,200
-------------
233,563
-------------
FOREST PRODUCTS & PAPER 0.8%
Bowater, Inc.
9.375%, due 12/15/21 (f) 195,000 52,650
Domtar Corp.
7.875%, due 10/15/11 170,000 176,800
Georgia-Pacific Corp.
7.00%, due 1/15/15 (b) 290,000 292,900
7.125%, due 1/15/17 (b) 102,000 103,020
8.00%, due 1/15/24 68,000 68,680
8.875%, due 5/15/31 160,000 164,000
-------------
858,050
-------------
HAND & MACHINE TOOLS 0.0%++
Thermadyne Holdings Corp.
9.25%, due 2/1/14 55,000 48,125
-------------
</Table>
16 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
HEALTH CARE--PRODUCTS 0.5%
Biomet, Inc.
10.00%, due 10/15/17 $ 60,000 $ 64,875
11.625%, due 10/15/17 95,000 104,144
Hanger Orthopedic Group,
Inc.
10.25%, due 6/1/14 165,000 174,900
Invacare Corp.
9.75%, due 2/15/15 175,000 185,062
ReAble Therapeutics Finance
LLC/
ReAble Therapeutics
Finance Corp.
11.75%, due 11/15/14 45,000 45,000
-------------
573,981
-------------
HEALTH CARE--SERVICES 1.3%
Alliance Imaging, Inc.
7.25%, due 12/15/12 100,000 97,500
Series B
7.25%, due 12/15/12 125,000 121,875
Community Health Systems,
Inc.
8.875%, due 7/15/15 180,000 185,400
HCA, Inc.
5.75%, due 3/15/14 125,000 116,250
6.30%, due 10/1/12 305,000 298,900
6.375%, due 1/15/15 35,000 32,725
9.00%, due 12/15/14 10,000 10,076
Highmark, Inc.
6.80%, due 8/15/13 (b)(c) 245,000 256,615
Skilled Healthcare Group,
Inc.
11.00%, due 1/15/14 52,000 54,080
Sun Healthcare Group, Inc.
9.125%, due 4/15/15 70,000 70,875
Vanguard Health Holding Co.
II LLC
9.00%, due 10/1/14 75,000 78,000
-------------
1,322,296
-------------
HOLDING COMPANY--DIVERSIFIED 0.2%
Leucadia National Corp.
8.125%, due 9/15/15 190,000 192,375
-------------
HOUSEHOLD PRODUCTS & WARES 0.1%
Jarden Corp.
7.50%, due 5/1/17 75,000 73,875
Libbey Glass, Inc.
8.26%, due 6/1/11 (a) 80,000 77,400
-------------
151,275
-------------
INSURANCE 0.7%
Crum & Forster Holdings
Corp.
7.75%, due 5/1/17 290,000 273,325
HUB International Holdings,
Inc.
9.00%, due 12/15/14 (b) 195,000 186,225
Lumbermens Mutual Casualty
Co.
8.45%, due 12/1/97 (b)(f) 35,000 350
9.15%, due 7/1/26 (b)(f) 535,000 5,350
Phoenix Life Insurance Co.
7.15%, due 12/15/34 (b) 95,000 30,301
USI Holdings Corp.
4.315%, due 11/15/14
(a)(b) 35,000 28,875
9.75%, due 5/15/15 (b) 95,000 84,550
Willis North America, Inc.
6.20%, due 3/28/17 105,000 102,720
-------------
711,696
-------------
INTERNET 0.1%
Expedia, Inc.
7.456%, due 8/15/18 10,000 10,575
8.50%, due 7/1/16 (b) 125,000 130,938
-------------
141,513
-------------
IRON & STEEL 0.9%
Allegheny Ludlum Corp.
6.95%, due 12/15/25 870,000 770,767
Allegheny Technologies,
Inc.
8.375%, due 12/15/11 185,000 195,944
-------------
966,711
-------------
LODGING 0.3%
Boyd Gaming Corp.
7.75%, due 12/15/12 60,000 59,550
Seminole Hard Rock
Entertainment,
Inc./Seminole Hard Rock
International LLC
2.799%, due 3/15/14
(a)(b) 125,000 100,625
Sheraton Holding Corp.
7.375%, due 11/15/15 85,000 84,575
Starwood Hotels & Resorts
Worldwide, Inc.
7.875%, due 5/1/12 70,000 72,800
-------------
317,550
-------------
MACHINERY--CONSTRUCTION & MINING 0.1%
Caterpillar, Inc.
6.05%, due 8/15/36 70,000 77,031
-------------
MEDIA 1.0%
Charter Communications
Operating LLC
8.00%, due 4/30/12 (b) 185,000 187,775
8.375%, due 4/30/14 (b) 80,000 81,400
CSC Holdings, Inc.
6.75%, due 4/15/12 75,000 78,000
CW Media Holdings, Inc.
13.50%, due 8/15/15
(b)(i) 45,000 45,900
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
HSN, Inc.
11.25%, due 8/1/16 $ 130,000 $ 141,700
ION Media Networks, Inc.
9.041%, due 1/15/13
(b)(f)(i) 62,751 1,020
Morris Publishing Group LLC
7.00%, due 8/1/13 (f) 220,000 61,600
Rainbow National Services
LLC
8.75%, due 9/1/12 (b) 90,000 91,350
10.375%, due 9/1/14 (b) 145,000 152,250
Time Warner Cable, Inc.
8.25%, due 2/14/14 140,000 164,196
Vertis, Inc.
18.50%, due 10/1/12 (i) 76,997 40,808
Ziff Davis Media, Inc.
8.788%, due 7/15/11
(c)(e) 39,397 9,455
-------------
1,055,454
-------------
METAL FABRICATE & HARDWARE 0.1%
Mueller Water Products,
Inc.
7.375%, due 6/1/17 80,000 69,200
Neenah Foundary Co.
9.50%, due 1/1/17 150,000 75,750
-------------
144,950
-------------
MINING 0.3%
Freeport-McMoRan Copper &
Gold, Inc.
3.881%, due 4/1/15 (a) 110,000 111,212
8.25%, due 4/1/15 55,000 58,988
8.375%, due 4/1/17 90,000 96,750
-------------
266,950
-------------
MISCELLANEOUS--MANUFACTURING 0.4%
Actuant Corp.
6.875%, due 6/15/17 70,000 65,975
Polypore, Inc.
8.75%, due 5/15/12 135,000 133,987
RBS Global, Inc./Rexnord
Corp.
9.50%, due 8/1/14 100,000 99,000
SPX Corp.
7.625%, due 12/15/14 150,000 154,500
-------------
453,462
-------------
OFFICE EQUIPMENT/SUPPLIES 0.2%
Xerox Corp.
8.25%, due 5/15/14 160,000 184,348
-------------
OIL & GAS 3.0%
Atlas Energy Operating Co.
LLC/
Atlas Energy Finance
Corp.
12.125%, due 8/1/17 55,000 59,950
Chaparral Energy, Inc.
8.50%, due 12/1/15 300,000 262,500
Chesapeake Energy Corp.
6.625%, due 1/15/16 255,000 245,119
6.875%, due 11/15/20 25,000 23,000
Forest Oil Corp.
8.00%, due 12/15/11 200,000 205,500
Frontier Oil Corp.
8.50%, due 9/15/16 100,000 102,000
Hilcorp Energy I,
L.P./Hilcorp Finance Co.
7.75%, due 11/1/15 (b) 60,000 57,300
9.00%, due 6/1/16 (b) 100,000 100,000
Holly Corp.
9.875%, due 6/15/17 (b) 140,000 144,900
Linn Energy LLC
9.875%, due 7/1/18 100,000 102,000
11.75%, due 5/15/17 (b) 60,000 66,675
Mariner Energy, Inc.
7.50%, due 4/15/13 95,000 92,625
Newfield Exploration Co.
6.625%, due 9/1/14 215,000 212,312
6.625%, due 4/15/16 15,000 14,775
7.125%, due 5/15/18 115,000 115,431
Parker Drilling Co.
9.625%, due 10/1/13 80,000 80,800
Pemex Project Funding
Master Trust
5.75%, due 3/1/18 320,000 316,800
PetroHawk Energy Corp.
7.875%, due 6/1/15 60,000 60,600
9.125%, due 7/15/13 70,000 72,450
10.50%, due 8/1/14 10,000 10,900
Petroquest Energy, Inc.
10.375%, due 5/15/12 125,000 123,125
Plains Exploration &
Production Co.
7.00%, due 3/15/17 95,000 90,250
10.00%, due 3/1/16 110,000 117,700
Range Resources Corp.
8.00%, due 5/15/19 70,000 72,625
SandRidge Energy, Inc.
8.00%, due 6/1/18 (b) 70,000 69,300
Stone Energy Corp.
6.75%, due 12/15/14 100,000 83,000
Venoco, Inc.
8.75%, due 12/15/11 1,000 1,025
Whiting Petroleum Corp.
7.00%, due 2/1/14 300,000 298,875
-------------
3,201,537
-------------
</Table>
18 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
OIL & GAS SERVICES 0.1%
Allis-Chalmers Energy, Inc.
9.00%, due 1/15/14 $ 44,000 $ 37,180
Complete Production
Services, Inc.
8.00%, due 12/15/16 100,000 94,750
-------------
131,930
-------------
PACKAGING & CONTAINERS 0.2%
Owens-Brockway Glass
Container, Inc.
7.375%, due 5/15/16 140,000 141,400
Silgan Holdings, Inc.
7.25%, due 8/15/16 (b) 55,000 55,825
-------------
197,225
-------------
PHARMACEUTICALS 0.8%
Catalent Pharma Solutions,
Inc.
10.25%, due 4/15/15 (i) 152,431 132,615
Medco Health Solutions,
Inc.
7.25%, due 8/15/13 240,000 269,180
NBTY, Inc.
7.125%, due 10/1/15 60,000 58,650
Valeant Pharmaceuticals
International
8.375%, due 6/15/16 (b) 220,000 224,950
Warner Chilcott Corp.
8.75%, due 2/1/15 110,000 113,850
-------------
799,245
-------------
PIPELINES 0.7%
ANR Pipeline Co.
9.625%, due 11/1/21 45,000 62,395
Copano Energy LLC
8.125%, due 3/1/16 115,000 112,412
Copano Energy LLC/Copano
Energy Finance Corp.
7.75%, due 6/1/18 55,000 52,938
El Paso Natural Gas Co.
7.50%, due 11/15/26 25,000 27,183
7.625%, due 8/1/10 205,000 204,361
MarkWest Energy Partners,
L.P./
MarkWest Energy Finance
Corp.
Series B
6.875%, due 11/1/14 145,000 137,750
8.50%, due 7/15/16 40,000 40,600
8.75%, due 4/15/18 70,000 71,575
Regency Energy
Partners/Regency Energy
Finance Corp.
8.375%, due 12/15/13 50,000 51,250
-------------
760,464
-------------
REAL ESTATE INVESTMENT TRUSTS 0.5%
Host Hotels & Resorts, L.P.
6.875%, due 11/1/14 115,000 112,413
Host Marriott, L.P.
6.375%, due 3/15/15 40,000 38,200
Series M
7.00%, due 8/15/12 40,000 40,150
Omega Healthcare Investors,
Inc.
7.00%, due 4/1/14 125,000 122,187
Trustreet Properties, Inc.
7.50%, due 4/1/15 180,000 190,777
-------------
503,727
-------------
RETAIL 0.9%
Amerigas Partners, L.P.
7.25%, due 5/20/15 60,000 59,100
AutoNation, Inc.
2.284%, due 4/15/13 (a) 60,000 56,700
CVS Caremark Corp.
5.789%, due 1/10/26
(b)(e) 92,626 89,558
Freedom Group, Inc.
10.25%, due 8/1/15 (b) 80,000 84,400
Home Depot, Inc.
5.40%, due 3/1/16 60,000 63,320
Penske Auto Group, Inc.
7.75%, due 12/15/16 65,000 62,725
Rite Aid Corp.
9.375%, due 12/15/15 30,000 24,900
9.50%, due 6/15/17 90,000 73,350
Star Gas Partners,
L.P./Star Gas
Finance Co.
Series B
10.25%, due 2/15/13 171,000 172,710
Susser Holdings LLC/Susser
Finance Corp.
10.625%, due 12/15/13 160,000 165,600
TJX Cos., Inc.
6.95%, due 4/15/19 40,000 46,986
Wendy's International, Inc.
6.25%, due 11/15/11 25,000 25,625
-------------
924,974
-------------
SOFTWARE 0.1%
SS&C Technologies, Inc.
11.75%, due 12/1/13 145,000 152,250
-------------
TELECOMMUNICATIONS 2.0%
Alcatel-Lucent USA, Inc.
6.45%, due 3/15/29 285,000 223,725
CC Holdings GS V LLC/Crown
Castle GS III Corp.
7.75%, due 5/1/17 (b) 230,000 241,500
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Centennial Cellular
Operating Co./
Centennial Communications
Corp.
10.125%, due 6/15/13 $ 170,000 $ 175,525
Centennial Communications
Corp./
Cellular Operating Co.
LLC/
Puerto Rico Operations
8.125%, due 2/1/14 25,000 25,844
DigitalGlobe, Inc.
10.50%, due 5/1/14 (b) 65,000 70,200
GCI, Inc.
7.25%, due 2/15/14 135,000 130,612
New Cingular Wireless
Services, Inc.
8.75%, due 3/1/31 150,000 197,790
NII Capital Corp.
10.00%, due 8/15/16 (b) 200,000 211,000
PAETEC Holding Corp.
9.50%, due 7/15/15 5,000 4,575
Qwest Communications
International, Inc.
7.25%, due 2/15/11 190,000 190,000
Qwest Corp.
7.50%, due 10/1/14 180,000 181,800
8.875%, due 3/15/12 100,000 105,250
Sprint Nextel Corp.
8.375%, due 8/15/17 205,000 197,825
Verizon Wireless Capital
LLC
7.375%, due 11/15/13 (b) 100,000 115,591
-------------
2,071,237
-------------
TEXTILES 0.3%
INVISTA
9.25%, due 5/1/12 (b) 355,000 358,550
-------------
TRANSPORTATION 0.2%
KAR Holdings, Inc.
8.75%, due 5/1/14 10,000 10,113
10.00%, due 5/1/15 190,000 194,750
-------------
204,863
-------------
TRUCKING & LEASING 0.1%
Greenbrier Cos., Inc.
8.375%, due 5/15/15 70,000 53,988
-------------
Total Corporate Bonds
(Cost $31,558,803) 31,982,437
-------------
FOREIGN BONDS 24.0%
- -------------------------------------------------------------------
ARGENTINA 1.4%
V Republic of Argentina
2.50%, due 12/31/38 4,000,000 1,420,000
-------------
AUSTRALIA 1.8%
V Australia Government
Bond
6.25%, due 6/15/14 A$ 2,005,000 1,873,076
-------------
AUSTRIA 1.0%
Republic of Austria
4.65%, due 1/15/18 E 643,000 1,027,405
-------------
BRAZIL 2.0%
V Brazil Notas do Tesouro
Nacional
Series F
10.00%, due 1/1/14 B$ 2,790,000 1,506,107
Federal Republic of Brazil
5.625%, due 1/7/41 $ 400,000 376,000
7.125%, due 1/20/37 200,000 230,500
-------------
2,112,607
-------------
CANADA 0.2%
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 225,000 237,227
-------------
COLOMBIA 0.7%
Republic of Colombia
6.125%, due 1/18/41 $ 400,000 380,000
8.125%, due 5/21/24 300,000 355,500
-------------
735,500
-------------
EL SALVADOR 0.4%
Republic of El Salvador
7.65%, due 6/15/35 200,000 200,000
8.25%, due 4/10/32 (b) 200,000 204,000
-------------
404,000
-------------
GABON 0.3%
Gabonese Republic
8.20%, due 12/12/17 (b) 300,000 309,375
-------------
GERMANY 4.7%
V Republic of Germany
3.75%, due 1/4/17 2,135,000 3,312,867
4.25%, due 7/4/14 1,015,000 1,614,284
-------------
4,927,151
-------------
</Table>
20 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS (CONTINUED)
INDONESIA 2.6%
V Republic of Indonesia
10.375%, due 5/4/14 (b) $ 650,000 $ 780,000
11.625%, due 3/4/19 (b) 1,400,000 1,932,000
-------------
2,712,000
-------------
LEBANON 0.3%
Republic of Lebanon
Series Reg S
8.25%, due 4/12/21 275,000 301,813
-------------
LITHUANIA 0.5%
Republic of Lithuania
6.75%, due 1/15/15 (b) 500,000 502,993
-------------
MEXICO 1.6%
V United Mexican States
7.25%, due 12/15/16 M$ 23,075,000 1,697,803
-------------
PANAMA 1.1%
Republic of Panama
6.70%, due 1/26/36 $ 243,000 255,150
8.875%, due 9/30/27 325,000 409,500
9.375%, due 4/1/29 350,000 476,000
-------------
1,140,650
-------------
PERU 0.3%
Republic of Peru
6.55%, due 3/14/37 300,000 312,000
-------------
PHILIPPINES 0.3%
Republic of Philippines
9.50%, due 2/2/30 250,000 331,875
-------------
RUSSIA 0.7%
Russian Federation
7.50%, due 3/31/30 705,000 784,383
-------------
SOUTH AFRICA 1.0%
Republic of South Africa
6.875%, due 5/27/19 900,000 1,004,625
-------------
SRI LANKA 0.2%
Republic of Sri Lanka
7.40%, due 1/22/15 (b) 200,000 200,000
-------------
TURKEY 0.8%
Republic of Turkey
(zero coupon), due
1/13/10 TRY 234,000 153,440
7.375%, due 2/5/25 470,000 515,825
7.50%, due 7/14/17 200,000 223,250
-------------
892,515
-------------
UKRAINE 0.3%
Ukraine Government
6.875%, due 3/4/11 (b) 175,000 161,000
7.65%, due 6/11/13 (b) 200,000 170,000
-------------
331,000
-------------
URUGUAY 0.7%
Republic of Uruguay
9.25%, due 5/17/17 450,000 556,875
Republica of Uruguay
6.875%, due 9/28/25 200,000 207,000
-------------
763,875
-------------
VENEZUELA 1.1%
Republic of Venezuela
6.00%, due 12/9/20 1,500,000 862,500
9.25%, due 5/7/28 475,000 338,437
-------------
1,200,937
-------------
Total Foreign Bonds
(Cost $22,217,681) 25,222,810
-------------
LOAN ASSIGNMENTS & PARTICIPATIONS 1.3% (J)
- -------------------------------------------------------------------
AEROSPACE & DEFENSE 0.1%
DAE Aviation Holdings, Inc.
Tranche B2 Term Loan
4.01%, due 7/31/14 46,449 43,198
Tranche B1 Term Loan
4.04%, due 7/31/14 47,479 44,155
-------------
87,353
-------------
AUTO MANUFACTURERS 0.1%
Ford Motor Co.
Term Loan
3.288%, due 12/16/13 168,710 149,967
-------------
ELECTRIC 0.3%
Calpine Corp.
First Priority Term Loan
3.165%, due 3/29/14 60,963 55,971
Texas Competitive Electric
Holdings Co. LLC
Term Loan B2
3.745%, due 10/10/14 225,400 174,227
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
ELECTRIC (CONTINUED)
Term Loan B3
3.745%, due 10/10/14 $ 98,000 $ 75,038
-------------
305,236
-------------
HEALTH CARE--SERVICES 0.4%
Community Health Systems,
Inc.
Term Loan
2.61%, due 7/25/14 180,466 168,036
HCA, Inc.
Term Loan B
2.533%, due 11/18/13 303,544 282,339
-------------
450,375
-------------
MACHINERY 0.0%++
BHM Technologies LLC
Exit Term Loan B
8.50%, due 11/26/10
(c)(e) 110,544 32,610
-------------
MEDIA 0.3%
Charter Communications
Operating LLC
Replacement Term Loan
6.25%, due 3/6/14 99,242 89,974
Nielsen Finance LLC
Class A Term Loan
2.244%, due 8/9/13 179,355 166,551
-------------
256,525
-------------
RETAIL 0.1%
Toys 'R' Us (Delaware),
Inc.
Term Loan
5.244%, due 1/19/13 145,000 131,769
-------------
Total Loan Assignments &
Participations
(Cost $1,733,340) 1,413,835
-------------
MORTGAGE-BACKED SECURITIES 0.4%
- -------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 0.4%
Banc of America Commercial
Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 249,313 251,484
Bayview Commercial Asset
Trust
Series 2006-4A, Class A1
0.474%, due 12/25/36
(a)(b)(c) 79,263 48,700
LB-UBS Commercial Mortgage
Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 73,954 74,074
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36
(b)(e) 40,000 36,800
-------------
Total Mortgage-Backed
Securities
(Cost $442,019) 411,058
-------------
MUNICIPAL BONDS 1.4%
- -------------------------------------------------------------------
CALIFORNIA 1.0%
State of California
Series 3
7.50%, due 4/1/34 1,000,000 1,040,060
-------------
OHIO 0.2%
Buckeye, Ohio, Tobacco
Settlement Financing
Authority
5.75%, due 6/1/34 250,000 210,237
-------------
TEXAS 0.1%
Harris County Texas
Industrial Development
Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 120,000 120,077
-------------
WEST VIRGINIA 0.1%
Tobacco Settlement Finance
Authority of West
Virginia
7.467%, due 6/1/47 100,000 79,590
-------------
Total Municipal Bonds
(Cost $1,560,987) 1,449,964
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 6.6%
- -------------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATION) 0.1%
Series 2006-B1, Class AB
6.00%, due 6/25/16 74,006 77,006
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) 0.2%
3.00%, due 8/1/10 39,535 39,783
4.31%, due 3/1/35 (a) 58,457 60,651
5.043%, due 6/1/35 (a) 138,286 144,696
-------------
245,130
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 1.3%
4.625%, due 5/1/13 1,135,000 1,198,106
5.125%, due 1/2/14 150,000 159,956
-------------
1,358,062
-------------
</Table>
22 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
V FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 1.6%
5.50%, due 10/1/38 $ 1,435,240 $ 1,515,996
6.00%, due 9/1/34 65,149 69,713
6.00%, due 9/1/35 67,499 72,412
-------------
1,658,121
-------------
FREDDIE MAC (COLLATERALIZED MORTGAGE OBLIGATION) 0.1%
Series 2632, Class NH
3.50%, due 6/15/13 110,318 112,487
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITY) 0.0%++
6.00%, due 8/15/32 2 2
-------------
OVERSEAS PRIVATE INVESTMENT CORPORATION 1.1%
5.142%, due 12/15/23 1,110,024 1,179,700
-------------
UNITED STATES TREASURY BONDS 0.6%
3.50%, due 2/15/39 570,000 499,640
4.25%, due 5/15/39 200,000 200,469
-------------
700,109
-------------
UNITED STATES TREASURY NOTES 0.5%
3.625%, due 8/15/19 115,000 117,210
4.75%, due 8/15/17 80,000 88,931
4.875%, due 8/15/16 270,000 303,181
-------------
509,322
-------------
UNITED STATES TREASURY INFLATION INDEXED NOTE 1.1%
2.625%, due 7/15/17 1,041,240 1,145,771
-------------
Total U.S. Government &
Federal Agencies
(Cost $6,565,781) 6,985,710
-------------
YANKEE BONDS 24.0% (K)
- -------------------------------------------------------------------
ADVERTISING 1.0%
Cia de Saneamento Basico do
Estado de Sao Paulo
7.50%, due 11/3/16 (b) 215,000 233,812
Independencia
International, Ltd.
9.875%, due 1/31/17 (f) 100,000 20,000
Odebrecht Finance, Ltd.
7.50%, due 10/18/17 (b) 250,000 254,375
TNK-BP Finance S.A.
7.875%, due 3/13/18 (b) 200,000 202,500
UBS Luxembourg S.A. for
OJSC
Vimpel Communications
Series Reg S
8.25%, due 5/23/16 (b) 300,000 304,125
-------------
1,014,812
-------------
AEROSPACE & DEFENSE 0.2%
Embraer Overseas, Ltd.
6.375%, due 1/15/20 200,000 189,500
-------------
AIRLINES 0.4%
TAM Capital 2, Inc.
9.50%, due 1/29/20 (b) 400,000 377,000
-------------
BANKS 2.0%
Industrial Bank of Korea
7.125%, due 4/23/14 (b) 300,000 330,423
Kookmin Bank
7.25%, due 5/14/14 (b) 500,000 553,831
National Agricultural Co.
5.00%, due 9/30/14 (b) 400,000 407,131
Royal Bank of Scotland
Group PLC
6.40%, due 10/21/19 50,000 50,987
Royal Bank of Scotland PLC
(The)
4.875%, due 8/25/14 (b) 125,000 127,220
RSHB Capital S.A. for OJSC
Russian Agricultural Bank
6.97%, due 9/21/16 400,000 386,000
Woori Bank
7.00%, due 2/2/15 (b) 200,000 215,947
-------------
2,071,539
-------------
BEVERAGES 0.1%
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 50,000 53,569
-------------
BUILDING MATERIALS 0.2%
Asia Aluminum Holdings,
Ltd.
8.00%, due 12/23/11
(b)(f) 500,000 78,750
Voto-Votorantim Overseas
Trading Operations N.V.
6.625%, due 9/25/19 (b) 200,000 192,000
-------------
270,750
-------------
CHEMICALS 0.1%
Nova Chemicals Corp.
4.538%, due 11/15/13 (a) 65,000 58,500
8.375%, due 11/1/16 (b) 80,000 80,400
-------------
138,900
-------------
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
COAL 0.2%
Raspadskaya Securities,
Ltd.
7.50%, due 5/22/12 $ 260,000 $ 259,025
-------------
DIVERSIFIED FINANCIAL SERVICES 0.7%
Macquarie Group, Ltd.
7.625%, due 8/13/19 (b) 700,000 773,185
-------------
ELECTRIC 2.7%
Abu Dhabi National Energy
Co.
Series Reg S
7.25%, due 8/1/18 500,000 535,625
7.25%, due 8/1/18 (b) 225,000 242,903
AES China Generating Co.,
Ltd.
8.25%, due 6/26/10 227,000 221,233
Centrais Eletricas
Brasileiras S.A.
6.875%, due 7/30/19 (b) 500,000 523,750
Intergen N.V.
9.00%, due 6/30/17 (b) 65,000 67,600
Korea Hydro & Nuclear Power
6.25%, due 6/17/14 (b) 400,000 428,209
Majapahit Holding B.V.
8.00%, due 8/7/19 (b) 400,000 408,000
Taqa Abu Dhabi National
Energy Co.
6.25%, due 9/16/19 (b) 400,000 403,124
-------------
2,830,444
-------------
ENERGY--ALTERNATE SOURCES 0.1%
Paiton Energy Funding B.V.
9.34%, due 2/15/14 96,105 97,066
-------------
ENGINEERING & CONSTRUCTION 0.4%
Odebrecht Finance, Ltd.
7.00%, due 4/21/20 (b) 400,000 378,000
-------------
ENTERTAINMENT 0.6%
Galaxy Entertainment
Finance Co., Ltd.
Series Reg S
9.875%, due 12/15/12 500,000 490,000
9.875%, due 12/15/12 (b) 125,000 122,500
-------------
612,500
-------------
FOREST PRODUCTS & PAPER 0.2%
Catalyst Paper Corp.
Series D
8.625%, due 6/15/11 40,000 25,200
Smurfit Capital Funding PLC
7.50%, due 11/20/25 300,000 237,000
-------------
262,200
-------------
HEALTH CARE--PRODUCTS 0.2%
DJO Finance LLC/DJO Finance
Corp.
10.875%, due 11/15/14 255,000 265,838
-------------
HOLDING COMPANY--DIVERSIFIED 0.4%
Noble Group, Ltd.
6.75%, due 1/29/20 (b) 400,000 400,471
-------------
HOME BUILDERS 0.5%
Corporacion GEO SAB de C.V.
8.875%, due 9/25/14 (b) 500,000 516,250
-------------
HOUSEHOLD PRODUCTS & WARES 0.4%
Controladora Mabe S.A. C.V.
7.875%, due 10/28/19 (b) 400,000 384,000
-------------
INSURANCE 0.2%
Allied World Assurance Co.
Holdings, Ltd.
7.50%, due 8/1/16 130,000 135,572
Fairfax Financial Holdings,
Ltd.
7.375%, due 4/15/18 10,000 9,700
7.75%, due 7/15/37 35,000 31,850
8.30%, due 4/15/26 10,000 9,500
-------------
186,622
-------------
LEISURE TIME 0.3%
Royal Caribbean Cruises,
Ltd.
8.75%, due 2/2/11 225,000 227,250
Willis Group Holdings, Ltd.
(Trinity Acquisition,
Ltd.)
12.875%, due 12/31/16
(b)(c)(e) 85,000 114,696
-------------
341,946
-------------
MEDIA 1.3%
British Sky Broadcasting
Group PLC
9.50%, due 11/15/18 (b) 135,000 172,006
BSKYB Finance UK PLC
6.50%, due 10/15/35 (b) 95,000 96,967
Grupo Televisa S.A.
6.00%, due 5/15/18 290,000 292,843
Quebecor Media, Inc.
7.75%, due 3/15/16 240,000 237,000
Videotron, Ltee
6.375%, due 12/15/15 400,000 390,000
9.125%, due 4/15/18 (b) 150,000 162,375
-------------
1,351,191
-------------
MINING 1.7%
ALROSA Finance S.A.
8.875%, due 11/17/14 700,000 696,500
Rio Tinto Finance USA, Ltd.
9.00%, due 5/1/19 15,000 18,663
</Table>
24 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
MINING (CONTINUED)
Vale Overseas, Ltd.
6.875%, due 11/21/36 $ 1,100,000 $ 1,106,710
-------------
1,821,873
-------------
MISCELLANEOUS--MANUFACTURING 0.3%
Siemens
Financieringsmaatschappij
N.V.
5.75%, due 10/17/16 (b) 215,000 233,667
Tyco Electronics Group S.A.
6.00%, due 10/1/12 75,000 79,882
-------------
313,549
-------------
OIL & GAS 5.6%
Citic Resources Finance,
Ltd.
6.75%, due 5/15/14 (b) 200,000 191,500
Ecopetrol S.A.
7.625%, due 7/23/19 (b) 200,000 218,000
V Gaz Capital S.A.
8.125%, due 7/31/14 (b) 1,500,000 1,584,450
KazMunaiGaz Finance Sub
B.V.
11.75%, due 1/23/15 (b) 500,000 597,500
Nexen, Inc.
7.50%, due 7/30/39 600,000 662,623
Petroleos de Venezuela S.A.
5.25%, due 4/12/17 770,000 451,220
V Petroleum Co. of
Trinidad & Tobago, Ltd.
9.75%, due 8/14/19 (b) 1,700,000 1,929,500
TNK-BP Finance S.A.
7.50%, due 7/18/16 (b) 215,000 216,613
-------------
5,851,406
-------------
PHARMACEUTICALS 0.1%
Angiotech Pharmaceuticals,
Inc.
4.111%, due 12/1/13 (a) 75,000 62,250
-------------
RETAIL 0.4%
Arcos Dorados B.V.
7.50%, due 10/1/19 (b) 400,000 386,000
-------------
SAVINGS & LOANS 2.1%
ADCB Finance Cayman, Ltd.
4.75%, due 10/8/14 (b) 800,000 798,617
CCL Finance, Ltd.
9.50%, due 8/15/14 (b) 500,000 531,875
Grupo Petrotemex S.A. de
C.V.
9.50%, due 8/19/14 (b) 400,000 415,000
TDIC Finance, Ltd.
6.50%, due 7/2/14 (b) 250,000 272,229
TransCapitalInvest, Ltd.
for
OJSC AK Transneft
8.70%, due 8/7/18 (b) 200,000 224,000
-------------
2,241,721
-------------
TELECOMMUNICATIONS 1.6%
Axtel SAB de CV
9.00%, due 9/22/19 (b) 200,000 206,000
Inmarsat Finance PLC
10.375%, due 11/15/12 250,000 258,125
Intelsat Subsidiary Holding
Co., Ltd.
8.50%, due 1/15/13 220,000 220,825
8.875%, due 1/15/15 (b) 15,000 15,056
8.875%, due 1/15/15 295,000 297,581
Millicom International
Cellular S.A.
10.00%, due 12/1/13 165,000 170,569
Nortel Networks, Ltd.
10.125%, due 7/15/13 (f) 25,000 14,313
10.75%, due 7/15/16 (f) 180,000 103,050
Qtel International Finance
7.875%, due 6/10/19 (b) 200,000 233,386
Telecom Italia Capital S.A.
6.20%, due 7/18/11 140,000 148,951
Virgin Media Finance PLC
9.125%, due 8/15/16 65,000 66,950
-------------
1,734,806
-------------
TRANSPORTATION 0.0%++
Kansas City Southern de
Mexico
S.A. de C.V.
7.375%, due 6/1/14 30,000 28,350
-------------
Total Yankee Bonds
(Cost $24,889,913) 25,214,763
-------------
Total Long-Term Bonds
(Cost $93,089,728) 96,706,571
-------------
<Caption>
SHARES
COMMON STOCKS 0.1%
- -------------------------------------------------------------------
AIRLINES 0.0%++
Delta Air Lines, Inc. (h) 33 236
-------------
COMMERCIAL SERVICES 0.0%++
World Color Press, Inc. (h) 1,086 9,774
-------------
MACHINERY 0.0%++
BHM Technologies Holdings,
Inc. (c)(e)(f) 7,233 73
-------------
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MEDIA 0.0%++
Adelphia Contingent Value
Vehicle (c)(e)(h) 100,330 $ 1,003
-------------
SOFTWARE 0.0%++
QuadraMed Corp. (c)(h) 4,714 34,412
-------------
TELECOMMUNICATIONS 0.1%
Loral Space &
Communications, Ltd. (h) 1,410 37,252
-------------
Total Common Stocks
(Cost $211,049) 82,750
-------------
CONVERTIBLE PREFERRED STOCKS 0.9%
- -------------------------------------------------------------------
BANKS 0.2%
Bank of America Corp.
7.25% Series L 181 151,559
Wells Fargo & Co.
7.50% Series L 100 89,500
-------------
241,059
-------------
CHEMICALS 0.1%
Celanese Corp.
4.25% 3,335 117,225
-------------
LEISURE TIME 0.0%++
Callaway Golf Co.
7.50% (b) 200 23,200
-------------
MINING 0.1%
Freeport-McMoRan Copper &
Gold, Inc.
6.75% 510 54,570
Vale Capital, Ltd.
5.50% 1,000 49,050
-------------
103,620
-------------
OIL & GAS 0.0%++
Whiting Petroleum Corp.
6.25% 100 15,227
-------------
PHARMACEUTICALS 0.2%
Merck & Co., Inc.
6.00% 840 202,650
-------------
SOFTWARE 0.2%
QuadraMed Corp.
5.50% (c)(g) 10,400 158,808
-------------
TELECOMMUNICATIONS 0.1%
Crown Castle International
Corp.
6.25% 1,300 68,900
-------------
Total Convertible Preferred
Stocks
(Cost $1,038,182) 930,689
-------------
PREFERRED STOCK 0.0%++
- -------------------------------------------------------------------
MACHINERY 0.0%++
BHM Technologies Holdings,
Inc.
10.00% (c)(e)(f) 87 1
-------------
Total Preferred Stock
(Cost $0) 1
-------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS 0.0%++
- -------------------------------------------------------------------
COMMERCIAL SERVICES 0.0%++
World Color Press, Inc.
Strike Price $13.00
Expires 7/20/14 (h) 615 2,515
Strike Price $16.30
Expires 7/20/14 (h) 615 1,796
-------------
Total Warrants
(Cost $23,321) 4,311
-------------
</Table>
26 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 5.2%
- -------------------------------------------------------------------
REPURCHASE AGREEMENT 5.2%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$5,453,433
(Collateralized by a
United States Treasury
Bill with a rate of
0.105% and a maturity
date of 3/18/10, with a
Principal Amount of
$5,565,000 and a Market
Value of $5,562,774) $ 5,453,429 $ 5,453,429
-------------
Total Short-Term Investment
(Cost $5,453,429) 5,453,429
-------------
Total Investments
(Cost $99,815,709) (n) 98.1% 103,177,751
Cash and Other Assets,
Less Liabilities 1.9 2,021,022
----- ------------
Net Assets 100.0% $ 105,198,773
===== ============
</Table>
<Table>
<Caption>
UNREALIZED
CONTRACTS APPRECIATION
LONG (DEPRECIATION) (L)
FUTURES CONTRACTS (0.0%)++
- ----------------------------------------------------------
United States Treasury
Note
December 2009 (10 Year)
(m) 22 $ 46,856
--------
Total Futures Contracts
Long
(Settlement Value
$2,609,406) 46,856
--------
<Caption>
CONTRACTS
SHORT
United States Treasury
Note December 2009 (2
Year) (m) (42) (76,907)
--------
Total Futures Contracts
Short
(Settlement Value
$9,139,594) (76,907)
--------
Total Futures Contracts
(Settlement Value
$6,530,188) $(30,051)
========
</Table>
<Table>
<Caption>
+++ On a daily basis New York Life
Investments 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) Floating rate. Rate shown is the rate in
effect at October 31, 2009.
(b) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Illiquid security. The total market
value of these securities at October 31,
2009 is $723,200, which represents 0.7%
of the Fund's net assets.
(d) Subprime mortgage investment and other
asset-backed securities. The total market
value of the securities at October 31,
2009 is $210,511, which represents 0.2%
of the Fund's net assets.
(e) Fair valued security. The total market
value of these securities at October 31,
2009 is $332,324, which represents 0.3%
of the Fund's net assets.
(f) Issue in default.
(g) Restricted security.
(h) Non-income producing security.
(i) PIK ("Payment in Kind")--interest or
dividend payment is made with additional
securities.
(j) Floating Rate Loan--generally pays
interest at rates which are periodically
re-determined at a margin above the
London Inter-Bank Offered Rate ("LIBOR")
or other short-term rates. The rate shown
is the rate(s) in effect at October 31,
2009. Floating Rate Loans are generally
considered restrictive in that the Fund
is ordinarily contractually obligated to
receive consent from the Agent Bank
and/or borrower prior to disposition of a
Floating Rate Loan.
(k) Yankee Bond--dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(l) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2009.
(m) At October 31, 2009, cash in the amount
of $12,720 is segregated as collateral
for futures contracts with the broker.
(n) At October 31, 2009, cost is $100,133,477
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 6,976,199
Gross unrealized depreciation (3,931,925)
-----------
Net unrealized appreciation $ 3,044,274
===========
</Table>
<Table>
The following abbreviations are used in the
above portfolio:
A$--Australian Dollar
B$--Brazilian Real
C$--Canadian Dollar
E--Euro
M$--Mexican Peso
TRY--Turkish Lira
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
27
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets and liabilities.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Long-Term Bonds
Asset-Backed Securities $ -- $ 605,127 $ -- $ 605,127
Convertible Bonds (a) -- 3,420,817 50 3,420,867
Corporate Bonds (b) -- 31,835,346 147,091 31,982,437
Foreign Bonds -- 25,222,810 -- 25,222,810
Loan Assignments & Participations (c) -- 1,381,225 32,610 1,413,835
Mortgage-Backed Securities (d) -- 374,258 36,800 411,058
Municipal Bonds -- 1,449,964 -- 1,449,964
U.S. Government & Federal Agencies -- 6,985,710 -- 6,985,710
Yankee Bonds (e) -- 25,100,067 114,696 25,214,763
---------- ------------ -------- ------------
Total Long-Term Bonds -- 96,375,324 331,247 96,706,571
---------- ------------ -------- ------------
Common Stocks (f) 81,674 -- 1,076 82,750
Convertible Preferred Stocks 907,489 23,200 -- 930,689
Preferred Stock (g) -- -- 1 1
Warrant 4,311 -- -- 4,311
Short-Term Investment
Repurchase Agreement -- 5,453,429 -- 5,453,429
---------- ------------ -------- ------------
Total Investments in Securities 993,474 101,851,953 332,324 103,177,751
---------- ------------ -------- ------------
Other Financial Instruments
Futures Contracts Long (h) 46,856 -- -- 46,856
Foreign Currency Forward Contracts (h) -- 240,591 -- 240,591
---------- ------------ -------- ------------
Total Other Financial Instruments 46,856 240,591 -- 287,447
---------- ------------ -------- ------------
Total Investments in Securities and Other
Financial Instruments $1,040,330 $102,092,544 $332,324 $103,465,198
========== ============ ======== ============
</Table>
(a) The level 3 security valued at $50 is held in Internet within the
Convertible Bonds section of the Portfolio of Investments.
(b) The level 3 securities valued at $260, $8,320, $39,498, $9,455 and $89,558
are held in Commercial Services, Commercial Services, Entertainment, Media
and Retail, respectively, within the Corporate Bonds section of the
Portfolio of Investments.
(c) The level 3 security valued at $32,610 is held in Machinery within the Loan
Assignments & Participations section of the Portfolio of Investments.
(d) The level 3 security valued at $36,800 is held in Commercial Mortgage Loans
(Collateralized Mortgage Obligations) within the Mortgage-Backed Securities
section of the Portfolio of Investments.
(e) The level 3 security valued at $114,696 is held in Leisure Time within the
Yankee Bonds section of the Portfolio of Investments.
(f) The level 3 securities valued at $73 and $1,003 are held in Machinery and
Media, respectively, within the Common Stocks section of the Portfolio of
Investments.
(g) The level 3 security valued at $1 is held in Machinery within the Preferred
Stock section of the Portfolio of Investments.
(h) The value listed for these securities represents the unrealized appreciation
as shown on the Portfolio of Investments or Note 5 of the financial
statements for futures contracts and foreign currency forward contracts,
respectively.
28 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
LIABILITY VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES
IN ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Other Financial Instruments
Futures Contracts Short (a) $(76,907) $ -- $ -- $ (76,907)
Foreign Currency Forward Contracts (a) -- (390,185) -- (390,185)
-------- --------- -------- ---------
Total Other Financial Instruments $(76,907) $(390,185) $-- $(467,092)
======== ========= ======== =========
</Table>
(a) The value listed for these securities represents the unrealized depreciation
as shown on the Portfolio of Investments or Note 5 of the financial
statements for futures contracts and foreign currency forward contracts,
respectively.
The following is a reconciliation of investments in which significant
unobservable inputs (Level 3) were used in determining value:
<Table>
<Caption>
BALANCE CHANGE IN NET NET BALANCE
AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS AS OF
INVESTMENTS OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET NET IN TO OUT OF OCTOBER 31,
IN SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 2009
Long-Term Bonds
Convertible Bonds
Internet $ 50 $ -- $ -- $ -- $ -- $ -- $ -- $-- $ 50
Corporate Bonds
Commercial Services -- -- -- 8,580 -- -- -- -- 8,580
Diversified
Financial Services 69,272 5 (12,939) 30,328 -- (86,666) -- -- --
Entertainment 44,108 1,258 1,325 489 -- (7,682) -- -- 39,498
Media 38,465 -- 5,134 (30,185) 3,728 (7,687) -- -- 9,455
Retail -- -- -- (5,764) -- -- 95,322 -- 89,558
Loan Assignments &
Participations
Machinery -- -- -- (234,402) 267,012 -- -- -- 32,610
Mortgage-Backed
Securities
Commercial Mortgage
Loans
(Collateralized
Mortgage
Obligations) 36,206 -- -- 594 -- -- -- -- 36,800
Yankee Bonds
Leisure Time -- -- -- 29,696 85,000 -- -- -- 114,696
Common Stocks
Advertising 1 -- (1) -- -- -- -- -- --
Machinery -- -- -- 73 -- -- -- -- 73
Media 55,365 -- (181,729) 127,367 -- -- -- -- 1,003
Preferred Stocks
Machinery -- -- -- 1 -- -- -- -- 1
Real Estate
Investment Trusts 280,988 -- 30,722 (16,815) 264,173 (559,068) -- -- --
Warrant
Media 756 -- (36) (720) -- -- -- -- --
-------- ------ --------- --------- -------- --------- ------- --- --------
Total $525,211 $1,263 $(157,524) $ (90,758) $619,913 $(661,103) $95,322 $-- $332,324
======== ====== ========= ========= ======== ========= ======= === ========
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
INVESTMENTS
STILL HELD AT
INVESTMENTS OCTOBER 31,
IN SECURITIES 2009 (A)
Long-Term Bonds
Convertible Bonds
Internet $ --
Corporate Bonds
Commercial Services 8,580
Diversified
Financial Services --
Entertainment (1,258)
Media (21,747)
Retail (5,764)
Loan Assignments &
Participations
Machinery (234,402)
Mortgage-Backed
Securities
Commercial Mortgage
Loans
(Collateralized
Mortgage
Obligations) 594
Yankee Bonds
Leisure Time 29,696
Common Stocks
Advertising --
Machinery 73
Media --
Preferred Stocks
Machinery 1
Real Estate
Investment Trusts --
Warrant
Media --
---------
Total $(224,227)
=========
</Table>
(a) Included in "Net Change in unrealized appreciation (depreciation) on
investments" in the Statement of Operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
29
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $99,815,709) $103,177,751
Cash denominated in foreign
currencies
(identified cost $180,677) 183,228
Cash collateral on deposit at
broker 12,720
Receivables:
Investment securities sold 2,126,613
Dividends and interest 1,876,701
Fund shares sold 113,001
Variation margin on futures
contracts 5,156
Other assets 16,639
Unrealized appreciation on foreign
currency forward contracts 240,591
------------
Total assets 107,752,400
------------
LIABILITIES:
Payables:
Investment securities purchased 1,789,566
Fund shares redeemed 50,327
NYLIFE Distributors (See Note 3) 42,320
Shareholder communication 41,935
Transfer agent (See Note 3) 41,264
Manager (See Note 3) 38,528
Professional fees 28,325
Custodian 21,310
Trustees 299
Accrued expenses 3,751
Dividend payable 105,817
Unrealized depreciation on foreign
currency forward contracts 390,185
------------
Total liabilities 2,553,627
------------
Net assets $105,198,773
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 125,018
Additional paid-in capital 112,102,734
------------
112,227,752
Accumulated distributions in excess
of net investment income (89,904)
Accumulated net realized loss on
investments, futures transactions
and foreign currency transactions (10,135,660)
Net unrealized appreciation on
investments and futures contracts 3,331,991
Net unrealized depreciation on
translation of other assets and
liabilities in foreign currencies
and foreign currency forward
contracts (135,406)
------------
Net assets $105,198,773
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 12,200,304
============
Shares of beneficial interest
outstanding 1,440,995
============
Net asset value per share
outstanding $ 8.47
Maximum sales charge (4.50% of
offering price) 0.40
------------
Maximum offering price per share
outstanding $ 8.87
============
CLASS A
Net assets applicable to
outstanding shares $ 60,555,013
============
Shares of beneficial interest
outstanding 7,193,805
============
Net asset value per share
outstanding $ 8.42
Maximum sales charge (4.50% of
offering price) 0.40
------------
Maximum offering price per share
outstanding $ 8.82
============
CLASS B
Net assets applicable to
outstanding shares $ 19,175,913
============
Shares of beneficial interest
outstanding 2,285,086
============
Net asset value and offering price
per share outstanding $ 8.39
============
CLASS C
Net assets applicable to
outstanding shares $ 12,948,289
============
Shares of beneficial interest
outstanding 1,544,030
============
Net asset value and offering price
per share outstanding $ 8.39
============
CLASS I
Net assets applicable to
outstanding shares $ 319,254
============
Shares of beneficial interest
outstanding 37,900
============
Net asset value and offering price
per share outstanding $ 8.42
============
</Table>
30 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest (a) $ 5,891,125
Dividends 68,450
-----------
Total income 5,959,575
-----------
EXPENSES:
Manager (See Note 3) 567,745
Transfer agent--Investor Class
(See Note 3) 48,968
Transfer agent--Class A (See Note
3) 53,415
Transfer agent--Classes B and C
(See Note 3) 129,204
Transfer agent--Class I (See Note
3) 304
Distribution/Service--Investor
Class (See Note 3) 27,293
Distribution/Service--Class A (See
Note 3) 122,996
Service--Class B (See Note 3) 46,182
Service--Class C (See Note 3) 25,679
Distribution--Class B (See Note 3) 138,546
Distribution--Class C (See Note 3) 77,035
Shareholder communication 96,848
Custodian 83,277
Registration 67,244
Professional fees 63,084
Trustees 4,143
Miscellaneous 14,354
-----------
Total expenses before waiver 1,566,317
Expense waiver from Manager (See
Note 3) (160,852)
-----------
Net expenses 1,405,465
-----------
Net investment income 4,554,110
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $(2,876,372)
Futures transactions (92,081)
Foreign currency transactions 836,123
-----------
Net realized loss on investments,
futures transactions and foreign
currency transactions (2,132,330)
-----------
Net change in unrealized
appreciation (depreciation) on:
Investments 20,587,770
Futures contracts (30,051)
Translation of other assets and
liabilities in foreign
currencies and foreign currency
forward contracts (656,365)
-----------
Net change in unrealized
depreciation on investments,
futures contracts and foreign
currency transactions 19,901,354
-----------
Net realized and unrealized gain on
investments, futures transactions
and foreign currency transactions 17,769,024
-----------
Net increase in net assets resulting
from operations $22,323,134
===========
</Table>
(a) Interest recorded net of foreign withholding taxes in the amount of $24,488.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
31
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 4,554,110 $ 5,170,798
Net realized loss on
investments, futures
transactions, written
option transactions and
foreign currency
transactions (2,132,330) (1,570,910)
Net change in unrealized
appreciation (depreciation)
on investments, futures
contracts and foreign
currency transactions 19,901,354 (20,739,571)
---------------------------
Net increase (decrease) in
net assets resulting from
operations 22,323,134 (17,139,683)
---------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (867,386) (352,751)
Class A (3,983,006) (3,249,169)
Class B (1,390,031) (1,127,794)
Class C (732,786) (580,376)
Class I (23,636) (15,760)
---------------------------
(6,996,845) (5,325,850)
---------------------------
Return of capital:
Investor Class (49,062) --
Class A (225,290) --
Class B (78,624) --
Class C (41,448) --
Class I (1,337) --
---------------------------
(395,761) --
---------------------------
Total dividends and
distributions to
shareholders (7,392,606) (5,325,850)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 20,813,801 27,636,704
Net asset value of shares
issued to shareholders in
reinvestment of dividends 5,602,002 4,029,360
Cost of shares redeemed (19,740,811) (34,655,359)
---------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 6,674,992 (2,989,295)
---------------------------
Net increase (decrease)
in net assets 21,605,520 (25,454,828)
NET ASSETS:
Beginning of year 83,593,253 109,048,081
---------------------------
End of year $105,198,773 $ 83,593,253
===========================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of year $ (89,904) $ 1,918,502
===========================
</Table>
32 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 33
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
---------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
---------------------------
2009 2008
Net asset value at
beginning of period $ 7.20 $ 8.86
------- -------
Net investment income (a) 0.40 0.29
Net realized and
unrealized gain (loss)
on investments 1.50 (1.77)
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.02 0.11
------- -------
Total from investment
operations 1.92 (1.37)
------- -------
Less dividends and
distributions:
From net investment
income (0.62) (0.29)
Return of capital (0.03) --
------- -------
Total dividends and
distributions (0.65) (0.29)
------- -------
Net asset value at end of
period $ 8.47 $ 7.20
======= =======
Total investment return
(b) 28.35% (15.88%)(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.26% 5.07% ++
Net expenses 1.42% 1.40% ++
Expenses (before waiver) 1.70% 1.51% ++
Portfolio turnover rate 154%(d) 81% (d)
Net assets at end of
period (in 000's) $12,200 $ 9,990
</Table>
<Table>
<Caption>
CLASS B
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 7.14 $ 8.99 $ 8.89 $ 8.78 $ 8.99
------- ------- ------- ------- -------
Net investment income (a) 0.34 0.37 0.38 0.34 0.32
Net realized and
unrealized gain (loss)
on investments 1.48 (1.95) 0.20 0.18 (0.25)
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.02 0.12 (0.04) (0.01) 0.04
------- ------- ------- ------- -------
Total from investment
operations 1.84 (1.46) 0.54 0.51 0.11
------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income (0.56) (0.39) (0.44) (0.40) (0.32)
Return of capital (0.03) -- -- -- --
------- ------- ------- ------- -------
Total dividends and
distributions (0.59) (0.39) (0.44) (0.40) (0.32)
------- ------- ------- ------- -------
Net asset value at end of
period $ 8.39 $ 7.14 $ 8.99 $ 8.89 $ 8.78
======= ======= ======= ======= =======
Total investment return
(b) 27.35% (16.88%) 6.23% 6.01% 1.23%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 4.54% 4.32% 4.26% 3.85% 3.57%
Net expenses 2.17% 2.11% 2.05% 2.05% 2.09%
Expenses (before waiver) 2.46% 2.20% 2.13% 2.21% 2.15%
Portfolio turnover rate 154%(d) 81% (d) 64% 87%(d) 105%
Net assets at end of
period (in 000's) $19,176 $18,567 $28,069 $34,148 $71,515
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(c) Total return is not annualized.
(d) The portfolio turnover rates not including mortgage dollar rolls were 117%,
72% and 66% for the years ended October 31, 2009, 2008 and 2006, respectively.
</Table>
34 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 7.16 $ 9.02 $ 8.91 $ 8.81 $ 9.01
------- ------- ------- ------- -------
0.41 0.44 0.45 0.40 0.39
1.49 (1.96) 0.21 0.18 (0.24)
0.02 0.12 (0.04) (0.01) 0.04
------- ------- ------- ------- -------
1.92 (1.40) 0.62 0.57 0.19
------- ------- ------- ------- -------
(0.62) (0.46) (0.51) (0.47) (0.39)
(0.04) -- -- -- --
------- ------- ------- ------- -------
(0.66) (0.46) (0.51) (0.47) (0.39)
------- ------- ------- ------- -------
$ 8.42 $ 7.16 $ 9.02 $ 8.91 $ 8.81
======= ======= ======= ======= =======
28.56% (16.27%) 7.14% 6.67% 2.11%
5.41% 5.13% 5.01% 4.60% 4.32%
1.27% 1.30% 1.30% 1.30% 1.34%
1.37% 1.34% 1.39% 1.46% 1.40%
154%(d) 81% (d) 64% 87%(d) 105%
$60,555 $45,293 $68,637 $65,566 $40,076
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 7.14 $ 8.99 $ 8.89 $ 8.78 $ 8.99
------- ------- ------- ------- -------
0.34 0.37 0.38 0.34 0.32
1.48 (1.95) 0.20 0.18 (0.25)
0.02 0.12 (0.04) (0.01) 0.04
------- ------- ------- ------- -------
1.84 (1.46) 0.54 0.51 0.11
------- ------- ------- ------- -------
(0.56) (0.39) (0.44) (0.40) (0.32)
(0.03) -- -- -- --
------- ------- ------- ------- -------
(0.59) (0.39) (0.44) (0.40) (0.32)
------- ------- ------- ------- -------
$ 8.39 $ 7.14 $ 8.99 $ 8.89 $ 8.78
======= ======= ======= ======= =======
27.36% (16.88%) 6.23% 6.01% 1.23%
4.50% 4.32% 4.26% 3.85% 3.57%
2.17% 2.11% 2.05% 2.05% 2.09%
2.45% 2.20% 2.13% 2.21% 2.15%
154%(d) 81% (d) 64% 87%(d) 105%
$12,948 $ 9,484 $12,081 $12,355 $14,004
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
35
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
-----------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of year $ 7.17 $ 9.02 $ 8.91 $ 8.81 $ 9.02
------ ------- ------ ------ ------
Net investment income (a) 0.43 0.47 0.48 0.43 0.42
Net realized and
unrealized gain (loss)
on investments 1.48 (1.94) 0.21 0.18 (0.25)
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.02 0.11 (0.04) (0.01) 0.04
------ ------- ------ ------ ------
Total from investment
operations 1.93 (1.36) 0.65 0.60 0.21
------ ------- ------ ------ ------
Less dividends and
distributions:
From net investment
income (0.64) (0.49) (0.54) (0.50) (0.42)
Return of capital (0.04) -- -- -- --
------ ------- ------ ------ ------
Total dividends and
distributions (0.68) (0.49) (0.54) (0.50) (0.42)
------ ------- ------ ------ ------
Net asset value at end of
year $ 8.42 $ 7.17 $ 9.02 $ 8.91 $ 8.81
====== ======= ====== ====== ======
Total investment return
(b) 28.78% (15.86%) 7.50% 7.09% 2.32%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.75% 5.49% 5.37% 4.94% 4.69%
Net expenses 0.95% 0.96% 0.96% 0.96% 0.97%
Expenses (before waiver) 1.12% 1.03% 1.04% 1.12% 1.03%
Portfolio turnover rate 154%(d) 81% (d) 64% 87%(d) 105%
Net assets at end of year
(in 000's) $ 319 $ 259 $ 262 $ 199 $ 232
</Table>
<Table>
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) The portfolio turnover rates not including mortgage dollar rolls were 117%,
72% and 66% for the years ended October 31, 2009, 2008 and 2006, respectively.
</Table>
36 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Diversified Income Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares and Class B
shares commenced operations on February 28, 1997. Class C shares commenced
operations on September 1, 1998. Class I shares commenced operations on January
2, 2004. Investor Class shares commenced operations on February 28, 2008.
Investor Class and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are offered at NAV and 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 and service 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 provide current income and competitive
overall return by investing primarily in domestic and foreign debt securities.
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 (as defined in Note 3(A)),
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. Options contracts are valued at the last posted
settlement price on the market where such options are principally traded.
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 NAVs as of the close of the New York Stock Exchange on the
valuation date.
Foreign currency forward contracts are valued at their fair market values
determined on the basis of the mean between the last current bid and ask prices
based on dealer or exchange quotations.
Loan assignments, participations and commitments are valued at the average of
bid quotations obtained from a pricing service. The Trust has engaged an
independent pricing service to provide market value quotations from dealers in
loans.
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 ("short-term investments") 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
mainstayinvestments.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, under normal conditions, it would be open. At
October 31, 2009, the Fund held securities with a value of $332,324 that were
valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issuer in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3(A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures. At October 31, 2009, foreign securities
held by the Fund were not fair valued.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2009, maximized the use of observable inputs and minimized the
use of unobservable inputs. The Fund may have utilized some of the following
fair value techniques: multi-dimensional relational pricing models, option
adjusted spread pricing and estimating the price that would have prevailed in a
liquid market for an international equity security given information available
at the time of evaluation, when there are significant events after the close of
local foreign markets. For the year ended October 31, 2009, there have been no
changes to the fair value methodologies.
Generally, a security is considered illiquid if it cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued. Its illiquidity might prevent the sale of such security at a time when
the Manager or Subadvisor, if any, as defined might wish to sell, and these
securities could have the effect of decreasing the overall level of a Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, requiring a Fund to rely on judgments
that may be somewhat subjective in determining value, which could vary from the
amount that a Fund could realize upon disposition. Difficulty in selling
illiquid securities may result in a loss or may be costly to the Fund. Under the
supervision of the Board of Trustees, the Manager or Subadvisor, if any,
determines the liquidity of a Fund's investments; in doing so, the Manager or
Subadvisor, if any, may consider various factors, including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective purchasers, (3)
the dealer undertakings to make a market, and (4) the nature of the security and
the market in which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Illiquid
securities generally will be valued in such manner, as the Board of Trustees in
good faith deems appropriate to reflect their fair market value.
38 MainStay Diversified Income Fund
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at NAV, 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 securities
purchased, other than short-term investments, 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
investments 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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. These securities are
subject to interest rate risk in the normal course of investing in these
transactions. Premiums received are recorded as assets, and the market value of
the written options are recorded as liabilities. The liabilities are
subsequently adjusted and unrealized appreciation or depreciation is
mainstayinvestments.com 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
recorded to reflect the current value of the options written. Premiums received
from writing options that expire are treated as realized gains. Premiums
received from writing options that are exercised or are cancelled in closing
purchase transactions are added to the proceeds or netted against the amount
paid on the transaction to determine the realized gain or loss. By writing a
covered call option, in exchange for the premium, the Fund foregoes the
opportunity for capital appreciation above the exercise price should the price
of the underlying security or foreign currency increase. The Fund, in exchange
for the premium, accepts the risk of a decline in the market value of the
underlying security or foreign currency below the exercise price. A call option
may be covered by the call writer's owning the underlying security throughout
the option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price. However, as long as the
obligation as the writer continues, the Fund has retained the risk of loss
should the price of the underlying security decline. After writing a put option,
the Fund may incur risk exposure equal to the difference between the exercise
price of the option and the sum of the market value of the underlying security
plus the premium received from the sale of the option. The Fund writes covered
call options to try to realize greater return on the sale of a stock. The Fund
writes put options to help protect against unanticipated adverse developments.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing. The Fund may purchase put options on its securities or foreign
currencies to protect against a decline in the value of the security or foreign
currency or to close out covered written put positions. The Fund may also
purchase options to seek to enhance returns. Risks may arise from an imperfect
correlation between the change in market value of the securities or foreign
currencies held by the Fund and the prices of options relating to the securities
or foreign currencies purchased or sold by the Fund and from the possible lack
of a liquid secondary market for an option. The maximum risk exposure for any
purchased option is limited to the premium initially paid for the option. The
Fund did not invest in purchased or written options during the year ended
October 31, 2009.
(I) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a financial
instrument (i.e., foreign currency, interest rate, security, or securities
index.) The Fund is subject to equity price risk and interest rate risk in the
normal course of investing in these transactions. 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 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 have minimal counterparty risk as they are
conducted through regulated exchanges that guarantee the futures against default
by the counterparty. The Fund invests in futures contracts to help manage the
duration and yield curve of the portfolio while minimizing the exposure to wider
bid/ask spreads in traditional bonds. The Fund's investment in futures contracts
and other derivatives may increase the volatility of the Fund's NAV and may
result in a loss to the Fund.
(J) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations
("loans") are agreements to make money available (a "commitment") to a borrower
in a specified amount, at a specified rate and within a specified time. Such
loans are typically senior, secured and collateralized in nature. The Fund
records an investment when the borrower withdraws money and records interest as
earned. These loans pay interest at rates that are periodically reset by
reference to a base lending rate plus a spread. These base lending rates are
generally the prime rate offered by a designated U.S. bank or the London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants become insolvent or enters into
40 MainStay Diversified Income Fund
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are marked to
market and recorded in the Statement of Assets and Liabilities. At October 31,
2009, the Fund did not hold unfunded commitments.
(K) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign
currency forward contracts, which are agreements to buy or sell currencies of
different countries on a specified future date at a specified rate. The Fund is
subject to foreign currency exchange rate risk in the normal course of investing
in these transactions. During the period the forward contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. Cash movement occurs on
settlement date. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract. The Fund
enters into foreign currency forward contracts to reduce currency risk versus
the benchmark or for trade settlement.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. While a
Fund may enter into forward contracts to reduce currency exchange risks, changes
in currency exchange rates may result in poorer overall performance for the Fund
than if it had not engaged in such transactions. Exchange rate movements can be
large, depending on the currency, and can last for extended periods of time,
affecting the value of the Fund's assets. Moreover, there may be an imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to the risk of currency exchange loss. The unrealized
appreciation on forward contracts reflects the Fund's exposure at valuation date
to credit loss in the event of a counterparty's failure to perform its
obligations. (See Note 5.)
(L) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(M) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. The Fund maintains liquid assets from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(N) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. In the event the Fund does engage in securities lending, the Fund
will lend through its custodian, State
mainstayinvestments.com 41
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Street Bank and Trust Company ("State Street"). State Street will manage the
Fund's cash collateral in accordance with the Lending Agreement between the Fund
and State Street, and indemnify the Fund's portfolio against counterparty risk.
The loans will be 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 will
receive compensation for lending its securities in the form of fees or retain a
portion of interest on the investment of any cash received as collateral. The
Fund also will continue 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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(O) 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 6.)
(P) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes
called "junk bonds"), which are generally considered speculative because they
present a greater risk of loss, including default, than higher quality debt
securities. These securities pay investors a premium--a high interest rate or
yield--because of the increased risk of loss. These securities can also be
subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific country, industry or region.
(Q) 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.
(R) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
Fair Value of Derivatives as of October 31, 2009:
ASSET DERIVATIVES
<Table>
<Caption>
FOREIGN INTEREST
STATEMENT OF EXCHANGE EQUITY RATE
ASSETS AND LIABILITIES CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Warrants Investment in securities, at value $ -- $4,311 $ -- $ 4,311
Net Assets --
Unrealized appreciation on
investments and
Futures Contracts (a) futures contracts -- -- 46,856 46,856
Unrealized appreciation on foreign
Forward Contracts currency forward contracts 240,591 -- -- 240,591
----------------------------------------------------
Total Fair Value $240,591 $4,311 $46,856 $291,758
====================================================
</Table>
(a) Includes cumulative appreciation (depreciation) of futures contracts as
reported in Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets & Liabilities.
42 MainStay Diversified Income Fund
LIABILITY DERIVATIVES
<Table>
<Caption>
FOREIGN INTEREST
STATEMENT OF EXCHANGE EQUITY RATE
ASSETS AND LIABILITIES CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Net Assets -- Unrealized
appreciation on investments and
Futures Contracts (a) futures contracts $ -- $ -- $(76,907) $ (76,907)
Unrealized depreciation on foreign
Forward Contracts currency forward contracts (390,185) -- -- (390,185)
-------------------------------------------------
Total Fair Value $(390,185) $-- $(76,907) $(467,092)
=================================================
</Table>
(a) Includes cumulative appreciation (depreciation) of futures contracts as
reported in Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets & Liabilities.
The effect of derivative instruments on the Statement of Operations for the year
ended October 31, 2009:
REALIZED GAIN (LOSS)
<Table>
<Caption>
FOREIGN INTEREST
STATEMENT OF EXCHANGE EQUITY RATE
OPERATIONS CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Net realized gain (loss) on
Warrants security transactions $ -- $(36) $ -- $ (36)
Net realized gain (loss) on
Futures Contracts futures transactions -- -- (92,081) (92,081)
Net realized gain (loss) on
Forward Contracts foreign currency transactions 893,129 -- -- 893,129
-------------------------------------------------
Total Realized Gain (Loss) $893,129 $(36) $(92,081) $801,012
=================================================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
FOREIGN INTEREST
STATEMENT OF EXCHANGE EQUITY RATE
OPERATIONS CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Net change in unrealized
appreciation (depreciation) on
Warrants security transactions $ -- $(19,730) $ -- $ (19,730)
Net change in unrealized
appreciation (depreciation) on
Futures Contracts futures contracts -- -- (30,051) (30,051)
Net change in unrealized
appreciation (depreciation) on
translation of other assets
and liabilities in foreign
currencies and foreign
Forward Contracts currency forward contracts (701,151) -- -- (701,151)
--------------------------------------------------
Total Change in Appreciation
(Depreciation) $(701,151) $(19,730) $(30,051) $(750,932)
==================================================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
FOREIGN INTEREST
EXCHANGE EQUITY RATE
CONTRACTS CONTRACTS CONTRACTS
RISK RISK RISK TOTAL
Warrants (2) -- 559 -- 559
Futures Contracts Long (2) -- -- 22 22
Futures Contracts Short (2) -- -- (42) (42)
Forward Contracts Long (3) 8,501,526 -- -- 8,501,526
Forward Contracts Short (3) $(12,430,019) -- -- $(12,430,019)
</Table>
mainstayinvestments.com 43
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) Amount disclosed represents the weighted average held during the twelve-
month period.
(2) Amount(s) represent(s) number of contracts or number of shares/units.
(3) Amount(s) represent(s) notional amount.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and
an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to
the Fund and is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between New York Life Investments and the Subadvisor,
New York Life Investments pays for the services of the Subadvisor.
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:
0.60% on assets up to $500 million, 0.55% on assets from $500 million to $1
billion and 0.50% on assets in excess of $1 billion, plus a fee for fund
accounting services previously provided by New York Life Investments under a
separate accounting agreement.
Effective August 1, 2009, New York Life Investments has entered into a written
expense limitation agreement, under which it agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses (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) for the
Fund's Class A shares do not exceed 1.19% of its average daily net assets. New
York Life Investments will apply an equivalent waiver or reimbursement, in an
equal amount of basis points, to the other share classes of the Fund. These
expense limitations may be modified or terminated only with the approval of the
Board of Trustees. Under the written expense limitation agreement, New York Life
Investments 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 existing expense limitations and the recoupment is made
within the term of the agreement. Any recoupment amount is generally applied
within a fiscal year. This agreement was set to expire on July 31, 2010. On
December 11, 2009, the Board of the Fund approved an extension of the agreement
to February 28, 2011.
Prior to August 1, 2009, New York Life Investments had a written expense
limitation agreement under which it had agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses of the appropriate class of shares did not
exceed the following percentages of average daily net assets: Investor Class,
1.40%; Class A, 1.30%; Class B, 2.15%; Class C, 2.15%; and Class I, 0.96%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $567,745 and waived its fees in the amount of
$160,852.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has
entered into a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund
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 Investor Class and Class A shares at an annual
rate of 0.25% of the average daily net assets of the Investor Class and Class A
shares for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, Class B and Class C shares of the
Fund pay the Distributor a monthly distribution fee at an 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 an annual rate of 0.25% of the average daily NAV of the Class B
44 MainStay Diversified Income Fund
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 $5,060
and $21,473, respectively for the year ended October 31, 2009. 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 $1, $36,
$23,219 and $787, respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $231,891.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $9,314,279 15.4%
- ---------------------------------------------------
Class C 119 0.0++
- ---------------------------------------------------
Class I 1,289 0.4
- ---------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $4,275.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(9,831,785) $(254,946) $3,057,752 $(7,028,979)
- ------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to defaulted bonds release, mark to market on foreign currency and
forward contracts, partnership basis adjustments, straddle loss deferrals,
securities lending adjustments, and wash sales deferrals.
The other temporary differences are primarily due to interest income on
defaulted securities and distributions payable.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income, accumulated net
realized gain on investments and additional paid-in capital arising from
permanent differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$830,090 $424,533 $(1,254,623)
- -------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to mark to market on
foreign currency gain (loss), paydowns gain (loss), expiring of a portion of the
capital loss carryforwards, return of capital distributions, tax-exempt
municipal income, and settlement income.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $9,831,785 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. No capital gain distributions shall be made until
any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2010 $1,161
2011 523
2014 1,450
2016 4,026
2017 2,672
- ------------------------------------
Total $9,832
- ------------------------------------
</Table>
mainstayinvestments.com 45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Fund had $864,189 of capital loss carryforwards that expired during the year
ended October 31, 2009.
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distribution paid from:
Ordinary Income $6,996,845 $5,325,850
Return of Capital 395,761 --
- ------------------------------------------------------
$7,392,606 $5,325,850
- ------------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS:
As of October 31, 2009, the Fund held the following foreign currency forward
contracts:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
COUNTERPARTY PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts:
- -----------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar,
expiring 11/16/09 HSBC BankUSA AUD 500,000 USD 450,978 USD (1,449)
- -----------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar,
expiring 11/27/09 JPMorgan Chase Bank AUD 200,000 184,752 (5,126)
- -----------------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar,
expiring 12/3/09 Barclays Bank PLC BRL 3,800,000 2,157,865 (13,619)
- -----------------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar,
expiring 11/3/09 JPMorgan Chase Bank BRL 8,500,000 4,722,747 102,412
- -----------------------------------------------------------------------------------------------------------
Canadian Dollar vs. U.S. Dollar,
expiring 11/27/09 JPMorgan Chase Bank CAD 4,600,000 4,330,120 (78,865)
- -----------------------------------------------------------------------------------------------------------
Chilean Peso vs. U.S. Dollar,
expiring 11/13/09 JPMorgan Chase Bank CLP 800,000,000 1,458,656 49,497
- -----------------------------------------------------------------------------------------------------------
Colombian Peso vs. U.S. Dollar,
expiring 11/23/09 Barclays Bank PLC COP 2,000,000,000 1,067,236 (69,066)
- -----------------------------------------------------------------------------------------------------------
Hungarian Forint vs. U.S. Dollar,
expiring 11/13/09 HSBC BankUSA HUF 400,000,000 2,180,193 (41,541)
- -----------------------------------------------------------------------------------------------------------
Indonesian Rupiah vs. U.S. Dollar,
expiring 11/30/09 JPMorgan Chase Bank IDR 24,000,000,000 2,529,244 (28,997)
- -----------------------------------------------------------------------------------------------------------
Norwegian Krone vs. U.S. Dollar,
expiring 11/19/09 HSBC BankUSA NOK 33,000,000 5,896,911 (137,053)
- -----------------------------------------------------------------------------------------------------------
Polish Zloty vs. U.S. Dollar,
expiring 11/23/09 JPMorgan Chase Bank PLN 1,000,000 355,240 (10,075)
- -----------------------------------------------------------------------------------------------------------
South Korean Won vs. U.S. Dollar,
expiring 11/27/09 JPMorgan Chase Bank KRW 1,200,000,000 1,010,441 4,264
- -----------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Currency Sale Contracts:
- ---------------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar,
expiring 11/3/09 JPMorgan Chase Bank BRL 8,500,000 4,832,291 7,132
- ---------------------------------------------------------------------------------------------------------
Chilean Peso vs. U.S. Dollar,
expiring 11/13/09 JPMorgan Chase Bank CLP 800,000,000 1,503,759 (4,394)
- ---------------------------------------------------------------------------------------------------------
Colombian Peso vs. U.S. Dollar,
expiring 11/23/09 Barclays Bank PLC COP 2,000,000,000 1,050,420 52,250
- ---------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring
11/13/09 JPMorgan Chase Bank EUR 4,545,000 6,692,946 4,444
- ---------------------------------------------------------------------------------------------------------
Hungarian Forint vs. U.S. Dollar,
expiring 11/13/09 HSBC BankUSA HUF 400,000,000 2,159,244 20,592
- ---------------------------------------------------------------------------------------------------------
Net unrealized depreciation on
foreign currency forward
contracts USD(149,594)
- ---------------------------------------------------------------------------------------------------------
</Table>
46 MainStay Diversified Income Fund
As of October 31, 2009, the Fund held the following foreign currencies:
<Table>
<Caption>
CURRENCY COST VALUE
Australian Dollar AUD56,395 USD 48,392 USD 50,764
- --------------------------------------------------------------------------------------------
Canadian Dollar CAD 8,438 7,742 7,798
- --------------------------------------------------------------------------------------------
Euro EUR82,000 120,745 120,675
- --------------------------------------------------------------------------------------------
Turkish Lira YTL 6,000 3,798 3,991
- --------------------------------------------------------------------------------------------
Total USD180,677 USD183,228
- --------------------------------------------------------------------------------------------
</Table>
NOTE 6--RESTRICTED SECURITIES:
As of October 31, 2009, the Fund held the following restricted securities:
<Table>
<Caption>
SHARES/ PERCENTAGE OF
DATE(S) OF PRINCIPAL 10/31/09
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
At Home Corp. Convertible Bond 4.75%, due
12/31/49 7/25/01 504,238 $ 8,348 $ 50 0.0%++
- ------------------------------------------------------------------------------------------------------
QuadraMed Corp. Convertible Preferred Stock
5.50% 6/16/04 10,400 253,700 158,808 0.2
- ------------------------------------------------------------------------------------------------------
Total $262,048 $158,858 0.2%
- ------------------------------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
NOTE 7--CUSTODIAN:
State Street is the custodian of the cash and the securities of the Fund.
Custodial fees are charged to the Fund based on the market value of securities
in the Fund and the number of certain cash transactions incurred by the Fund.
NOTE 8--LINE OF CREDIT:
The Fund and certain affiliated fund maintain a line of credit 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of U.S. Government
securities were $43,256 and $56,192, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $93,784 and $73,791, respectively.
NOTE 10--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 217,043 $ 1,665,811
Shares issued to shareholders in reinvestment of dividends 114,218 842,674
Shares redeemed (299,081) (2,248,741)
-------------------------
Net increase in shares outstanding before conversion 32,180 259,744
Shares converted into Investor Class (See Note 1) 146,213 1,089,759
Shares converted from Investor Class (See Note 1) (124,403) (991,395)
-------------------------
Net increase 53,990 $ 358,108
=========================
Period ended October 31, 2008 (a):
Shares sold 363,906 $ 3,194,393
Shares issued to shareholders in reinvestment of dividends 38,653 323,248
Shares redeemed (260,939) (2,187,508)
-------------------------
Net increase in shares outstanding before conversion 141,620 1,330,133
Shares converted into Investor Class (See Note 1) 1,372,106 11,929,136
Shares converted from Investor Class (See Note 1) (126,721) (1,059,104)
-------------------------
Net increase 1,387,005 $ 12,200,165
=========================
(a) Investor Class shares were first offered on February 28, 2008.
</Table>
mainstayinvestments.com 47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 1,465,154 $ 11,304,022
Shares issued to shareholders in reinvestment of dividends 430,086 3,162,284
Shares redeemed (1,231,063) (9,142,296)
-------------------------
Net increase in shares outstanding before conversion 664,177 5,324,010
Shares converted into Class A (See Note 1) 276,610 2,159,198
Shares converted from Class A (See Note 1) (69,482) (512,125)
-------------------------
Net increase 871,305 $ 6,971,083
=========================
Year ended October 31, 2008:
Shares sold 1,626,679 $ 14,143,866
Shares issued to shareholders in reinvestment of dividends 288,892 2,478,099
Shares redeemed (2,235,774) (19,096,286)
-------------------------
Net decrease in shares outstanding before conversion (320,203) (2,474,321)
Shares converted into Class A (See Note 1) 360,683 3,084,017
Shares converted from Class A (See Note 1) (1,330,336) (11,519,220)
-------------------------
Net decrease (1,289,856) $(10,909,524)
=========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 419,871 $ 3,148,237
Shares issued to shareholders in reinvestment of dividends 155,105 1,128,177
Shares redeemed (658,991) (4,925,067)
-------------------------
Net decrease in shares outstanding before conversion (84,015) (648,653)
Shares converted from Class B (See Note 1) (229,894) (1,745,437)
-------------------------
Net decrease (313,909) $ (2,394,090)
=========================
Year ended October 31, 2008:
Shares sold 542,124 $ 4,710,795
Shares issued to shareholders in reinvestment of dividends 98,845 843,502
Shares redeemed (881,629) (7,509,537)
-------------------------
Net decrease in shares outstanding before conversion (240,660) (1,955,240)
Shares converted from Class B (See Note 1) (281,916) (2,434,829)
-------------------------
Net decrease (522,576) $ (4,390,069)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 610,922 $ 4,654,326
Shares issued to shareholders in reinvestment of dividends 61,342 447,865
Shares redeemed (456,544) (3,377,082)
-------------------------
Net increase 215,720 $ 1,725,109
=========================
Year ended October 31, 2008:
Shares sold 628,002 $ 5,486,628
Shares issued to shareholders in reinvestment of dividends 43,358 370,512
Shares redeemed (687,173) (5,808,860)
-------------------------
Net increase (decrease) (15,813) $ 48,280
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 5,467 $ 41,405
Shares issued to shareholders in reinvestment of dividends 2,860 21,002
Shares redeemed (6,611) (47,625)
-------------------------
Net increase 1,716 $ 14,782
=========================
Year ended October 31, 2008:
Shares sold 11,549 $ 101,022
Shares issued to shareholders in reinvestment of dividends 1,641 13,999
Shares redeemed (6,028) (53,168)
-------------------------
Net increase 7,162 $ 61,853
=========================
</Table>
NOTE 11--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These
48 MainStay Diversified Income Fund
amounts, totaling approximately $6.101 million, are being distributed to
shareholders who held shares of the Equity Index Fund between March 2002 and
June 2004, without any material financial impact to New York Life Investments.
NOTE 12--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Diversified Income Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2009, 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, 2009, 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 Diversified Income Fund of The MainStay Funds as of October 31, 2009,
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 23, 2009
50 MainStay Diversified Income Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Diversified Income Fund ("Fund")
and New York Life Investment Management LLC ("New York Life Investments"), and
the Subadvisory Agreement between New York Life Investments and MacKay Shields
LLC ("MacKay Shields") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group of Funds, including
the privilege of
mainstayinvestments.com 51
exchanging investments between the same class of shares without the imposition
of a sales charge, as described more fully in the Fund's prospectus.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
52 MainStay Diversified Income Fund
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to MacKay Shields from legally
permitted "soft-dollar" arrangements by which brokers provide research and other
services to MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund. The Board also
considered the impact of the Fund's expense limitation arrangements pursuant to
which New York Life Investments has agreed to limit the Fund's total ordinary
operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MacKay Shields on fees charged 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 explanations from New York Life Investments and MacKay
Shields about the different scope of services provided to retail mutual funds as
compared with other investment advisory clients.
mainstayinvestments.com 53
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
modify the expense limitations on the Fund's share classes in order to increase
the amount of class expenses subsidized by New York Life Investments. The Board
acknowledged that New York Life Investments may recoup amounts waived or
reimbursed under contractual expense limitations if such action does not cause a
share class to exceed an expense limitation, and the recoupment is made during
the term of the agreement. The Board further acknowledged that New York Life
Investments may determine voluntarily to waive expenses of Fund share classes
without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
54 MainStay Diversified Income Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$48,510 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, 2009,
should be multiplied by 61.0% to arrive at the amount eligible for qualified
interest income and 1.1% for the corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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 55
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Chief Executive Officer,
Director since 2008 (20 NYLIFE Distributors LLC and
portfolios). Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
56 MainStay Diversified Income Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 57
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
58 MainStay Diversified Income Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 59
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
60 MainStay Diversified Income Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO17234 (RECYCLE LOGO) MS283-09 MSDI11-12/09
16
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 8
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 10
- ---------------------------------------------
FINANCIAL STATEMENTS 19
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 23
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT 31
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 35
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 35
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 35
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 36
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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.
CLASS A SHARES--MAXIMUM 3% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- -------------------------------------------------------
With sales charges 6.20% -0.78% -1.91%
Excluding sales charges 9.48 -0.18 -1.61
</Table>
(With sales charge)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY EQUITY S&P 500(R)
INDEX FUND INDEX
--------------- ----------
10/31/99 24250 25000
25521 26523
19028 19918
16032 16909
19182 20426
20796 22350
22454 24299
26013 28270
29616 32386
18829 20696
10/31/09 20614 22725
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
S&P 500(R) Index(2) 9.80% 0.33% -0.95%
Average Lipper S&P 500 Index objective fund(3) 9.34 -0.16 -1.42
</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 graph assumes an initial investment of $25,000 and
reflects the deduction of all sales charges that would have applied for the
period of investment. Class A shares were sold with a maximum initial sales
charge of 3.00% and an annual 12b-1 fee of 0.25%. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns
may have been lower. These fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of certain management
fee waivers or expense reimbursements from the Fund pursuant to the agreement
if such action does not cause the Fund to exceed existing expense limitations
and the recoupment is made within the term of the agreement. Any recoupment
amount is generally applied within a fiscal year. The agreement expires on
February 28, 2011. Performance figures shown reflect nonrecurring
reimbursements from affiliates for professional fees and losses attributable
to shareholder trading arrangements. If these nonrecurring reimbursements had
not been made the total return (excluding sales charges) would have been
-0.22% for the five-year period ended October 31, 2009, and -1.63% for the
ten-year period then ended.
2. S&P 500(R) Index is a trademark of The McGraw Hill Companies, Inc. The S&P
500(R) Index is widely regarded as the standard for measuring large-cap U.S.
stock market performance. Total returns assume reinvestment of all dividends
and capital gains. The S&P 500(R) Index is the Fund's broad-based securities
market index for comparison purposes. An investment cannot be made directly
in an index.
3. The average Lipper S&P 500(R) Index objective fund is representative of funds
that are passively managed, and commit by prospectus language to replicate
the performance of the S&P 500(R) Index (including reinvested basis
dividends). In addition, S&P 500(R) Index objective funds have limited
expenses (advisor fee no higher than 0.50%). This benchmark is a product of
Lipper Inc. 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.
mainstayinvestments.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY EQUITY INDEX FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
CLASS A SHARES $1,000.00 $1,198.60 $3.33 $1,022.20 $3.06
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(0.60% for Class A) multiplied by the average account value over the period,
divided by 365 and multiplied by 184 (to reflect the one-half year period).
The table above represents the actual expenses incurred during the one-half
year period.
6 MainStay Equity Index Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Oil, Gas & Consumable Fuels 9.6%
Pharmaceuticals 6.1
Computers & Peripherals 5.4
Software 4.0
Diversified Financial Services 3.9
Capital Markets 2.7
Food & Staples Retailing 2.7
Beverages 2.6
Commercial Banks 2.6
Diversified Telecommunication
Services 2.6
Aerospace & Defense 2.5
Communications Equipment 2.5
Household Products 2.5
Insurance 2.4
Media 2.4
Semiconductors & Semiconductor
Equipment 2.3
Industrial Conglomerates 2.1
Electric Utilities 1.9
Health Care Providers & Services 1.9
Chemicals 1.8
Energy Equipment & Services 1.8
Health Care Equipment & Supplies 1.8
Internet Software & Services 1.8
Specialty Retail 1.7
Food Products 1.6
Biotechnology 1.5
Machinery 1.5
Tobacco 1.5
Hotels, Restaurants & Leisure 1.4
Multi-Utilities 1.2
IT Services 1.1
Real Estate Investment Trusts 1.0
Air Freight & Logistics 0.9
Metals & Mining 0.9
Multiline Retail 0.9
Road & Rail 0.8
Consumer Finance 0.7
Commercial Services & Supplies 0.5
Electronic Equipment & Instruments 0.5
Internet & Catalog Retail 0.5
Textiles, Apparel & Luxury Goods 0.5
Electrical Equipment 0.4
Life Sciences Tools & Services 0.4
Automobiles 0.3
Household Durables 0.3
Auto Components 0.2
Construction & Engineering 0.2
Containers & Packaging 0.2
Diversified Consumer Services 0.2
Independent Power Producers &
Energy Traders 0.2
Paper & Forest Products 0.2
Personal Products 0.2
Wireless Telecommunication Services 0.2
Airlines 0.1
Construction Materials 0.1
Distributors 0.1
Gas Utilities 0.1
Leisure Equipment & Products 0.1
Office Electronics 0.1
Professional Services 0.1
Thrifts & Mortgage Finance 0.1
Trading Companies & Distributors 0.1
Building Products 0.0++
Health Care Technology 0.0++
Real Estate Management &
Development 0.0++
Short-Term Investments 7.8
Liabilities in Excess of Other
Assets -0.3
-----
100.0%
=====
</Table>
See Portfolio of Investments beginning on page 10 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. ExxonMobil Corp.
2. Microsoft Corp.
3. Procter & Gamble Co. (The)
4. Apple, Inc.
5. JPMorgan Chase & Co.
6. Johnson & Johnson
7. International Business Machines Corp.
8. Chevron Corp.
9. General Electric Co.
10. AT&T, Inc.
</Table>
mainstayinvestments.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
Questions answered by portfolio manager Francis J. Ok of Madison Square
Investors LLC,
the Fund's Subadvisor.
HOW DID MAINSTAY EQUITY INDEX FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, Class A shares of MainStay Equity Index Fund
returned 9.48% for the 12 months ended October 31, 2009. The Fund, which offers
only one share class, outperformed the 9.34% return of the average Lipper(1) S&P
500 Index objective fund and underperformed the 9.80% return of the S&P 500(R)
Index(2) for the 12 months ended October 31, 2009. Because the Fund incurs
operating expenses that an index does not, there will be times when the Fund's
performance lags that of the Index. The S&P 500(R) Index is the Fund's broad-
based securities- market index. See page 5 for Fund returns with sales charges.
DURING THE REPORTING PERIOD, WHICH SECTORS HAD THE HIGHEST TOTAL RETURNS AND
WHICH HAD THE LOWEST?
On the basis of total return, the best-performing sector in the S&P 500(R) Index
was information technology, followed by consumer discretionary and materials.
During the reporting period, financials had the lowest total return of any
sector in the Index. Utilities had the second-lowest total return, followed by
industrials.
DURING THE REPORTING PERIOD, WHICH SECTORS WERE THE STRONGEST CONTRIBUTORS TO
THE FUND'S PERFORMANCE AND WHICH WERE THE WEAKEST CONTRIBUTORS?
On the basis of impact, which takes weightings and total returns into account,
the sector that made the strongest contribution to the Fund's performance was
information technology. Consumer discretionary was the second-strongest
contributor, followed by energy. The sector that made the weakest contribution
to the Fund's performance was financials. The second-weakest contributor was
utilities, followed by telecommunication services.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS HAD THE HIGHEST TOTAL
RETURNS AND WHICH HAD THE LOWEST TOTAL RETURNS?
Within the S&P 500(R) Index, the stock with the highest total return during the
12-month reporting period was auto manufacturer Ford Motor Company. Grocery
store chain Whole Foods Market had the second-highest total return, followed by
gold, silver and copper producer Freeport-McMoRan Copper & Gold.
The S&P 500(R) Index holding with the lowest total return during the reporting
period was auto manufacturer General Motors. Two companies in the financials
sector, Citigroup and global asset manager American Capital, Ltd., had the
second- and third-lowest total returns, respectively, of all S&P 500(R) stocks
during the reporting period.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH STOCKS WERE THE GREATEST
DETRACTORS?
On the basis of impact, which takes weightings and total returns into account,
the stocks that made the greatest positive contributions to the Fund's
performance during the reporting period were information technology companies
Apple, Microsoft and Google. The weakest contributor was Citigroup, followed by
General Electric and Bank of America.
WERE THERE ANY CHANGES IN THE MAKEUP OF THE S&P 500(R) INDEX DURING THE
REPORTING PERIOD?
During the 12-month reporting period, there were 33 additions to the S&P 500(R)
Index and 33 deletions from it. Two significant additions to the Index based on
index weightings were savings-and-loan holding company People's United Financial
and alternative energy company First Solar.
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. 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 was closed to new investors
and new purchases as of January 1, 2002. Existing shareholders are permitted to
reinvest dividends only. Index funds generally seek to reflect the performance
of an index or an allocation among indices, unlike other funds, whose objectives
may, in some cases, involve seeking to outperform an index or other benchmark.
The Fund seeks to track the performance and weightings of stocks in the S&P
500(R) Index. The Index itself, however, may change from time to time as
companies merge, divest units, add to their market capitalization or face
financial difficulties. In addition, Standard & Poor's may occasionally adjust
the Index to better reflect the companies that it believes are most
representative of the makeup of the U.S. economy. "Standard & Poor's(R),"
"S&P(R)," "S&P 500(R)," "Standard & Poor's 500" and "500" are trademarks of The
McGraw-Hill Companies, Inc., and have been licensed for use by New York Life
Investments. "New York Life Investments" is a service mark used by New York Life
Investment Management LLC.
1. See footnote on page 5 for more information on Lipper Inc.
2. See footnote on page 5 for more information on the S&P 500(R) Index.
8 MainStay Equity Index Fund
Anheuser-Busch Companies was a major deletion during the reporting period. The
stock was deleted from the S&P 500(R) Index when Anheuser-Busch Companies was
acquired by international beverage company InBev NV. Another notable deletion
was pharmaceutical company Wyeth, which was acquired by Pfizer in October 2009.
- ----------
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
mainstayinvestments.com 9
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 92.5%+
- ---------------------------------------------------------------
AEROSPACE & DEFENSE 2.5%
Boeing Co. (The) 16,699 $ 798,212
General Dynamics Corp. 8,853 555,083
Goodrich Corp. 2,839 154,300
Honeywell International,
Inc. 17,288 620,466
ITT Corp. 4,189 212,382
L-3 Communications Holdings,
Inc. 2,684 194,027
Lockheed Martin Corp. 7,422 510,560
Northrop Grumman Corp. 7,313 366,601
Precision Castparts Corp. 3,217 307,320
Raytheon Co. 8,951 405,301
Rockwell Collins, Inc. 3,624 182,577
United Technologies Corp. 21,638 1,329,655
-------------
5,636,484
-------------
AIR FREIGHT & LOGISTICS 0.9%
C.H. Robinson Worldwide,
Inc. 3,871 213,331
Expeditors International of
Washington, Inc. 4,894 157,685
FedEx Corp. 7,182 522,060
United Parcel Service, Inc.
Class B 22,861 1,227,178
-------------
2,120,254
-------------
AIRLINES 0.1%
Southwest Airlines Co. 17,070 143,388
-------------
AUTO COMPONENTS 0.2%
Goodyear Tire & Rubber Co.
(The) (a) 5,559 71,600
Johnson Controls, Inc. 14,591 349,017
-------------
420,617
-------------
AUTOMOBILES 0.3%
Ford Motor Co. (a) 74,111 518,777
Harley-Davidson, Inc. 5,371 133,845
-------------
652,622
-------------
BEVERAGES 2.6%
Brown-Forman Corp. Class B 2,526 123,294
Coca-Cola Co. (The) 53,274 2,840,037
Coca-Cola Enterprises, Inc. 7,321 139,611
Constellation Brands, Inc.
Class A (a) 4,568 72,266
Dr. Pepper Snapple Group,
Inc. (a) 5,855 159,607
Molson Coors Brewing Co.
Class B 3,605 176,537
Pepsi Bottling Group, Inc.
(The) 3,311 123,964
PepsiCo, Inc. 35,812 2,168,417
-------------
5,803,733
-------------
BIOTECHNOLOGY 1.5%
Amgen, Inc. (a) 23,344 1,254,273
Biogen Idec, Inc. (a) 6,645 279,954
Celgene Corp. (a) 10,543 538,220
Cephalon, Inc. (a) 1,698 92,677
Genzyme Corp. (a) 6,214 314,428
Gilead Sciences, Inc. (a) 20,787 884,487
-------------
3,364,039
-------------
BUILDING PRODUCTS 0.0%++
Masco Corp. 8,309 97,631
-------------
CAPITAL MARKETS 2.7%
Ameriprise Financial, Inc. 5,868 203,444
Bank of New York Mellon Corp.
(The) 27,651 737,176
Charles Schwab Corp. (The) 21,882 379,434
E*TRADE Financial Corp. (a) 33,099 48,325
Federated Investors, Inc.
Class B 2,034 53,392
Franklin Resources, Inc. 3,442 360,136
Goldman Sachs Group, Inc.
(The) 11,752 1,999,838
Invesco, Ltd. 9,564 202,279
Janus Capital Group, Inc. 4,187 54,933
Legg Mason, Inc. 3,733 108,668
Morgan Stanley 31,245 1,003,589
Northern Trust Corp. 5,549 278,837
State Street Corp. 11,370 477,313
T. Rowe Price Group, Inc. 5,888 286,922
-------------
6,194,286
-------------
CHEMICALS 1.8%
Air Products & Chemicals,
Inc. 4,836 373,001
Airgas, Inc. 1,876 83,219
CF Industries Holdings, Inc. 1,120 93,240
Dow Chemical Co. (The) 26,305 617,642
E.I. du Pont de Nemours &
Co. 20,772 660,965
Eastman Chemical Co. 1,674 87,902
Ecolab, Inc. 5,444 239,318
FMC Corp. 1,680 85,848
International Flavors &
Fragrances, Inc. 1,815 69,133
Monsanto Co. 12,550 843,109
PPG Industries, Inc. 3,788 213,757
Praxair, Inc. 7,053 560,290
Sigma-Aldrich Corp. 2,800 145,404
-------------
4,072,828
-------------
COMMERCIAL BANKS 2.6%
BB&T Corp. 15,650 374,191
Comerica, Inc. 3,473 96,376
Fifth Third Bancorp 18,306 163,655
First Horizon National Corp.
(a) 5,017 59,351
Huntington Bancshares, Inc. 16,421 62,564
KeyCorp 20,196 108,856
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding
short-term investments. May be subject to change daily.
10 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
M&T Bank Corp. 1,882 $ 118,284
Marshall & Ilsley Corp. 8,462 45,018
PNC Financial Services Group,
Inc. 10,598 518,666
Regions Financial Corp. 27,314 132,200
SunTrust Banks, Inc. 11,481 219,402
U.S. Bancorp 43,953 1,020,589
Wells Fargo & Co. 107,392 2,955,428
Zions Bancorp 2,907 41,163
-------------
5,915,743
-------------
COMMERCIAL SERVICES & SUPPLIES 0.5%
Avery Dennison Corp. 2,592 92,405
Cintas Corp. 3,032 83,956
Iron Mountain, Inc. (a) 4,141 101,165
Pitney Bowes, Inc. 4,756 116,522
R.R. Donnelley & Sons Co. 4,731 94,998
Republic Services, Inc. 7,408 191,941
Stericycle, Inc. (a) 1,976 103,483
Waste Management, Inc. 11,319 338,212
-------------
1,122,682
-------------
COMMUNICATIONS EQUIPMENT 2.5%
Ciena Corp. (a) 2,104 24,680
Cisco Systems, Inc. (a) 132,593 3,029,750
Harris Corp. 3,013 125,702
JDS Uniphase Corp. (a) 4,988 27,883
Juniper Networks, Inc. (a) 12,051 307,421
Motorola, Inc. 52,766 452,205
QUALCOMM, Inc. 38,235 1,583,311
Tellabs, Inc. (a) 9,107 54,824
-------------
5,605,776
-------------
COMPUTERS & PERIPHERALS 5.4%
V Apple, Inc. (a) 20,593 3,881,780
Dell, Inc. (a) 39,561 573,239
EMC Corp. (a) 46,456 765,130
Hewlett-Packard Co. 54,506 2,586,855
V International Business
Machines Corp. 30,135 3,634,582
Lexmark International, Inc.
Class A (a) 1,795 45,773
NetApp, Inc. (a) 7,732 209,151
QLogic Corp. (a) 2,715 47,621
SanDisk Corp. (a) 5,220 106,906
Sun Microsystems, Inc. (a) 17,318 141,661
Teradata Corp. (a) 3,949 110,098
Western Digital Corp. (a) 5,165 173,957
-------------
12,276,753
-------------
CONSTRUCTION & ENGINEERING 0.2%
Fluor Corp. 4,135 183,677
Jacobs Engineering Group,
Inc. (a) 2,833 119,807
Quanta Services, Inc. (a) 4,810 101,972
-------------
405,456
-------------
CONSTRUCTION MATERIALS 0.1%
Vulcan Materials Co. 2,873 132,244
-------------
CONSUMER FINANCE 0.7%
American Express Co. 27,343 952,630
Capital One Financial Corp. 10,459 382,799
Discover Financial Services 12,335 174,417
SLM Corp. (a) 10,785 104,615
-------------
1,614,461
-------------
CONTAINERS & PACKAGING 0.2%
Ball Corp. 2,185 107,786
Bemis Co., Inc. 2,483 64,136
Owens-Illinois, Inc. (a) 3,852 122,802
Pactiv Corp. (a) 3,034 70,055
Sealed Air Corp. 3,642 70,035
-------------
434,814
-------------
DISTRIBUTORS 0.1%
Genuine Parts Co. 3,680 128,763
-------------
DIVERSIFIED CONSUMER SERVICES 0.2%
Apollo Group, Inc. Class A
(a) 2,934 167,531
DeVry, Inc. 1,416 78,291
H&R Block, Inc. 7,708 141,365
-------------
387,187
-------------
DIVERSIFIED FINANCIAL SERVICES 3.9%
Bank of America Corp. 198,884 2,899,729
Citigroup, Inc. 299,977 1,226,906
CME Group, Inc. 1,528 462,388
IntercontinentalExchange,
Inc. (a) 1,682 168,520
V JPMorgan Chase & Co. 90,402 3,776,091
Leucadia National Corp. (a) 4,370 98,194
Moody's Corp. 4,479 106,063
NASDAQ OMX Group, Inc. (The)
(a) 3,262 58,912
NYSE Euronext 5,977 154,505
-------------
8,951,308
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.6%
V AT&T, Inc. 135,635 3,481,750
CenturyTel, Inc. 6,801 220,761
Frontier Communications
Corp. 7,184 51,509
Qwest Communications
International, Inc. 34,079 122,344
Verizon Communications, Inc. 65,302 1,932,286
Windstream Corp. 10,039 96,776
-------------
5,905,426
-------------
</Table>
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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
ELECTRIC UTILITIES 1.9%
Allegheny Energy, Inc. 3,901 $ 89,021
American Electric Power Co.,
Inc. 10,980 331,816
Duke Energy Corp. 29,809 471,578
Edison International 7,520 239,286
Entergy Corp. 4,501 345,317
Exelon Corp. 15,151 711,491
FirstEnergy Corp. 7,008 303,306
FPL Group, Inc. 9,459 464,437
Northeast Utilities 4,029 92,868
Pepco Holdings, Inc. 5,076 75,785
Pinnacle West Capital Corp. 2,326 72,850
PPL Corp. 8,653 254,744
Progress Energy, Inc. 6,401 240,230
Southern Co. (The) 18,310 571,089
-------------
4,263,818
-------------
ELECTRICAL EQUIPMENT 0.4%
Emerson Electric Co. 17,275 652,131
First Solar, Inc. (a) 1,104 134,611
Rockwell Automation, Inc. 3,265 133,702
-------------
920,444
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.5%
Agilent Technologies, Inc.
(a) 7,933 196,262
Amphenol Corp. Class A 3,941 158,113
Corning, Inc. 35,737 522,118
FLIR Systems, Inc. (a) 3,484 96,890
Jabil Circuit, Inc. 4,239 56,718
Molex, Inc. 3,125 58,344
-------------
1,088,445
-------------
ENERGY EQUIPMENT & SERVICES 1.8%
Baker Hughes, Inc. 7,123 299,665
BJ Services Co. 6,738 129,369
Cameron International Corp.
(a) 5,066 187,290
Diamond Offshore Drilling,
Inc. 1,605 152,876
ENSCO International, Inc. 3,272 149,825
FMC Technologies, Inc. (a) 2,815 148,069
Halliburton Co. 20,729 605,494
Nabors Industries, Ltd. (a) 6,570 136,853
National Oilwell Varco, Inc.
(a) 9,631 394,775
Rowan Cos., Inc. 2,615 60,799
Schlumberger, Ltd. 27,536 1,712,739
Smith International, Inc. 5,049 140,009
-------------
4,117,763
-------------
FOOD & STAPLES RETAILING 2.7%
Costco Wholesale Corp. 9,997 568,329
CVS Caremark Corp. 33,177 1,171,148
Kroger Co. (The) 14,976 346,395
Safeway, Inc. 9,575 213,810
SUPERVALU, Inc. 4,888 77,572
Sysco Corp. 13,615 360,117
Wal-Mart Stores, Inc. 49,650 2,466,612
Walgreen Co. 22,813 863,016
Whole Foods Market, Inc. (a) 3,228 103,490
-------------
6,170,489
-------------
FOOD PRODUCTS 1.6%
Archer-Daniels-Midland Co. 14,759 444,541
Campbell Soup Co. 4,429 140,621
ConAgra Foods, Inc. 10,163 213,423
Dean Foods Co. (a) 4,144 75,545
General Mills, Inc. 7,481 493,148
H.J. Heinz Co. 7,256 291,981
Hershey Co. (The) 3,828 144,660
Hormel Foods Corp. 1,604 58,482
J.M. Smucker Co. (The) 2,733 144,111
Kellogg Co. 5,897 303,931
Kraft Foods, Inc. Class A 33,899 932,900
McCormick & Co., Inc. 2,999 104,995
Sara Lee Corp. 15,992 180,550
Tyson Foods, Inc. Class A 6,967 87,227
-------------
3,616,115
-------------
GAS UTILITIES 0.1%
EQT Corp. 3,021 126,459
Nicor, Inc. 1,040 38,563
Questar Corp. 4,002 159,440
-------------
324,462
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 1.8%
Baxter International, Inc. 13,855 749,001
Becton, Dickinson & Co. 5,503 376,185
Boston Scientific Corp. (a) 34,646 281,326
C.R. Bard, Inc. 2,244 168,457
CareFusion Corp. (a) 4,149 92,813
DENTSPLY International, Inc. 3,439 113,349
Hospira, Inc. (a) 3,681 164,320
Intuitive Surgical, Inc. (a) 872 214,817
Medtronic, Inc. 25,443 908,315
St. Jude Medical, Inc. (a) 7,999 272,606
Stryker Corp. 6,492 298,632
Varian Medical Systems, Inc.
(a) 2,865 117,408
Zimmer Holdings, Inc. (a) 4,926 258,960
-------------
4,016,189
-------------
HEALTH CARE PROVIDERS & SERVICES 1.9%
Aetna, Inc. 10,034 261,185
AmerisourceBergen Corp. 6,833 151,351
Cardinal Health, Inc. 8,301 235,250
CIGNA Corp. 6,269 174,529
Coventry Health Care, Inc.
(a) 3,438 68,176
DaVita, Inc. (a) 2,396 127,060
</Table>
12 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
Express Scripts, Inc. (a) 6,308 $ 504,135
Humana, Inc. (a) 3,892 146,261
Laboratory Corp. of America
Holdings (a) 2,492 171,674
McKesson Corp. 6,118 359,310
Medco Health Solutions, Inc.
(a) 10,890 611,147
Patterson Cos., Inc. (a) 2,137 54,558
Quest Diagnostics, Inc. 3,587 200,621
Tenet Healthcare Corp. (a) 10,115 51,789
UnitedHealth Group, Inc. 26,737 693,825
WellPoint, Inc. (a) 10,921 510,666
-------------
4,321,537
-------------
HEALTH CARE TECHNOLOGY 0.0%++
IMS Health, Inc. 4,197 68,789
-------------
HOTELS, RESTAURANTS & LEISURE 1.4%
Carnival Corp. 10,084 293,646
Darden Restaurants, Inc. 3,200 96,992
International Game Technology 6,799 121,294
Marriott International, Inc.
Class A 5,782 144,897
McDonald's Corp. 25,102 1,471,228
Starbucks Corp. (a) 16,974 322,166
Starwood Hotels & Resorts
Worldwide, Inc. 4,295 124,813
Wyndham Worldwide Corp. 4,106 70,007
Wynn Resorts, Ltd. (a) 1,585 85,939
Yum! Brands, Inc. 10,725 353,389
-------------
3,084,371
-------------
HOUSEHOLD DURABLES 0.3%
Black & Decker Corp. 1,383 65,305
D.R. Horton, Inc. 6,358 69,684
Fortune Brands, Inc. 3,460 134,767
Harman International
Industries, Inc. 1,594 59,950
KB Home 1,701 24,120
Leggett & Platt, Inc. 3,605 69,685
Lennar Corp. Class A 3,545 44,667
Newell Rubbermaid, Inc. 6,384 92,632
Pulte Homes, Inc. 7,266 65,467
Whirlpool Corp. 1,695 121,345
-------------
747,622
-------------
HOUSEHOLD PRODUCTS 2.5%
Clorox Co. (The) 3,201 189,595
Colgate-Palmolive Co. 11,458 900,943
Kimberly-Clark Corp. 9,528 582,732
V Procter & Gamble Co. (The) 67,100 3,891,800
-------------
5,565,070
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.2%
AES Corp. (The) (a) 15,333 200,402
Constellation Energy Group,
Inc. 4,594 142,047
Dynegy, Inc. Class A (a) 11,655 23,310
-------------
365,759
-------------
INDUSTRIAL CONGLOMERATES 2.1%
3M Co. 16,053 1,181,019
V General Electric Co. 244,291 3,483,590
Textron, Inc. 6,212 110,449
-------------
4,775,058
-------------
INSURANCE 2.4%
Aflac, Inc. 10,756 446,266
Allstate Corp. (The) 12,331 364,628
American International Group,
Inc. (a) 3,109 104,525
Aon Corp. 6,310 242,998
Assurant, Inc. 2,714 81,230
Chubb Corp. (The) 8,044 390,295
Cincinnati Financial Corp. 3,747 95,024
Genworth Financial, Inc.
Class A (a) 11,068 117,542
Hartford Financial Services
Group, Inc. (The) 8,841 216,781
Lincoln National Corp. 6,945 165,499
Loews Corp. 8,351 276,418
Marsh & McLennan Cos., Inc. 12,042 282,505
MBIA, Inc. (a) 3,634 14,754
MetLife, Inc. 18,819 640,411
Principal Financial Group,
Inc. 7,332 183,593
Progressive Corp. (The) (a) 15,589 249,424
Prudential Financial, Inc. 10,660 482,152
Torchmark Corp. 1,902 77,221
Travelers Cos., Inc. (The) 13,055 650,009
Unum Group 7,643 152,478
XL Capital, Ltd. Class A 7,866 129,081
-------------
5,362,834
-------------
INTERNET & CATALOG RETAIL 0.5%
Amazon.com, Inc. (a) 7,648 908,659
Expedia, Inc. (a) 4,837 109,655
Priceline.com, Inc. (a) 488 77,024
-------------
1,095,338
-------------
INTERNET SOFTWARE & SERVICES 1.8%
Akamai Technologies, Inc. (a) 3,963 87,186
eBay, Inc. (a) 25,822 575,056
Google, Inc. Class A (a) 5,531 2,965,280
VeriSign, Inc. (a) 4,481 102,211
Yahoo!, Inc. (a) 27,438 436,264
-------------
4,165,997
-------------
IT SERVICES 1.1%
Affiliated Computer Services,
Inc. Class A (a) 2,251 117,255
Automatic Data Processing,
Inc. 11,552 459,770
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
IT SERVICES (CONTINUED)
Cognizant Technology
Solutions Corp. Class A (a) 6,717 $ 259,612
Computer Sciences Corp. (a) 3,496 177,282
Convergys Corp. (a) 2,824 30,640
Fidelity National Information
Services, Inc. 7,160 155,802
Fiserv, Inc. (a) 3,549 162,793
Mastercard, Inc. Class A 2,206 483,158
Paychex, Inc. 7,411 210,546
Total System Services, Inc. 4,542 72,536
Western Union Co. (The) 16,150 293,445
-------------
2,422,839
-------------
LEISURE EQUIPMENT & PRODUCTS 0.1%
Eastman Kodak Co. (a) 6,198 23,243
Hasbro, Inc. 2,894 78,919
Mattel, Inc. 8,270 156,551
-------------
258,713
-------------
LIFE SCIENCES TOOLS & SERVICES 0.4%
Life Technologies Corp. (a) 4,054 191,227
Millipore Corp. (a) 1,274 85,371
PerkinElmer, Inc. 2,730 50,806
Thermo Fisher Scientific,
Inc. (a) 9,388 422,460
Waters Corp. (a) 2,196 126,116
-------------
875,980
-------------
MACHINERY 1.5%
Caterpillar, Inc. 14,291 786,863
Cummins, Inc. 4,647 200,100
Danaher Corp. 5,954 406,241
Deere & Co. 9,747 443,976
Dover Corp. 4,292 161,723
Eaton Corp. 3,805 230,012
Flowserve Corp. 1,286 126,298
Illinois Tool Works, Inc. 8,853 406,530
PACCAR, Inc. 8,370 313,122
Pall Corp. 2,726 86,523
Parker Hannifin Corp. 3,690 195,422
Snap-On, Inc. 1,327 48,475
Stanley Works (The) 1,818 82,228
-------------
3,487,513
-------------
MEDIA 2.4%
CBS Corp. Class B 15,580 183,377
Comcast Corp. Class A 65,971 956,579
DIRECTV Group, Inc. (The) (a) 10,340 271,942
Gannett Co., Inc. 5,396 52,989
Interpublic Group of Cos.,
Inc. (The) (a) 11,175 67,274
McGraw-Hill Cos., Inc. (The) 7,259 208,914
Meredith Corp. 837 22,649
New York Times Co. (The)
Class A 2,657 21,176
News Corp. Class A 51,714 595,745
Omnicom Group, Inc. 7,144 244,896
Scripps Networks Interactive
Class A 2,051 77,446
Time Warner Cable, Inc. 8,100 319,464
Time Warner, Inc. 27,255 820,921
Viacom, Inc. Class B (a) 13,941 384,632
Walt Disney Co. (The) 42,710 1,168,973
Washington Post Co. Class B 143 61,776
-------------
5,458,753
-------------
METALS & MINING 0.9%
AK Steel Holding Corp. 2,515 39,913
Alcoa, Inc. 22,438 278,680
Allegheny Technologies, Inc. 2,255 69,589
Freeport-McMoRan Copper &
Gold, Inc. (a) 9,466 694,426
Newmont Mining Corp. 11,264 489,533
Nucor Corp. 7,245 288,713
Titanium Metals Corp. 1,951 16,779
United States Steel Corp. 3,295 113,645
-------------
1,991,278
-------------
MULTI-UTILITIES 1.2%
Ameren Corp. 5,365 130,584
CenterPoint Energy, Inc. 8,883 111,926
CMS Energy Corp. 5,216 69,373
Consolidated Edison, Inc. 6,313 256,813
Dominion Resources, Inc. 13,684 466,488
DTE Energy Corp. 3,760 139,045
Integrys Energy Group, Inc. 1,764 61,034
NiSource, Inc. 6,327 81,745
PG&E Corp. 8,521 348,424
Public Service Enterprise
Group, Inc. 11,632 346,634
SCANA Corp. 2,535 85,784
Sempra Energy 5,620 289,149
TECO Energy, Inc. 4,910 70,409
Wisconsin Energy Corp. 2,699 117,865
Xcel Energy, Inc. 10,476 197,577
-------------
2,772,850
-------------
MULTILINE RETAIL 0.9%
Big Lots, Inc. (a) 1,899 47,570
Family Dollar Stores, Inc. 3,225 91,267
J.C. Penney Co., Inc. 5,430 179,896
Kohl's Corp. (a) 7,031 402,314
Macy's, Inc. 9,708 170,570
Nordstrom, Inc. 3,787 120,351
Sears Holdings Corp. (a) 1,147 77,835
Target Corp. 17,284 837,064
-------------
1,926,867
-------------
</Table>
14 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
OFFICE ELECTRONICS 0.1%
Xerox Corp. 19,973 $ 150,197
-------------
OIL, GAS & CONSUMABLE FUELS 9.6%
Anadarko Petroleum Corp. 11,283 687,473
Apache Corp. 7,722 726,795
Cabot Oil & Gas Corp. 2,385 91,751
Chesapeake Energy Corp. 14,759 361,595
V Chevron Corp. 46,103 3,528,724
ConocoPhillips 34,089 1,710,586
CONSOL Energy, Inc. 4,154 177,833
Denbury Resources, Inc. (a) 5,736 83,746
Devon Energy Corp. 10,193 659,589
El Paso Corp. 16,186 158,785
EOG Resources, Inc. 5,791 472,893
V ExxonMobil Corp. 110,476 7,917,815
Hess Corp. 6,691 366,265
Marathon Oil Corp. 16,282 520,535
Massey Energy Co. 1,965 57,162
Murphy Oil Corp. 4,397 268,833
Noble Energy, Inc. 3,985 261,535
Occidental Petroleum Corp. 18,638 1,414,251
Peabody Energy Corp. 6,153 243,597
Pioneer Natural Resources
Co. 2,645 108,736
Range Resources Corp. 3,615 180,931
Southwestern Energy Co. (a) 7,922 345,241
Spectra Energy Corp. 14,885 284,601
Sunoco, Inc. 2,697 83,068
Tesoro Corp. 3,193 45,149
Valero Energy Corp. 12,937 234,160
Williams Cos., Inc. 13,348 251,610
XTO Energy, Inc. 13,338 554,327
-------------
21,797,586
-------------
PAPER & FOREST PRODUCTS 0.2%
International Paper Co. 9,948 221,940
MeadWestvaco Corp. 3,934 89,813
Weyerhaeuser Co. 4,877 177,230
-------------
488,983
-------------
PERSONAL PRODUCTS 0.2%
Avon Products, Inc. 9,838 315,308
Estee Lauder Cos., Inc. (The)
Class A 2,713 115,302
-------------
430,610
-------------
PHARMACEUTICALS 6.1%
Abbott Laboratories 35,538 1,797,157
Allergan, Inc. 7,069 397,631
Bristol-Myers Squibb Co. 45,538 992,728
Eli Lilly & Co. 23,244 790,528
Forest Laboratories, Inc. (a) 6,956 192,473
V Johnson & Johnson 63,347 3,740,640
King Pharmaceuticals, Inc.
(a) 5,686 57,599
Merck & Co., Inc. 48,479 1,499,456
Mylan, Inc. (a) 7,032 114,200
Pfizer, Inc. 185,391 3,157,209
Schering-Plough Corp. 37,561 1,059,220
Watson Pharmaceuticals, Inc.
(a) 2,412 83,021
-------------
13,881,862
-------------
PROFESSIONAL SERVICES 0.1%
Dun & Bradstreet Corp. 1,213 92,867
Equifax, Inc. 2,915 79,813
Monster Worldwide, Inc. (a) 2,894 42,021
Robert Half International,
Inc. 3,491 80,991
-------------
295,692
-------------
REAL ESTATE INVESTMENT TRUSTS 1.0%
Apartment Investment &
Management Co. Class A 2,697 33,308
AvalonBay Communities, Inc. 1,838 126,418
Boston Properties, Inc. 3,186 193,613
Equity Residential 6,274 181,193
HCP, Inc. 6,738 199,377
Health Care REIT, Inc. 2,756 122,284
Host Hotels & Resorts, Inc. 13,882 140,347
Kimco Realty Corp. 8,657 109,425
Plum Creek Timber Co., Inc. 3,743 117,118
ProLogis 10,179 115,328
Public Storage 3,119 229,558
Simon Property Group, Inc. 6,507 441,760
Ventas, Inc. 3,606 144,709
Vornado Realty Trust 3,589 213,761
-------------
2,368,199
-------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.0%++
CB Richard Ellis Group, Inc.
Class A (a) 5,445 56,356
Forestar Real Estate Group,
Inc. (a) 1 15
-------------
56,371
-------------
ROAD & RAIL 0.8%
Burlington Northern Santa Fe
Corp. 6,022 453,577
CSX Corp. 9,012 380,126
Norfolk Southern Corp. 8,451 393,986
Ryder System, Inc. 1,286 52,147
Union Pacific Corp. 11,588 638,962
-------------
1,918,798
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.3%
Advanced Micro Devices, Inc.
(a) 12,931 59,483
Altera Corp. 6,763 133,840
Analog Devices, Inc. 6,721 172,259
Applied Materials, Inc. 30,660 374,052
Broadcom Corp. Class A (a) 9,918 263,918
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
Intel Corp. 128,687 $ 2,459,209
KLA-Tencor Corp. 3,894 126,594
Linear Technology Corp. 5,117 132,428
LSI Corp. (a) 14,986 76,728
MEMC Electronic Materials,
Inc. (a) 5,183 64,373
Microchip Technology, Inc. 4,196 100,536
Micron Technology, Inc. (a) 19,467 132,181
National Semiconductor Corp. 5,381 69,630
Novellus Systems, Inc. (a) 2,243 46,161
NVIDIA Corp. (a) 12,593 150,612
Teradyne, Inc. (a) 4,121 34,493
Texas Instruments, Inc. 28,998 680,003
Xilinx, Inc. 6,318 137,416
-------------
5,213,916
-------------
SOFTWARE 4.0%
Adobe Systems, Inc. (a) 12,059 397,224
Autodesk, Inc. (a) 5,281 131,655
BMC Software, Inc. (a) 4,230 157,187
CA, Inc. 9,151 191,439
Citrix Systems, Inc. (a) 4,190 154,024
Compuware Corp. (a) 5,461 38,555
Electronic Arts, Inc. (a) 7,401 134,994
Intuit, Inc. (a) 7,427 215,903
McAfee, Inc. (a) 3,614 151,354
V Microsoft Corp. 178,210 4,941,763
Novell, Inc. (a) 7,972 32,606
Oracle Corp. 89,783 1,894,421
Red Hat, Inc. (a) 4,322 111,551
Salesforce.com, Inc. (a) 2,508 142,329
Symantec Corp. (a) 18,724 329,168
-------------
9,024,173
-------------
SPECIALTY RETAIL 1.7%
Abercrombie & Fitch Co. Class
A 2,007 65,870
AutoNation, Inc. (a) 2,169 37,393
AutoZone, Inc. (a) 701 94,852
Bed Bath & Beyond, Inc. (a) 5,990 210,908
Best Buy Co., Inc. 7,848 299,637
GameStop Corp. Class A (a) 3,778 91,768
Gap, Inc. (The) 11,069 236,212
Home Depot, Inc. (The) 39,185 983,152
Limited Brands, Inc. 6,138 108,029
Lowe's Cos., Inc. 33,966 664,715
O'Reilly Automotive, Inc. (a) 3,116 116,164
Office Depot, Inc. (a) 6,316 38,212
RadioShack Corp. 2,887 48,761
Sherwin-Williams Co. (The) 2,245 128,055
Staples, Inc. 16,605 360,328
Tiffany & Co. 2,840 111,584
TJX Cos., Inc. 9,744 363,938
-------------
3,959,578
-------------
TEXTILES, APPAREL & LUXURY GOODS 0.5%
Coach, Inc. 7,313 241,109
NIKE, Inc. Class B 8,948 556,387
Polo Ralph Lauren Corp. 1,329 98,904
VF Corp. 2,050 145,632
-------------
1,042,032
-------------
THRIFTS & MORTGAGE FINANCE 0.1%
Guaranty Financial Group,
Inc. (a) 1 0 (b)
Hudson City Bancorp, Inc. 10,849 142,556
People's United Financial,
Inc. 8,027 128,673
-------------
271,229
-------------
TOBACCO 1.5%
Altria Group, Inc. 47,617 862,344
Lorillard, Inc. 3,797 295,103
Philip Morris International,
Inc. 44,470 2,106,099
Reynolds American, Inc. 3,902 189,169
-------------
3,452,715
-------------
TRADING COMPANIES & DISTRIBUTORS 0.1%
Fastenal Co. 3,039 104,846
W.W. Grainger, Inc. 1,432 134,221
-------------
239,067
-------------
WIRELESS TELECOMMUNICATION SERVICES 0.2%
American Tower Corp. Class A
(a) 9,072 334,031
MetroPCS Communications, Inc.
(a) 5,990 37,318
Sprint Nextel Corp. (a) 65,900 195,064
-------------
566,413
-------------
Total Common Stocks
(Cost $134,320,576) 209,808,809
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS 7.8%
- ---------------------------------------------------------------
REPURCHASE AGREEMENT 0.0%++
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$13,237 (Collateralized by
a United States Treasury
Bill with a rate of 0.105%
and a maturity date of
3/18/10, with a Principal
Amount of $15,000 and a
Market Value of $14,994) $ 13,237 13,237
-------------
Total Repurchase Agreement
(Cost $13,237) 13,237
-------------
</Table>
16 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT 7.8%
United States Treasury Bills
0.045%, due 1/21/10 (c)(d) $ 2,700,000 $ 2,699,778
0.054%, due 1/7/10 (c) 14,900,000 14,899,449
-------------
Total U.S. Government
(Cost $17,598,170) 17,599,227
-------------
Total Short-Term Investments
(Cost $17,611,407) 17,612,464
-------------
Total Investments
(Cost $151,931,983) (f) 100.3% 227,421,273
Liabilities in Excess of
Other Assets (0.3) (721,895)
----- ------------
Net Assets 100.0% $ 226,699,378
===== ============
</Table>
<Table>
<Caption>
CONTRACTS UNREALIZED
LONG DEPRECIATION (e)
FUTURES CONTRACTS (0.2%)
- --------------------------------------------------------
Standard & Poor's 500
Index
Mini December 2009 330 $(471,518)
---------
Total Futures Contracts
(Settlement Value
$17,044,500) $(471,518)
=========
</Table>
<Table>
+++ On a daily basis New York Life
Investments 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) Non-income producing security.
(b) Less than one dollar.
(c) Interest rate presented is yield to
maturity.
(d) Represents a security which is
segregated, or partially segregated as
collateral for futures contracts.
(e) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2009.
(f) At October 31, 2009, cost is $158,444,872
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 93,479,892
Gross unrealized depreciation (24,503,491)
------------
Net unrealized appreciation $ 68,976,401
============
</Table>
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets and liabilities.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $209,808,809 $ -- $ -- $209,808,809
------------ ----------- -------- ------------
Short-Term Investments
Repurchase Agreement -- 13,237 -- 13,237
U.S. Government -- 17,599,227 -- 17,599,227
------------ ----------- -------- ------------
Total Short-Term Investments -- 17,612,464 -- 17,612,464
------------ ----------- -------- ------------
Total Investments in Securities $209,808,809 $17,612,464 $-- $227,421,273
============ =========== ======== ============
</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, 2009 (CONTINUED)
LIABILITY VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Other Financial Instruments
Futures Contracts (a) $ (471,518) $ -- $ -- $ (471,518)
------------- ------------- -------- -------------
Total Other Financial Instruments $(471,518) $-- $-- $(471,518)
============= ============= ======== =============
</Table>
(a) The value listed for these securities reflects unrealized depreciation as
shown on the Portfolio of Investments.
At October 31, 2009, the Portfolio did not hold any investments with
significant unobservable inputs (Level 3).
18 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $151,931,983) $227,421,273
Receivables:
Dividends and interest 263,726
Other assets 8,938
------------
Total assets 227,693,937
------------
LIABILITIES:
Payables:
Variation margin on futures
contracts 474,059
Fund shares redeemed 197,555
Transfer agent (See Note 3) 91,295
Investment securities purchased 77,025
NYLIFE Distributors (See Note 3) 49,957
Shareholder communication 46,390
Professional fees 31,838
Manager (See Note 3) 11,144
Custodian 6,232
Trustees 677
Accrued expenses 8,387
------------
Total liabilities 994,559
------------
Net assets $226,699,378
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 59,779
Additional paid-in capital 187,008,665
------------
187,068,444
Accumulated undistributed net
investment income 3,930,318
Accumulated net realized loss on
investments and futures
transactions (39,317,156)
Net unrealized appreciation on
investments and futures contracts 75,017,772
------------
Net assets applicable to
outstanding shares $226,699,378
============
Shares of beneficial interest
outstanding 5,977,919
============
Net asset value per share
outstanding (a) $ 37.92
Maximum sales charge (3.00% of
offering price) (a) 1.17
------------
Maximum offering price per share
outstanding (a) $ 39.09
============
</Table>
(a) Adjusted to reflect the cumulative effects of the reverse stock split in
each year, as well as the reverse stock split on December 14, 2009. (See
Note 2 (C).)
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, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 5,271,979
Interest 16,708
-----------
Total income 5,288,687
-----------
EXPENSES:
Manager (See Note 3) 578,718
Transfer agent (See Note 3) 566,589
Distribution/Service (See Note 3) 530,821
Shareholder communication 111,526
Professional fees 95,655
Custodian 24,275
Registration 20,639
Trustees 9,842
Miscellaneous 23,437
-----------
Total expenses before
waiver/reimbursement 1,961,502
Expense waiver/reimbursement from
Manager (See Note 3) (687,531)
-----------
Net expenses 1,273,971
-----------
Net investment income 4,014,716
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on:
Security transactions 1,397,517
Futures transactions (1,165,802)
-----------
Net realized gain on investments and
futures transactions 231,715
-----------
Net change in unrealized
appreciation (depreciation) on:
Investments 10,964,350
Futures contracts 2,045,314
-----------
Net change in unrealized
appreciation on investments and
futures contracts 13,009,664
-----------
Net realized and unrealized gain on
investments and futures
transactions 13,241,379
-----------
Net increase in net assets resulting
from
operations $17,256,095
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $19.
20 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 4,014,716 $ 6,037,735
Net realized gain on
investments and futures
transactions 231,715 9,439,967
Net change in unrealized
appreciation (depreciation)
on investments and futures
contracts 13,009,664 (165,672,571)
----------------------------
Net increase (decrease) in
net assets resulting from
operations 17,256,095 (150,194,869)
----------------------------
Dividends to shareholders:
From net investment income (5,950,646) (5,990,321)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 385,343 193,539
Net asset value of shares
issued to shareholders in
reinvestment of dividends 5,718,581 5,766,090
Cost of shares redeemed (32,712,323) (66,094,744)
----------------------------
Decrease in net assets
derived from capital
share transactions (26,608,399) (60,135,115)
----------------------------
Net decrease in net
assets (15,302,950) (216,320,305)
NET ASSETS:
Beginning of year 242,002,328 458,322,633
----------------------------
End of year $226,699,378 $ 242,002,328
============================
Accumulated undistributed net
investment income at end of
year $ 3,930,318 $ 5,949,924
============================
</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>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of year (a) $ 35.62 $ 56.83 $ 50.67 $ 44.28 $ 41.41
-------- -------- -------- -------- --------
Net investment income (a) 0.67 0.80 (c) 0.80 (c) 0.77 0.65 (d)
Net realized and
unrealized gain (loss)
on investments (a) 2.50 (21.27) 6.14 6.18 (e) 2.67
-------- -------- -------- -------- --------
Total from investment
operations (a) 3.17 (20.47) 6.94 6.95 3.32
-------- -------- -------- -------- --------
Less dividends:
From net investment
income (a) (0.87) (0.74) (0.78) (0.56) (0.45)
-------- -------- -------- -------- --------
Net asset value at end of
year (a) $ 37.92 $ 35.62 $ 56.83 $ 50.67 $ 44.28
======== ======== ======== ======== ========
Total investment return
(b) 9.48% (36.44%) 13.83% 15.85%(e)(f) 7.97%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.89% 1.67% 1.51% 1.45% 1.40%(d)
Net expenses 0.60% 0.60% 0.60% 0.64% 0.74%
Expenses (before
waiver/reimbursement) 0.92% 0.79% 0.74% 0.79%(f) 1.03%
Portfolio turnover rate 14% 4% 5% 5% 6%
Net assets at end of year
(in 000's) $226,699 $242,002 $458,323 $494,971 $550,307
</Table>
<Table>
(a) Adjusted to reflect the cumulative effects of the reverse stock split in each
year, as well as the reverse stock split on December 14, 2009. (See Note 2
(C).)
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions.
(c) Per share data based on average shares outstanding during the period.
(d) Net investment income and the ratio of net investment income includes $0.12
per share and 0.29%, respectively as a result of a special one time dividend
from Microsoft Corp.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was $0.04 per
share on net realized gains on investments and the effect on total investment
return was 0.12%, respectively.
(f) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
</Table>
22 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Equity Index Fund (the "Fund"). The Board of Trustees of the Trust
approved the closure of the Fund to new investors and new share purchases
effective January 1, 2002. Existing shareholders are permitted to reinvest
dividends only and NYLIFE LLC will continue to honor the unconditional guarantee
associated with the Fund. (See Note 9.)
The Fund's investment objective is to seek to provide investment results that
correspond to the total return performance (reflecting reinvestment of
dividends) of publicly traded common stocks represented by the S&P 500(R) Index.
When formed, the Fund was sub-classified as a "non-diversified" fund, which
meant that it could invest a greater percentage of its assets than other funds
in a particular issuer. However, due to the Fund's principal investment strategy
and investment process, it has historically operated as a "diversified" fund.
Therefore, the Fund will not operate as a "non-diversified" fund without first
obtaining shareholder approval.
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 ("NAVs") as of the close of the New York Stock
Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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.
The Fund declared a dividend of $0.6586 per share, which was paid on December
14, 2009, and also underwent a reverse share split on that day. The reverse
share split rate was 0.98362 per share outstanding, based on the number of fund
shares outstanding immediately after reinvestment of dividends.
Certain amounts in the Financial Highlights and Notes to Financial Statements
(see Note 8) have been adjusted to reflect the cumulative effects of this
reverse stock split and those that occurred in each of the years presented.
(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
investments are accreted and amortized, respectively, on the straight-line
method.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. 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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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,
24 MainStay Equity Index Fund
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 and possible realized loss to the Fund.
(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 financial
instrument (i.e., foreign currency, interest rate, security, or securities
index.) The Fund is subject to equity rate risk in the normal course of
investing in these transactions. The Fund enters into futures contracts for
market exposure. 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 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 have minimal counterparty risk as they are
conducted through regulated exchanges that guarantee the futures against default
by the counterparty. The Fund invests in futures contracts to provide an
efficient means of maintaining liquidity while being fully invested in the
market. The Fund's investment in futures contracts and other derivatives may
increase the volatility of the Fund's NAV and may result in a loss to the Fund.
(I) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate. The Fund had no portfolio
securities on loan as of October 31, 2009.
(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.
(K) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fair Value of derivative instruments as of October 31, 2009
LIABILITY DERIVATIVES
<Table>
<Caption>
STATEMENT OF
ASSETS AND EQUITY
LIABILITIES CONTRACTS
LOCATION RISK TOTAL
Net Assets --
Unrealized
appreciation on
investments and
Futures Contracts (a) futures contracts $(471,518) $(471,518)
---------------------
Total Fair Value $(471,518) $(471,518)
=====================
</Table>
(a) Includes cumulative appreciation (depreciation)
of futures as reported in Portfolio of Investments. Only current day's
variation margin is reported within the Statement of Assets & Liabilities.
The effect of derivative instruments on the Statement of Operations for the year
ended October 31, 2009.
REALIZED GAIN (LOSS)
<Table>
<Caption>
STATEMENT EQUITY
OF OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net realized
gain (loss)
on futures
Futures Contracts transactions $(1,165,802) $(1,165,802)
-------------------------
Total Realized Gain (Loss) $(1,165,802) $(1,165,802)
=========================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
STATEMENT EQUITY
OF OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net change in
unrealized
appreciation
(depreciation)
on futures
Futures Contracts contracts $2,045,314 $2,045,314
-----------------------
Total Change in
Appreciation
(Depreciation) $2,045,314 $2,045,314
=======================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
EQUITY
CONTRACTS
RISK TOTAL
Futures Contracts 218 218
======================
</Table>
(1) Amount disclosed represents the weighted average held during the twelve-
month period.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. Madison Square Investors LLC ("Madison Square Investors" or "Subadvisor"),
a registered investment adviser and an indirect, wholly-owned subsidiary of New
York Life, serves as Subadvisor to the Fund and is responsible for the day-to-
day portfolio management of the Fund. Pursuant to the terms of an Amended and
Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life
Investments and the Subadvisor, New York Life Investments pays for the services
of the Subadvisor.
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:
0.25% on assets up to $1 billion, 0.225% on assets from $1 billion to $3 billion
and 0.20% on assets in excess of $3 billion. The Manager has contractually
agreed to waive a portion of its management fee so that the management fee does
not exceed 0.19% on assets up to $1 billion, to 0.165% on assets from $1 billion
to $3 billion and to 0.14% on assets in excess of $3 billion, plus a fee for
fund accounting services previously provided by New York Life Investments under
a separate fund accounting agreement.
In addition, effective August 1, 2009, New York Life Investments has 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 Fund so
that the total ordinary operating expenses (total ordinary operating expenses
excludes taxes, interest, litigation, extraordinary expenses, brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed 0.60% of the average daily net assets of the Fund.
The expense limitation agreement may be modified or terminated only with the
approval of the Board of Trustees. New York Life Investments 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 limitations and the recoupment is made within the term of the
agreement. Any recoupment amount is generally applied within a fiscal year. This
agreement
26 MainStay Equity Index Fund
was set to expire July 31, 2010. On December 11, 2009, the Board of the Fund
approved an extension of the agreement to February 28, 2011.
Prior to August 1, 2009, the fund had a similar expense limitation agreement in
place.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $578,718 and waived its fees in the amount of
$687,531.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily NAV
of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's NAV, and assisting New York Life Investments in
conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street is compensated by New York
Life Investments.
(B) DISTRIBUTION FEES. The Trust, on behalf of the Fund, has entered into a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect, wholly-owned subsidiary of New York Life. The Fund has adopted a
distribution plan (the "Plan") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Plan, the Distributor receives a monthly distribution fee from
the Fund at an annual rate of 0.25% of the Fund's average daily net assets,
which is an expense of the Fund, for distribution or service activities as
designated by the Distributor.
The Plan provides that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $566,589.
(D) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(E) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $9,843.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$3,930,318 $(33,275,785) $-- $68,976,401 $39,630,934
- -------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals, mark to market on futures contracts, Real
Estate Investment Trust ("REIT") adjustments, and class action payments basis
adjustments.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
gain on investments arising from permanent differences; net assets at October
31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED UNDISTRIBUTED NET ADDITIONAL
NET INVESTMENT REALIZED GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$(83,676) $307,101 $(223,425)
- -----------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to REIT distributions.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $33,275,785 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2010 $ 784
2011 29,198
2012 3,294
- ------------------------------------
Total $33,276
- ------------------------------------
</Table>
The Fund utilized $3,193,840 of capital loss carryforwards during the year ended
October 31, 2009.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distribution paid from:
Ordinary Income $5,950,646 $5,990,321
- -----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $30,751 and $42,223 respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
Year ended October 31, 2009:
Shares sold 4,340 (a) $ 385,343
Shares issued to
shareholders in
reinvestment of dividends 187,559 (a) 5,718,581
Shares redeemed (1,006,381)(a) (32,712,323)
---------------------------
Net decrease (814,482) $(26,608,399)
===========================
Year ended October 31,
2008:
Shares sold 4,255 (a) $ 193,539
Shares issued to
shareholders in
reinvestment of dividends 108,402 (a) 5,766,090
Shares redeemed (1,385,655)(a) (66,094,744)
---------------------------
Net decrease (1,272,998) $(60,135,115)
===========================
</Table>
(a) Adjusted to reflect cumulative effects of the reverse stock split in each
year, as well as the reverse stock split on December 14, 2009. (See Note 2
(C).)
NOTE 9--GUARANTEE:
NYLIFE LLC ("NYLIFE"), a wholly-owned subsidiary of New York Life, has
guaranteed unconditionally and irrevocably pursuant to a Guaranty Agreement
between NYLIFE and the Fund (the "Guarantee") that if, on the business day
immediately after ten years from the date of purchase (the "Guarantee Date"),
the NAV of a Fund share plus the value of all dividends and distributions paid,
including cumulative reinvested dividends and distributions attributable to such
share paid during that ten-year period ("Guaranteed Share"), is less than the
price initially paid for the Fund share ("Guaranteed Amount"), NYLIFE will pay
shareholders an amount equal to the difference between the Guaranteed Amount and
the net asset value of that share as of the close of business on the Guarantee
Date. For the services that New York Life Investments and its affiliates provide
to the Fund, they receive the fees described in the prospectus (see Note 3).
Neither New York Life Investments nor its affiliates receive a separate fee for
providing the Guarantee, although the Guarantee has been considered in
connection with the annual renewal of the management fee. During the year ended
October 31, 2009, NYLIFE made payments directly to shareholders totaling
$22,964,283 related to the Guarantee.
NOTE 10--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the Fund. The Fund was created in 1990
and sold through January 1, 2001, at which time it was closed to new investors
and new investments. The settlement relates to the period from March 12, 2002
through June 30, 2004, at which time the SEC alleged that New York Life
Investments failed to provide the Fund's Board of Trustees with information
necessary to evaluate the cost of a Guarantee provided to shareholders of the
Fund, and that prospectus disclosures misrepresented that there was no charge to
the Fund or its shareholders for the
28 MainStay Equity Index Fund
Guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act and requiring a civil penalty of $800,000,
disgorgement of $3,950,075 (which represents a portion of its management fees
relating to the Fund for the relevant period) as well as interest of $1,350,709.
These amounts, totaling approximately $6.1 million, are being distributed to
shareholders who held shares of the Fund between March 2002 and June 2004,
without any material financial impact to New York Life Investments.
NOTE 11--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Equity Index Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Equity Index Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
30 MainStay Equity Index Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Equity Index Fund ("Fund") and New
York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and Madison Square
Investors LLC ("MSI") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MSI as subadviser to the Fund, and responses to
several comprehensive lists of questions encompassing a variety of topics
prepared on behalf of the Board by independent legal counsel to the Board.
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 Investments. 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 legal and compliance matters, portfolio turnover, and sales and
marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MSI; (ii)
the investment performance of the Fund, New York Life Investments and MSI; (iii)
the costs of the services to be provided, and profits to be realized, by New
York Life Investments and its affiliates, including MSI as subadviser to the
Fund, from their 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 and subadvisory fee levels and overall total ordinary operating
expenses, particularly as compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MSI
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MSI's compliance with
the Fund's policies and investment objectives, and for implementing Board
directives as they relate to the Fund. In addition, the Board noted that New
York Life Investments also is responsible for paying all of the salaries and
expenses for the Fund's officers. The Board also considered the benefits to
shareholders of being part
mainstayinvestments.com 31
of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the Fund, including materials provided to the Board of
Trustees of The MainStay Funds in 2002-2004 in connection with the annual review
of the Fund's management fee. The Board noted that, since this matter was first
brought to the Board's attention in 2003, New York Life Investments had taken a
number of steps to enhance the quality and completeness of information provided
to the Board in connection with the Board's consideration of the MainStay Group
of Funds' investment advisory contracts. The Board believes that New York Life
Investments has taken appropriate actions in response to this matter.
The Board also examined the nature, extent and quality of the services that MSI
proposed to provide to the Fund. The Board evaluated MSI's experience in serving
as subadviser to the Fund and managing other portfolios. It examined MSI's track
record and experience in providing investment advisory services, the experience
of investment advisory, senior management and administrative personnel at MSI,
and MSI's overall legal and compliance environment. The Board also reviewed
MSI's willingness to invest in personnel designed to benefit the Fund. In this
regard, the Board considered the experience of the Fund's portfolio managers,
the number of accounts managed by the portfolio managers and the method for
compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MSI'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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MSI
The Board considered the costs of the services provided by New York Life
Investments and MSI under the Agreements, and the profits expected to be
realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MSI is an affiliate of New York Life
Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MSI in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MSI, due to their relationships with the Fund, the Board
considered, among other things, each party's investments in personnel, systems,
equipment and other resources necessary to manage the Fund, and the fact that
New York Life Investments is responsible for paying the subadvisory fees for the
Fund. The Board acknowledged that New York Life Investments and MSI must be in a
position to pay and retain experienced professional personnel to provide
services to the Fund, and that New York Life Investments' ability to maintain a
strong financial position is important in order for New York Life Investments to
continue to provide high-quality ongoing services to the Fund. The Board noted,
for example, increased costs borne by New York Life Investments and its
affiliates due to new and ongoing regulatory
32 MainStay Equity Index Fund
and compliance requirements. The Board also noted that the Fund benefits from
the allocation of certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MSI, the Board
considered information illustrating the revenues and expenses allocated to the
Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MSI) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MSI may realize a larger profit margin as the Fund's assets grow
over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MSI are paid
by New York Life Investments, not the Fund. The Board also considered the impact
of the Fund's expense limitation arrangements pursuant to which New York Life
Investments has agreed to limit the Fund's total ordinary operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MSI on fees charged 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 explanations from New York Life Investments and MSI about the
different scope of services provided to retail mutual funds as compared with
other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
mainstayinvestments.com 33
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared
with certain other fees (e.g., management fees), which are charged based on the
Fund's average net assets. The Board took into account information from New York
Life Investments showing that the Fund's transfer agent fee schedule is
reasonable, including industry data showing that the per-account fees that NYLIM
Service Company ("NSC"), the Fund's transfer agent, charges the Fund are within
the range of per-account fees charged by transfer agents to other mutual funds.
In addition, the Board particularly considered representations from New York
Life Investments that the MainStay Group of Funds' transfer agent fee structure
is designed to allow NSC to provide transfer agent services to the Funds
essentially "at cost," and that NSC historically has realized only very modest
profitability from providing transfer agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management and subadvisory fees and total ordinary operating expenses
were within a range that is competitive and, within the context of the Board's
overall conclusions regarding the Agreements, support a conclusion that these
fees and expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
34 MainStay Equity Index Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$5,170,430 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, 2009,
should be multiplied by 100.0% to arrive at the amount eligible for the
corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
36 MainStay Equity Index Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Equity Index Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
40 MainStay Equity Index Fund
mainstayinvestments.com 41
42 MainStay Equity Index Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- --------------------------------------------------------
Not Bank Guarantee Not Insured by Any Government Agency
- --------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO17052 (RECYCLE LOGO) MS283-09 MSEI11-12/09
06
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENT LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 16
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 23
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 34
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 35
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 39
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 39
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 39
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 40
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 41.93% 7.06% 11.48%
Excluding sales charges 48.62 8.05 11.99
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY GLOBAL JPMORGAN EMBI
HIGH INCOME GLOBAL DIVERSIFIED
FUND INDEX
--------------- ------------------
10/31/99 9550 10000
10832 11500
11706 12867
13268 14129
17610 17506
20121 19691
22405 21695
25038 24133
27067 25996
19941 20738
10/31/09 29636 29357
</Table>
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 42.34% 7.14% 11.51%
Excluding sales charges 49.04 8.13 12.03
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY GLOBAL JPMORGAN EMBI
HIGH INCOME GLOBAL DIVERSIFIED
FUND INDEX
--------------- ------------------
10/31/99 23875 25000
27080 28750
29266 32166
33170 35322
44024 43764
50302 49227
56012 54238
62594 60333
67668 64990
49881 51846
10/31/09 74344 73392
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 42.69% 6.97% 11.17%
Excluding sales charges 47.69 7.27 11.17
</Table>
(With sales charges)
(PERFORMANCE GRAPH
<Table>
<Caption>
MAINSTAY GLOBAL JPMORGAN EMBI
HIGH INCOME GLOBAL DIVERSIFIED
FUND INDEX
--------------- ------------------
10/31/99 10000 10000
11261 11500
12081 12867
13602 14129
17912 17506
20305 19691
22462 21695
24904 24133
26718 25996
19525 20738
10/31/09 28836 29357
</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.
Class A shares generally have a $25,000 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, the minimum initial investment is $15,000. Investor Class
shares and Class A shares are sold with a maximum initial sales charge of
4.50% 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 Manager 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
existing expense limitations and the recoupment is made within the term of
the agreement. Any recoupment amount is generally applied within a fiscal
year. This agreement expires on February 28, 2011.
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--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 46.50% 7.27% 11.17%
Excluding sales charges 47.50 7.27 11.17
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY GLOBAL JPMORGAN EMBI
HIGH INCOME GLOBAL DIVERSIFIED
FUND INDEX
--------------- ------------------
10/31/99 10000 10000
11261 11500
12081 12867
13602 14129
17912 17506
20305 19691
22461 21695
24904 24133
26717 25996
19548 20738
10/31/09 28834 29357
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------
49.31% 8.39% 12.30%
</Table>
(With sales charges)
(PERFORMANCE GRAPH
<Table>
<Caption>
MAINSTAY GLOBAL JPMORGAN EMBI
HIGH INCOME GLOBAL DIVERSIFIED
FUND INDEX
--------------- ------------------
10/31/99 10000 10000
11371 11500
12319 12867
13998 14129
18625 17506
21334 19691
23815 21695
26680 24133
28924 25996
21372 20738
10/31/09 31912 29357
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
JPMorgan EMBI Global Diversified Index(4) 41.56% 8.32% 11.37%
Average Lipper emerging markets debt fund(5) 40.81 7.80 11.71
</Table>
2. Performance figures for Investor Class shares, which were 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 I shares, first offered to the public on August
31, 2007, include the historical performance of Class A shares through August
30, 2007 adjusted for certain contractual fees and expenses. Unadjusted, the
performance shown for Class I shares might have been lower.
4. The JPMorgan EMBI Global Diversified Index (formerly JPMorgan EMBI Global
Constrained Index) is a market-capitalization weighted, total return index
tracking the traded market for U.S. dollar-denominated Brady bonds,
Eurobonds, traded loans and local market debt instruments issued by sovereign
and quasi-sovereign entities. Total returns assume reinvestment of all
dividends and capital gains. The JPMorgan EMBI Global Diversified Index is
the Fund's broad-based securities market index for comparison purposes. An
investment cannot be made directly in an index.
5. The average Lipper emerging markets debt fund is representative of funds that
seek either current income or total return by investing at least 65% of total
assets in emerging market debt securities, where "emerging market" is defined
by a country's GNP per capita or other economic measures. This benchmark is a
product of Lipper Inc. 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 Global High Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GLOBAL HIGH INCOME FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,207.70 $ 8.18 $1,017.80 $ 7.48
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,208.70 $ 7.40 $1,018.50 $ 6.77
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,203.40 $12.33 $1,014.00 $11.27
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,203.40 $12.33 $1,014.00 $11.27
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,209.90 $ 6.18 $1,019.60 $ 5.65
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.47% for Investor Class, 1.33% for Class A, 2.22% for Class B and Class C
and 1.11% for Class I) multiplied by the average account value over the
period, divided by 365 and multiplied by 184 (to reflect the one-half year
period). The table above represents the actual expenses incurred during the
one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Corporate Bonds 50.10
Government & Federal Agencies 44.10
Short-Term Investment 5.20
Cash and Other Assets, Less Liabilities 0.60
</Table>
See Portfolio of Investments beginning on page 11 for specific holdings within
these categories.
TOP TEN ISSUERS HELD AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Republic of Indonesia, 6.625%-11.625%,
due 5/4/14-2/17/37
2. Republic of Turkey, zero coupon-7.50%,
due 1/13/10-2/5/25
3. Republic of Venezuela, 6.00%-9.25%, due
12/9/20-5/7/28
4. Republic of Philippines, 9.50%, due
2/2/30
5. Republic of Panama, 6.70%-9.375%, due
9/30/27-1/26/36
6. Russian Federation, 7.50%, due 3/31/30
7. Vale Overseas, Ltd., 6.875%, due
11/21/36
8. Republic of Argentina, 2.50%-8.28%,
due 12/31/33-12/31/38
9. Agribank FCB, 9.125%, due 7/15/19
10. Republic of Uruguay, 6.875%-9.25%,
due 5/17/17-9/28/25
</Table>
8 MainStay Global High Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS GARY GOODENOUGH, JAMES RAMSAY, CFA, AND
HOWARD BOOTH OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY GLOBAL HIGH INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Global High Income Fund returned 48.62%
for Investor Class shares, 49.04% for Class A shares, 47.69% for Class
B shares and 47.50% for Class C shares for the 12
months ended October 31, 2009. Over the same per-iod, the Fund's Class I shares
returned 49.31%. All share classes outperformed the 40.81% return of the average
Lipper(1) emerging markets debt fund and the 41.56% return of the JPMorgan EMBI
Global Diversified Index(2) for the 12 months ended October 31, 2009. The
JPMorgan EMBI Global Diversified Index is the Fund's broad-based securities-
market index. See pages 5 and 6 for Fund returns with sales charges.
WHAT FACTORS INFLUENCED EMERGING-MARKET DEBT AS A WHOLE DURING THE REPORTING
PERIOD?
As the reporting period began, emerging-market debt was still reeling from the
aftershocks of the mid-September bankruptcy of Lehman Brothers. That bankruptcy
brought lending and trading to a virtual halt in many financial markets as
counterparty risk became uncertain. Fortunately, Congress, the Federal Reserve,
the Federal Deposit Insurance Corporation (FDIC) and the U.S. Treasury
Department initiated emergency measures to boost liquidity, and these measures
improved market confidence as the months progressed.
As credit issuance resumed, refinancing risks of sovereign and corporate
borrowers were reduced and spreads tightened. In other words, the yield
differential between emerging-market debt and duration-equivalent U.S. Treasury
securities narrowed. The International Monetary Fund developed innovative and
flexible currency lines that supported emerging-market debt by providing backing
for many otherwise solid sovereign borrowers.
The monetary expansion of the G-10(3) further bolstered market confidence during
the reporting period. China's growth also strengthened market confidence by
extending swap lines(4) to various emerging-market countries and by providing
huge fiscal stimulus to its own economy. With China's economic growth
reaccelerating, commodity markets rebounded, strengthening prospects for many
commodity producers in the developing world.
WHAT FACTORS AFFECTED THE MANAGEMENT AND PERFORMANCE OF THE FUND DURING THE
REPORTING PERIOD?
The Fund outperformed the JPMorgan EMBI Global Diversified Index during the
reporting period by nimbly increasing risk in response to efforts by multiple
countries to reinvigorate their economies. We based our strategy on our
recollection of the emerging-market collapse of 1998. Having managed emerging-
market debt funds during that difficult period, we were acutely aware of the
magnitude of potential opportunities created by such declines.
We increased the Fund's beta--or volatility in relation to the market as a
whole--as it became apparent that investors were becoming less risk-averse than
they had been at the start of the reporting period. As the market moved to a new
stage in its risk cycle, the yield premium attached to emerging-market debt and
- ----------
The values of debt securities fluctuate depending on various factors, including
interest rates, issuer creditworthiness, liquidity, market conditions and
maturities. Foreign securities may be subject to greater risks than U.S.
investments, including currency fluctuations, less-liquid trading markets,
greater price volatility, political and economic instability, less publicly
available information, and changes in tax or currency laws or monetary policy.
These risks are likely to be greater in emerging markets than in developed
markets. High-yield debt securities ("junk bonds") are generally considered
speculative because they present a greater risk of loss than higher-quality debt
securities and may be subject to greater price volatility. The Fund may invest
in derivatives, which may increase the volatility of the Fund's net asset value
and may result in a loss to the Fund. The principal risk of mortgage-related and
asset-backed securities is that the underlying debt may be prepaid ahead of
schedule if interest rates fall, thereby reducing the value of the Fund's
investments. If interest rates rise, there may be fewer prepayments, which would
cause the average bond maturity to rise and increase the potential for the Fund
to lose money. The Fund is nondiversified. By concentrating in a smaller number
of investments, the Fund's risk is increased because each investment has a
greater effect on the Fund's performance.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the JPMorgan EMBI Global
Diversified Index.
3. The Group of Ten or G-10 consists of the wealthiest 11 member nations of the
International Monetary Fund (Belgium, Canada, France, Germany, Italy, Japan,
Netherlands, Sweden, Switzerland, the United Kingdom and the United States).
Although Switzerland became the eleventh member in 1994, the original name
persists.
4. A swap line is a temporary reciprocal currency arrangement between central
banks. The central banks agree to keep a supply of their country's currency
available to trade to other central banks at the going exchange rate. A swap
line is meant for overnight and short-term lending only. This keeps liquidity
available for central banks to lend to their private banks in order to
maintain their reserve requirements. This liquidity is necessary to keep
financial markets functioning smoothly.
mainstayinvestments.com 9
currencies started to decline. We increased the Fund's credit duration,(5) which
allowed the Fund to benefit from a steep yield curve(6) and later from rapidly
declining spreads.(7) We also increased the Fund's currency exposure, which
added significant value as the market responded to lower volatility by reducing
demand for the low-yielding U.S. dollar. We also adopted overweight positions in
select countries that we believed had solid prospects.
During the second half of the reporting period, we added to the Fund's holdings
of higher-yielding quasi-sovereign and corporate bonds. We found the risk/reward
profile of new issue securities to be attractive, providing excellent
opportunities to add value. We felt that issuance from Indonesia carried
unusually attractive risk/reward profiles, and Indo-nesian bonds rallied nearly
45 basis points in the second and third calendar quarters alone. (A basis point
is one-hundredth of a percentage point.)
HOW DID YOU INCREASE THE FUND'S CURRENCY EXPOSURE?
Sensing a near-term peak in the U.S. dollar, we bought a number of high-yielding
commodity currencies, including the South African rand. During the reporting
period, the rand's terms of trade showed signs of improvement as gold exports
remained strong and oil imports fell dramatically. From the time the Fund
purchased the South African rand through October 31, 2009, the rand was the
world's best performing currency, rallying nearly 20%. The Fund also benefited
from core holdings of the Brazilian real and the Norwegian krone, both of which
recorded substantial gains from the end of March through the end of October
2009.
WHAT CONDITIONS AFFECTED THE FUND'S WEAKER HOLDINGS DURING THE REPORTING PERIOD?
While the Fund was aggressive in its holdings of solid sovereign and corporate
credits, performance would have benefited from even greater exposure to
economically challenged countries such as Ecuador, Argentina, Ukraine and Iraq.
The emerging-market debt rally gathered steam as summer turned to fall. However,
we remained skeptical that the recovery would be strong enough to provide
sustainable fundamental improvements in these markets. Upcoming elections in
several of these countries gave us additional reasons to carefully evaluate
risks.
At the end of the reporting period, the Fund held overweight positions relative
to the JPMorgan EMBI Global Diversified Index in the Republic of Korea, the
United Arab Emirates and the United States. We adopted this positioning to
provide a measure of risk management in the event of a market correction.
- ----------
5. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
6. The yield curve is a line that plots the yields of various securities of
similar quality--typically U.S. Treasury issues--across a range of
maturities. The U.S. Treasury yield curve serves as a benchmark for other
debt and is used in economic forecasting.
7. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any 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 Global High Income Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 94.2%+
CORPORATE BONDS 50.1%
- -----------------------------------------------------------------
AUSTRALIA 0.4%
Macquarie Group, Ltd.
7.625%, due 8/13/19 (a) $ 800,000 $ 883,640
-------------
BERMUDA 2.1%
AES China Generating Co.,
Ltd.
8.25%, due 6/26/10 501,000 488,273
Asia Aluminum Holdings,
Ltd.
8.00%, due 12/23/11
(a)(b) 500,000 78,750
8.00%, due 12/23/11 (b) 985,000 155,138
Citic Resources Finance,
Ltd.
6.75%, due 5/15/14 (a) 1,475,000 1,412,312
Noble Group, Ltd.
6.75%, due 1/29/20 (a) 1,600,000 1,601,883
Qtel International Finance
7.875%, due 6/10/19 (a) 800,000 933,544
-------------
4,669,900
-------------
BRAZIL 2.2%
Centrais Eletricas
Brasileiras S.A.
6.875%, due 7/30/19 (a) 4,100,000 4,294,750
Companhia de Saneamento
Basico do Estado de Sao
Paulo
7.50%, due 11/3/16 (a) 630,000 685,125
-------------
4,979,875
-------------
CANADA 1.2%
Nexen, Inc.
7.50%, due 7/30/39 2,400,000 2,650,493
-------------
CAYMAN ISLANDS 7.0%
ADCB Finance Cayman, Ltd.
4.75%, due 10/8/14 (a) 3,200,000 3,194,467
CCL Finance, Ltd.
9.50%, due 8/15/14 (a) 2,500,000 2,659,375
Independencia
International, Ltd.
9.875%, due 1/31/17 400,000 80,000
Odebrecht Finance, Ltd.
7.00%, due 4/21/20 (a) 1,600,000 1,512,000
TAM Capital 2, Inc.
9.50%, due 1/29/20 (a) 1,600,000 1,508,000
V Vale Overseas, Ltd.
6.875%, due 11/21/36 5,900,000 5,935,990
Voto-Votorantim Overseas
Trading Operations N.V.
6.625%, due 9/25/19 (a) 800,000 768,000
-------------
15,657,832
-------------
COLOMBIA 0.6%
AES Chivor S.A. E.S.P.
9.75%, due 12/30/14 (a) 500,000 570,000
Ecopetrol S.A.
7.625%, due 7/23/19 800,000 872,000
-------------
1,442,000
-------------
IRELAND 0.3%
TransCapitalInvest, Ltd.
for
OJSC AK Transneft
8.70%, due 8/7/18 (a) 500,000 560,000
-------------
JAMAICA 1.3%
KazMunaiGaz Finance Sub
B.V.
11.75%, due 1/23/15 (a) 2,500,000 2,987,500
-------------
LUXEMBOURG 6.2%
ALROSA Finance S.A.
Series Reg S
8.875%, due 11/17/14 3,800,000 3,781,000
Gaz Capital S.A.
8.125%, due 7/31/14 (a) 2,500,000 2,640,750
Gazprom International S.A.
7.201%, due 2/1/20 (a) 1,702,697 1,738,965
RSHB Capital S.A. for OJSC
Russian Agricultural Bank
6.97%, due 9/21/16 2,500,000 2,412,500
TNK-BP Finance S.A.
7.50%, due 7/18/16 (a) 980,000 987,350
7.875%, due 3/13/18 (a) 1,000,000 1,012,500
UBS Luxembourg S.A. for
OJSC Vimpel
Communications
Series Reg S
8.25%, due 5/23/16 500,000 506,875
8.25%, due 5/23/16 (a) 900,000 912,375
-------------
13,992,315
-------------
MEXICO 2.1%
Axtel SAB de C.V.
9.00%, due 9/22/19 (a) 800,000 824,000
Controladora Mabe S.A. C.V.
7.875%, due 10/28/19 (a) 1,600,000 1,536,000
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest issuers held, as of October 31, 2009, excluding
short-term investment. 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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
MEXICO (CONTINUED)
Grupo Petrotemex S.A. de
C.V.
9.50%, due 8/19/14 (a) $ 1,600,000 $ 1,660,000
Grupo Televisa S.A.
6.00%, due 5/15/18 750,000 757,353
-------------
4,777,353
-------------
NETHERLANDS 2.5%
Arcos Dorados B.V.
7.50%, due 10/1/19 (a) 1,600,000 1,544,000
Majapahit Holding B.V.
7.75%, due 1/20/20 (a) 1,700,000 1,685,584
8.00%, due 8/7/19 (a) 1,600,000 1,632,000
Paiton Energy Funding B.V.
9.34%, due 2/15/14 712,895 720,024
-------------
5,581,608
-------------
RUSSIA 0.7%
Raspadskaya Securities,
Ltd.
7.50%, due 5/22/12 1,500,000 1,494,375
-------------
SOUTH KOREA 5.5%
Industrial Bank of Korea
7.125%, due 4/23/14 (a) 1,700,000 1,872,395
Kookmin Bank
7.25%, due 5/14/14 (a) 2,500,000 2,769,155
7.25%, due 5/14/14 1,300,000 1,434,116
Korea Hydro & Nuclear Power
6.25%, due 6/17/14 (a) 3,600,000 3,853,875
National Agricultural Co.
5.00%, due 9/30/14 (a) 1,600,000 1,628,525
Woori Bank
7.00%, due 2/2/15 (a) 800,000 863,789
-------------
12,421,855
-------------
TRINIDAD AND TOBAGO 2.5%
Petroleum Co. of Trinidad &
Tobago, Ltd.
9.75%, due 8/14/19 (a) 4,840,000 5,493,400
-------------
UNITED ARAB EMIRATES 3.0%
Abu Dhabi National Energy
Co.
6.25%, due 9/16/19 (a) 1,600,000 1,612,498
6.50%, due 7/2/14 (a) 3,250,000 3,538,980
7.25%, due 8/1/18 (a) 1,425,000 1,538,383
-------------
6,689,861
-------------
UNITED STATES 11.6%
V Agribank FCB
9.125%, due 7/15/19 5,300,000 5,698,814
Allegheny Ludlum Corp.
6.95%, due 12/15/25 2,100,000 1,860,472
Altria Group, Inc.
9.70%, due 11/10/18 1,680,000 2,068,360
Citigroup, Inc.
8.125%, due 7/15/39 600,000 698,197
Dow Chemical Co. (The)
8.55%, due 5/15/19 2,040,000 2,328,911
Harley-Davidson Funding
Corp.
6.80%, due 6/15/18 (a) 2,300,000 2,286,191
NII Capital Corp.
10.00%, due 8/15/16 (a) 1,800,000 1,899,000
Pemex Project Funding
Master Trust
5.75%, due 3/1/18 5,600,000 5,544,000
Rohm & Haas Co.
7.85%, due 7/15/29 2,400,000 2,401,954
Xerox Corp.
8.25%, due 5/15/14 1,000,000 1,152,177
-------------
25,938,076
-------------
VENEZUELA 0.5%
Petroleos de Venezuela S.A.
5.25%, due 4/12/17 1,940,000 1,136,840
-------------
VIRGIN ISLANDS 0.4%
Galaxy Entertainment
Finance Co., Ltd.
Series Reg S
9.875%, due 12/15/12 1,000,000 980,000
-------------
Total Corporate Bonds
(Cost $107,735,824) 112,336,923
-------------
GOVERNMENT & FEDERAL AGENCIES 44.1%
- -----------------------------------------------------------------
ARGENTINA 2.6%
V Republic of Argentina
2.50%, due 12/31/38 14,360,000 5,097,800
8.28%, due 12/31/33 1,052,669 742,131
-------------
5,839,931
-------------
BRAZIL 2.1%
Brazil Notas do Tesouro
Nacional
Series F
10.00%, due 1/1/14 B$ 6,210,000 3,352,304
Federal Republic of Brazil
5.625%, due 1/7/41 $ 1,550,000 1,457,000
-------------
4,809,304
-------------
COLOMBIA 2.2%
Republic of Colombia
6.125%, due 1/18/41 1,600,000 1,520,000
8.125%, due 5/21/24 2,830,000 3,353,550
-------------
4,873,550
-------------
</Table>
12 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
CROATIA 0.7%
Republic of Croatia
6.75%, due 11/5/19 (a) $ 1,500,000 $ 1,513,875
-------------
DOMINICAN REPUBLIC 0.6%
Dominican Republic
9.04%, due 1/23/18 (a) 655,786 675,460
Series Reg S
9.04%, due 1/23/18 546,488 562,883
-------------
1,238,343
-------------
EL SALVADOR 1.5%
Republic of El Salvador
7.65%, due 6/15/35 800,000 800,000
8.25%, due 4/10/32 (a) 1,550,000 1,581,000
Series Reg S
8.25%, due 4/10/32 900,000 918,000
-------------
3,299,000
-------------
GABON 0.5%
Gabonese Republic
8.20%, due 12/12/17 (a) 1,200,000 1,237,500
-------------
INDONESIA 8.0%
V Republic of Indonesia
6.625%, due 2/17/37 (a) 2,000,000 1,950,000
10.375%, due 5/4/14 (a) 2,150,000 2,580,000
11.625%, due 3/4/19 (a) 9,670,000 13,344,600
-------------
17,874,600
-------------
JAMAICA 0.2%
Jamaica Government
8.00%, due 6/24/19 650,000 562,250
-------------
LEBANON 0.8%
Republic of Lebanon
Series Reg S
8.25%, due 4/12/21 1,650,000 1,810,875
-------------
LITHUANIA 1.1%
Republic of Lithuania
6.75%, due 1/15/15 (a) 2,500,000 2,514,968
-------------
MEXICO 1.3%
United Mexican States
7.25%, due 12/15/16 M$39,250,000 2,887,920
-------------
PANAMA 2.8%
V Republic of Panama
6.70%, due 1/26/36 558,000 585,900
8.875%, due 9/30/27 920,000 1,159,200
9.375%, due 4/1/29 3,252,000 4,422,720
-------------
6,167,820
-------------
PHILIPPINES 2.8%
V Republic of Philippines
9.50%, due 2/2/30 4,660,000 6,186,150
-------------
POLAND 1.0%
Poland Government Bond
6.375%, due 7/15/19 2,000,000 2,202,320
-------------
RUSSIA 2.7%
V Russian Federation
7.50%, due 3/31/30 5,498,765 6,117,926
-------------
SOUTH AFRICA 0.3%
Republic of South Africa
6.875%, due 5/27/19 600,000 669,750
-------------
SRI LANKA 0.4%
Republic of Sri Lanka
7.40%, due 1/22/15 (a) 800,000 800,000
-------------
TURKEY 3.9%
V Republic of Turkey
(zero coupon), due
1/13/10 YTL 1,614,000 1,058,342
7.375%, due 2/5/25 $ 6,225,000 6,831,937
7.50%, due 7/14/17 800,000 893,000
-------------
8,783,279
-------------
UKRAINE 1.0%
Ukraine Government
6.75%, due 11/14/17 (a) 1,200,000 879,120
6.875%, due 3/4/11 (a) 350,000 322,000
7.65%, due 6/11/13 (a) 1,300,000 1,105,000
-------------
2,306,120
-------------
UNITED STATES 1.7%
State of California
General Obligation
7.50%, due 4/1/34 3,755,000 3,905,425
-------------
URUGUAY 2.5%
V Republic of Uruguay
6.875%, due 9/28/25 800,000 828,000
9.25%, due 5/17/17 3,835,000 4,745,812
-------------
5,573,812
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
VENEZUELA 3.4%
V Republic of Venezuela
6.00%, due 12/9/20 $ 4,300,000 $ 2,472,500
Series Reg S
9.25%, due 5/7/28 7,270,000 5,179,875
-------------
7,652,375
-------------
Total Government & Federal
Agencies
(Cost $89,811,920) 98,827,093
-------------
Total Long-Term Bonds
(Cost $197,547,744) 211,164,016
-------------
SHORT-TERM INVESTMENT 5.2%
- -----------------------------------------------------------------
REPURCHASE AGREEMENT 5.2%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$11,650,861
(Collateralized by a
United States Treasury
Bill with a rate of
0.105% and a maturity
date of 3/18/10, with a
Principal Amount of
$11,890,000 and a Market
Value of $11,885,244) 11,650,851 11,650,851
-------------
Total Short-Term Investment
(Cost $11,650,851) 11,650,851
-------------
Total Investments
(Cost $209,198,595) (c) 99.4% 222,814,867
Cash and Other Assets,
Less Liabilities 0.6 1,251,175
----- ------------
Net Assets 100.0% $ 224,066,042
===== ============
</Table>
<Table>
+++ On a daily basis New York Life
Investments 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) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Issue in default.
(c) At October 31, 2009, cost is $209,851,388
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $17,986,416
Gross unrealized depreciation (5,022,937)
-----------
Net unrealized appreciation $12,963,479
===========
</Table>
The following abbreviations are used in the above portfolio:
B$ -- Brazilian Real
M$ -- Mexican Peso
YTL -- Turkish Lira
14 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets and liabilities.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Long-Term Bonds
Corporate Bonds $ -- $112,336,923 $ -- $112,336,923
Government & Federal Agencies -- 98,827,093 -- 98,827,093
-------- ------------ -------- ------------
Total Long-Term Bonds -- 211,164,016 -- 211,164,016
-------- ------------ -------- ------------
Short-Term Investment
Repurchase Agreement -- 11,650,851 -- 11,650,851
-------- ------------ -------- ------------
Total Investments in Securities -- 222,814,867 -- $222,814,867
-------- ------------ -------- ------------
Other Financial Instruments
Foreign Currency Forward Contracts (a) -- 357,148 -- 357,148
-------- ------------ -------- ------------
Total Other Financial Instruments -- 357,148 -- 357,148
-------- ------------ -------- ------------
Total Investments and Other Financial
Instruments $-- $223,172,015 $-- $223,172,015
======== ============ ======== ============
</Table>
(a) The value listed for these securities represents unrealized appreciation on
Note 5 of the financial statements for foreign currency forward contracts.
LIABILITY VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Other Financial Instruments
Foreign Currency Forward Contracts (a) $ -- $(682,173) $ -- $(682,173)
-------- --------- -------- ---------
Total Other Financial Instruments $-- $(682,173) $-- $(682,173)
======== ========= ======== =========
</Table>
(a) The value listed for these securities represents unrealized depreciation on
Note 5 of the financial statements for foreign currency forward contracts.
At October 31, 2009, the Fund did not hold any investments with significant
unobservable inputs (Level 3).
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $209,198,595) $222,814,867
Cash denominated in foreign
currencies
(identified cost $4,753) 4,990
Receivables:
Interest 3,955,952
Fund shares sold 3,517,770
Other assets 25,451
Unrealized appreciation on foreign
currency forward contracts 357,148
------------
Total assets 230,676,178
------------
LIABILITIES:
Payables:
Investment securities purchased 3,157,984
Fund shares redeemed 2,033,827
Manager (See Note 3) 134,807
NYLIFE Distributors (See Note 3) 96,503
Transfer agent (See Note 3) 82,130
Shareholder communication 41,352
Professional fees 33,407
Custodian 12,189
Trustees 580
Accrued expenses 4,139
Dividend payable 331,045
Unrealized depreciation on foreign
currency forward contracts 682,173
------------
Total liabilities 6,610,136
------------
Net assets $224,066,042
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 202,654
Additional paid-in capital 216,872,443
------------
217,075,097
Accumulated undistributed net
investment income 1,411,576
Accumulated net realized loss on
investments, futures transactions
and foreign currency transactions (7,712,367)
Net unrealized appreciation on
investments 13,616,272
Net unrealized depreciation on
translation of other assets and
liabilities in foreign currencies
and foreign currency forward
contracts (324,536)
------------
Net assets $224,066,042
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 17,580,584
============
Shares of beneficial interest
outstanding 1,575,835
============
Net asset value per share
outstanding $ 11.16
Maximum sales charge (4.50% of
offering price) 0.53
------------
Maximum offering price per share
outstanding $ 11.69
============
CLASS A
Net assets applicable to
outstanding shares $119,132,049
============
Shares of beneficial interest
outstanding 10,737,778
============
Net asset value per share
outstanding $ 11.09
Maximum sales charge (4.50% of
offering price) 0.52
------------
Maximum offering price per share
outstanding $ 11.61
============
CLASS B
Net assets applicable to
outstanding shares $ 25,650,650
============
Shares of beneficial interest
outstanding 2,337,252
============
Net asset value and offering price
per share outstanding $ 10.97
============
CLASS C
Net assets applicable to
outstanding shares $ 57,730,976
============
Shares of beneficial interest
outstanding 5,256,743
============
Net asset value and offering price
per share outstanding $ 10.98
============
CLASS I
Net assets applicable to
outstanding shares $ 3,971,783
============
Shares of beneficial interest
outstanding 357,774
============
Net asset value and offering price
per share outstanding $ 11.10
============
</Table>
16 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest (a) $12,375,646
-----------
EXPENSES:
Manager (See Note 3) 1,109,708
Transfer agent--Investor Class
(See Note 3) 59,367
Transfer agent--Class A (See Note
3) 170,345
Transfer agent--Classes B and C
(See Note 3) 227,322
Transfer agent--Class I (See Note
3) 3,275
Distribution--Class B (See Note 3) 172,797
Distribution--Class C (See Note 3) 269,653
Distribution/Service--Investor
Class (See Note 3) 38,186
Distribution/Service--Class A (See
Note 3) 191,830
Service--Class B (See Note 3) 57,599
Service--Class C (See Note 3) 89,884
Shareholder communication 85,662
Professional fees 76,304
Registration 69,667
Custodian 46,356
Trustees 7,136
Miscellaneous 17,488
-----------
Total expenses before waiver 2,692,579
Expense waiver from Manager
(See Note 3) (116,927)
-----------
Net expenses 2,575,652
-----------
Net investment income 9,799,994
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $(3,087,874)
Futures transactions 125,054
Foreign currency transactions 2,896,812
-----------
Net realized loss on investments,
futures transactions and foreign
currency transactions (66,008)
-----------
Net change in unrealized
appreciation (depreciation) on:
Investments 49,524,703
Translation of other assets and
liabilities in foreign
currencies and foreign currency
forward contracts (957,008)
-----------
Net change in unrealized
depreciation on investments and
foreign currency transactions 48,567,695
-----------
Net realized and unrealized gain on
investments, futures transactions
and foreign currency transactions 48,501,687
-----------
Net increase in net assets resulting
from
operations $58,301,681
===========
</Table>
(a) Interest recorded net of foreign withholding taxes in the amount of $63,656.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 9,799,994 $ 11,147,786
Net realized loss on
investments, futures
transactions, swap
transactions and foreign
currency transactions (66,008) (5,223,761)
Net change in unrealized
appreciation (depreciation)
on investments and foreign
currency transactions 48,567,695 (54,206,944)
---------------------------
Net increase (decrease) in
net assets resulting from
operations 58,301,681 (48,282,919)
---------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (1,082,486) (565,045)
Class A (5,584,414) (6,620,885)
Class B (1,501,881) (1,687,843)
Class C (2,307,007) (2,172,047)
Class I (102,950) (2,888)
---------------------------
(10,578,738) (11,048,708)
---------------------------
From net realized gain on
investments:
Class A -- (2,676,994)
Class B -- (753,826)
Class C -- (915,247)
Class I -- (1,091)
---------------------------
-- (4,347,158)
---------------------------
Total dividends and
distributions to
shareholders (10,578,738) (15,395,866)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 88,487,380 35,211,015
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 7,219,407 10,910,871
Cost of shares redeemed (40,279,078) (80,604,996)
---------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 55,427,709 (34,483,110)
---------------------------
Net increase (decrease)
in net assets 103,150,652 (98,161,895)
NET ASSETS:
Beginning of year 120,915,390 219,077,285
---------------------------
End of year $224,066,042 $120,915,390
===========================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of year $ 1,411,576 $ (37,799)
===========================
</Table>
18 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
---------------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
---------------------------------
2009 2008
Net asset value at beginning of period $ 8.07 $ 11.27
------- -------
Net investment income 0.65 (a) 0.42 (a)
Net realized and unrealized gain (loss)
on investments 3.00 (3.23)
Net realized and unrealized gain on
foreign currency transactions 0.13 0.02
------- -------
Total from investment operations 3.78 (2.79)
------- -------
Less dividends and distribution:
From net investment income (0.69) (0.41)
From net realized gain on investments -- --
------- -------
Total dividends and distributions (0.69) (0.41)
------- -------
Net asset value at end of period $ 11.16 $ 8.07
======= =======
Total investment return (c) 48.62% (25.54%)(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.69% 5.79% ++
Net expenses 1.49% 1.50% ++
Expenses (before
recoupment/waiver/reimbursement) 1.57% 1.53% ++
Portfolio turnover rate 133% 55%
Net assets at end of period (in 000's) $17,581 $12,662
</Table>
<Table>
<Caption>
CLASS B
-----------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 7.94 $ 11.70 $ 11.72 $ 11.36 $ 11.10
------- ------- ------- ------- -------
Net investment income 0.57 (a) 0.56 (a) 0.58 (a) 0.60 (a) 0.65
Net realized and
unrealized gain (loss)
on investments 2.96 (3.54) 0.23 0.58 (b) 0.48
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.12 0.02 0.01 0.01 (0.00)++
------- ------- ------- ------- -------
Total from investment
operations 3.65 (2.96) 0.82 1.19 1.13
------- ------- ------- ------- -------
Less dividends and
distribution:
From net investment
income (0.62) (0.57) (0.58) (0.83) (0.68)
From net realized gain
on investments -- (0.23) (0.26) -- (0.19)
------- ------- ------- ------- -------
Total dividends and
distributions (0.62) (0.80) (0.84) (0.83) (0.87)
------- ------- ------- ------- -------
Net asset value at end of
period $ 10.97 $ 7.94 $ 11.70 $ 11.72 $ 11.36
======= ======= ======= ======= =======
Total investment return
(c) 47.69% (26.92%) 7.28% 10.87%(b)(e) 10.62%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.98% 5.21% 4.95% 5.22% 5.88%
Net expenses 2.24% 2.20% 2.15% 2.15% 2.18%
Expenses (before
recoupment/waiver/-
reimbursement) 2.32% 2.19% 2.12% 2.18%(e) 2.21%
Portfolio turnover rate 133% 55% 30% 33% 34%
Net assets at end of
period (in 000's) $25,651 $21,006 $37,913 $43,136 $57,500
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Total return is not annualized.
(e) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
</Table>
20 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
- --------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
$ 8.02 $ 11.81 $ 11.82 $ 11.44 $ 11.17
-------- ------- -------- -------- -------
0.66 (a) 0.67 (a) 0.67 (a) 0.69 (a) 0.73
2.99 (3.59) 0.24 0.59 (b) 0.49
0.12 0.02 0.01 0.01 (0.00)++
-------- ------- -------- -------- -------
3.77 (2.90) 0.92 1.29 1.22
-------- ------- -------- -------- -------
(0.70) (0.66) (0.67) (0.91) (0.76)
-- (0.23) (0.26) -- (0.19)
-------- ------- -------- -------- -------
(0.70) (0.89) (0.93) (0.91) (0.95)
-------- ------- -------- -------- -------
$ 11.09 $ 8.02 $ 11.81 $ 11.82 $ 11.44
======== ======= ======== ======== =======
49.04% (26.29%) 8.11% 11.75%(b)(e) 11.35%
6.77% 6.08% 5.70% 5.97% 6.63%
1.32% 1.34% 1.40% 1.40% 1.43%
1.40% 1.37% 1.37% 1.43%(e) 1.46%
133% 55% 30% 33% 34%
$119,132 $59,843 $135,321 $121,810 $86,515
</Table>
<Table>
<Caption>
CLASS C
- -----------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
2009 2008 2007 2006 2005
$ 7.95 $ 11.70 $ 11.72 $ 11.36 $ 11.10
------- ------- ------- ------- -------
0.56 (a) 0.57 (a) 0.58 (a) 0.60 (a) 0.65
2.97 (3.54) 0.23 0.58 (b) 0.48
0.12 0.02 0.01 0.01 (0.00)++
------- ------- ------- ------- -------
3.65 (2.95) 0.82 1.19 1.13
------- ------- ------- ------- -------
(0.62) (0.57) (0.58) (0.83) (0.68)
-- (0.23) (0.26) -- (0.19)
------- ------- ------- ------- -------
(0.62) (0.80) (0.84) (0.83) (0.87)
------- ------- ------- ------- -------
$ 10.98 $ 7.95 $ 11.70 $ 11.72 $ 11.36
======= ======= ======= ======= =======
47.50% (26.83%) 7.28% 10.87%(b)(e) 10.62%
5.85% 5.22% 4.95% 5.22% 5.88%
2.23% 2.19% 2.15% 2.15% 2.18%
2.31% 2.20% 2.12% 2.18%(e) 2.21%
133% 55% 30% 33% 34%
$57,731 $27,377 $45,786 $39,176 $28,547
</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>
CLASS I
--------------------------------------------
AUGUST 31,
2007**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
--------------------------------------------
2009 2008 2007
Net asset value at beginning of
period $ 8.02 $ 11.81 $11.26
------ ------- ------
Net investment income 0.66 (a) 0.69 (a) 0.11 (a)
Net realized and unrealized gain
(loss) on investments 3.01 (3.58) 0.52
Net realized and unrealized gain
on foreign currency transactions 0.13 0.02 0.04
------ ------- ------
Total from investment operations 3.80 (2.87) 0.67
------ ------- ------
Less dividends and distributions:
From net investment income (0.72) (0.69) (0.12)
From net realized gain on
investments -- (0.23) --
------ ------- ------
Total dividends and distributions (0.72) (0.92) (0.12)
------ ------- ------
Net asset value at end of period $11.10 $ 8.02 $11.81
====== ======= ======
Total investment return (c) 49.31% (26.11%) 5.95%(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.32% 6.28% 6.12%++
Net expenses 1.12% 1.14% 1.15%++
Expenses (before
recoupment/waiver/reimburse-
ment) 1.12% 1.15% 0.99%++
Portfolio turnover rate 133% 55% 30%
Net assets at end of period (in
000's) $3,972 $ 27 $ 57
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Total return is not annualized.
</Table>
22 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Global High Income Fund (the "Fund"), a non-diversified fund.
The Fund currently offers five classes of shares. Class A shares and Class B
shares commenced operations on June 1, 1998. Class C shares commenced operations
on September 1, 1998. Class I shares commenced operations on August 31, 2007.
Investor Class shares commenced operations on February 28, 2008. Investor Class
and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I shares are offered at NAV and 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 and
service 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 to provide maximum current income by
investing primarily in high-yield debt securities of non-U.S. issuers. Capital
appreciation is a secondary objective. Effective February 26, 2010, the Fund's
investment objective will be to seek to provide maximum current income by
investing in high yield debt securities of non-U.S. issuers. Capital
appreciation will continue to be a secondary objective. The Fund is "non-
diversified," which means that it may invest a greater percentage of its assets
than diversified funds in a particular issuer. This may make it more susceptible
than diversified funds to risks associated with an individual issuer, and to
single economic, political or regulatory occurrences.
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 (as defined in Note 3(A)),
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"). Investments in other mutual funds are valued at their NAVs
as of the close of the New York Stock Exchange on the valuation date. Foreign
currency forward contracts are valued at their fair market values determined on
the basis of the mean between the last current bid and ask prices based on
dealer or exchange quotations.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
principally trade, and the time at which the Fund's NAV is calculated. These
events may include, but are not limited to, situations relating to a single
issuer in a market sector, significant fluctuations in U.S. or foreign markets,
natural disasters, armed conflicts, governmental actions or other developments
not tied directly to the securities markets. Should the Manager or Subadvisor,
as defined in Note 3(A), conclude that such events may have affected the
accuracy of the last price reported on the local foreign market, the Manager or
Subadvisor may, pursuant to procedures adopted by the Fund's Board of Trustees,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures. At October 31, 2009, foreign securities held by the
Fund were not fair valued.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at NAV, 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.
24 MainStay Global High Income Fund
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued as earned using the effective interest rate method. Discounts and
premiums on securities purchased, other than short-term investments, 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 investments 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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(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 financial
instrument (i.e., foreign currency, interest rate, security, or securities
index.) The Fund is subject to equity price risk and interest rate risk in the
normal course of investing in these transactions. 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 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 have minimal counterparty risk as they are
conducted through regulated exchanges that guarantee the futures against default
by the counterparty. The Fund invests in futures contracts to help manage the
duration and yield curve of the portfolio while minimizing the exposure to wider
bid/ask spreads in traditional bonds. The Fund's investment in futures contracts
and other derivatives may increase the volatility of the Fund's NAV and may
result in a loss to the Fund.
(I) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign
currency forward contracts, which are agreements to buy or sell currencies of
different countries on a specified future date at a specified rate. The Fund is
subject to foreign currency exchange rate risk in the normal course of investing
in these transactions. During the period the forward contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. Cash movement occurs on
settlement date. When the forward contract is closed, the Fund records
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
a realized gain or loss equal to the difference between the proceeds from (or
cost of) the closing transaction and the Fund's basis in the contract. The Fund
enters into foreign currency forward contracts to reduce currency risk versus
the benchmark or for trade settlement.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. While a
Fund may enter into forward contracts to reduce currency exchange risks, changes
in currency exchange rates may result in poorer overall performance for the Fund
than if it had not engaged in such transactions. Exchange rate movements can be
large, depending on the currency, and can last for extended periods of time,
affecting the value of the Fund's assets. Moreover, there may be an imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to the risk of currency exchange loss. The unrealized
appreciation on forward contracts reflects the Fund's exposure at valuation date
to credit loss in the event of a counterparty's failure to perform its
obligations. (See Note 5.)
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(K) SWAP AGREEMENTS. The Fund may enter into credit default, interest rate,
index and currency exchange rate swap agreements ("swaps") for purposes of
attempting to obtain a particular desired return at a lower cost to the Fund
than if the Fund had invested directly in an instrument that yielded the desired
return or for other portfolio management purposes ("hedge protection"). In a
standard swaps transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a notional amount. Credit
default swaps are contracts whereby one party makes periodic payments to a
counterparty in exchange for the right to receive a specified return in the
event of a default by a third party on its obligation. Credit default swaps may
be used to provide a measure of protection against defaults of sovereign or
corporate issuers. In connection with these agreements, cash or securities may
be set aside as collateral in accordance with the terms of the swap agreement.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an agreed-
upon level, while the seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. An interest rate collar combines elements of buying a cap and selling a
floor.
The Fund bears the risk of loss of the amount expected to be received under a
swap agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Fund may be able to eliminate its exposure under a swap
agreement either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly creditworthy party.
The Fund intends to minimize the risk and use the liquidity advantage by
generally not having a duration on the swap of more than one calendar quarter.
Swaps are marked to market daily based upon quotations from market makers and
vendors and the change in value, if any, is recorded as unrealized gain or loss.
Payments received or made on swap contracts are recorded as realized gain or
loss. Gains or losses are realized upon early termination of the swap
agreements. These financial instruments are not actively traded on financial
markets. Entering into these agreements involves elements of credit, market and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will be no
liquid market
26 MainStay Global High Income Fund
for these agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of the contractual terms in
the agreements and that there may be unfavorable changes in interest rates or
the price of the index or security underlying these transactions. The Fund did
not invest in swaps during the year ended October 31, 2009.
(L) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(M) CONCENTRATION OF RISK. The Fund's principal investments include high yield
securities (sometimes called "junk bonds"), which are generally considered
speculative because they present a greater risk of loss, including default, than
higher quality debt securities. These securities pay investors a premium--a high
interest rate or yield--because of the increased risk of loss. These securities
can also be subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific country, industry or region.
(N) 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.
(O) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
Fair Value of derivative instruments as of October 31, 2009:
ASSET DERIVATIVES
<Table>
<Caption>
STATEMENT OF FOREIGN INTEREST
ASSETS AND EXCHANGE RATE
LIABILITIES CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Unrealized
appreciation on
foreign currency
Forward Contracts forward contracts $357,148 $ -- $357,148
--------------------------------
Total Fair Value $357,148 $-- $357,148
================================
</Table>
LIABILITY DERIVATIVES
<Table>
<Caption>
STATEMENT OF FOREIGN INTEREST
ASSETS AND EXCHANGE RATE
LIABILITIES CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Unrealized
depreciation on
Forward foreign currency
Contracts forward contracts $(682,173) $ -- $(682,173)
---------------------------------
Total Fair Value $(682,173) $-- $(682,173)
=================================
</Table>
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The effect of derivatives on the Statement of Operations for the year ended
October 31, 2009:
REALIZED GAIN (LOSS)
<Table>
<Caption>
FOREIGN INTEREST
STATEMENT OF EXCHANGE RATE
OPERATIONS CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Net realized
gain (loss) on
Futures futures
Contracts transactions $ -- $125,054 $ 125,054
Net realized
gain (loss) on
Forward foreign currency
Contracts transactions 3,025,340 -- 3,025,340
-----------------------------------
Total Realized
Gain (Loss) $3,025,340 $125,054 $3,150,394
===================================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
FOREIGN
STATEMENT OF EXCHANGE INTEREST RATE
OPERATIONS CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Net change in
unrealized
appreciation
(depreciation)
on translation
of other assets
and liabilities
in foreign
currencies and
foreign currency
Forward forward
Contracts contracts $(981,677) $ -- $(981,677)
-------------------------------------
Total Change in
Appreciation
(Depreciation) $(981,677) $-- $(981,677)
=====================================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
FOREIGN INTEREST
EXCHANGE RATE
CONTRACTS CONTRACTS
RISK RISK TOTAL
Futures Contracts (2) -- (15) (15)
Forward Contracts Long
(3) $12,572,368 -- $12,572,368
Forward Contracts
Short (3) $(5,341,981) -- $(5,341,981)
</Table>
(1) Amounts disclosed represent the weighted average held during the twelve
month period.
(2) Amount(s) represent(s) number of contracts.
(3) Amount(s) represent(s) notional amount.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and
an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to
the Fund and is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between New York Life Investments and the Subadvisor,
New York Life Investments pays for the services of the Subadvisor.
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 $500 million and 0.65% on assets in excess of $500
million, plus a fee for fund accounting services previously provided by New York
Life Investments under a separate accounting agreement.
Effective August 1, 2009, New York Life Investments has entered into a written
expense limitation agreement under which it has agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses (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) for the
Fund's Class A shares do not exceed 1.35% of its average net assets. New York
Life Investments will apply an equivalent waiver or reimbursement, in an equal
amount of basis points, to the other share classes of the Fund. The expense
limitation agreement may be modified or terminated only with the approval of the
Board of Trustees. Under the expense limitation agreement, New York Life
Investments 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 existing expense limitations and the recoupment is made
within the term of the agreement. Any recoupment amount is generally applied
within a fiscal year. This expense limitation
28 MainStay Global High Income Fund
agreement was set to expire on July 31, 2010. On December 11, 2009, the Board of
the Fund approved an extension of the expense limitation agreement to February
28, 2011.
Prior to August 1, 2009, New York Life Investments had a written expense
limitation agreement under which it agreed to waive a portion of the management
fee or reimburse expenses to the extent necessary to ensure that the total
ordinary operating expenses for the appropriate class of shares did not exceed
the following percentages of average daily net assets: Investor Class, 1.50%;
Class A, 1.31%; Class B, 2.25%; Class C, 2.25%; and Class I, 1.15%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $1,109,708 and waived its fees in the amount of
$116,927.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has
entered into a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund
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 Investor Class and Class A shares at an annual
rate of 0.25% of the average daily net assets of the Investor Class and Class A
shares for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, Class B and Class C shares of the
Fund pay the Distributor a monthly distribution fee at an 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 an annual rate of 0.25% of the average daily NAV 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 $5,941
and $29,909, respectively, for the year ended October 31, 2009. 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 $158, $30,688 and $21,033,
respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $460,309.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $6,620,777 5.6%
- --------------------------------------------------
Class C 363 0.0++
- --------------------------------------------------
Class I 29,093 0.7
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $7,004.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,369,273 $(7,068,796) $(331,045) $13,021,513 $6,990,945
- -------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation
(depreciation) is primarily due to wash sale deferrals, distributions and mark
to market on forward contracts.
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The other temporary differences are primarily due to dividends payable and
interest income on defaulted securities.
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, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$2,228,119 $(2,226,690) $(1,429)
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss) and settlement income.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $7,068,796 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. No capital gain distributions shall be made until
any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $4,652
2017 2,417
- ------------------------------------
Total $7,069
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $10,578,738 $11,048,734
Long-Term Capital Gains -- 4,347,132
- -----------------------------------------------------
Total $10,578,738 $15,395,866
- -----------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS:
As of October 31, 2009, the Fund held the following foreign currency forward
contracts:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
COUNTERPARTY PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts:
- ---------------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/27/09 AUD 2,000,000 USD 1,847,520 USD (51,254)
- ---------------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, HSBC Bank USA
expiring 11/16/09 AUD 2,500,000 2,254,888 (7,247)
- ---------------------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/3/09 BRL 9,000,000 5,000,556 108,436
- ---------------------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, Barclays Bank PLC
expiring 12/3/09 BRL 7,200,000 4,088,586 (25,805)
- ---------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/27/09 CAD 9,000,000 8,475,184 (157,511)
- ---------------------------------------------------------------------------------------------------------------
Chilean Peso vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/13/09 CLP 1,500,000,000 2,734,980 92,807
- ---------------------------------------------------------------------------------------------------------------
Colombian Peso vs. U.S. Dollar, Barclays Bank PLC
expiring 11/23/09 COP 4,000,000,000 2,134,472 (138,131)
- ---------------------------------------------------------------------------------------------------------------
Hungarian Forint vs. U.S. Dollar, HSBC Bank USA
expiring 11/13/09 HUF 700,000,000 3,815,338 (72,696)
- ---------------------------------------------------------------------------------------------------------------
Indonesian Rupiah vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/30/09 IDR 30,000,000,000 3,161,555 (36,246)
- ---------------------------------------------------------------------------------------------------------------
Norwegian Krone vs. U.S. Dollar, HSBC Bank USA
expiring 11/19/09 NOK 30,000,000 5,360,828 (124,594)
- ---------------------------------------------------------------------------------------------------------------
Polish Zloty vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/23/09 PLN 6,000,000 2,131,439 (60,450)
- ---------------------------------------------------------------------------------------------------------------
South Korean Won vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/27/09 KRW 2,200,000,000 1,852,476 7,817
- ---------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay Global High Income Fund
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
COUNTERPARTY SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale Contracts:
- -----------------------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/3/09 BRL 9,000,000 USD 5,116,543 USD 7,552
- -----------------------------------------------------------------------------------------------------------------
Chilean Peso vs. U.S. Dollar, JPMorgan Chase Bank
expiring 11/13/09 CLP 1,500,000,000 2,819,549 (8,239)
- -----------------------------------------------------------------------------------------------------------------
Colombian Peso vs. U.S. Dollar, Barclays Bank PLC
expiring 11/23/09 COP 4,000,000,000 2,100,840 104,500
- -----------------------------------------------------------------------------------------------------------------
Hungarian Forint vs. U.S. Dollar, HSBC Bank USA
expiring 11/13/09 HUF 700,000,000 3,778,677 36,036
- -----------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on
foreign currency forward
contracts USD (325,025)
- -----------------------------------------------------------------------------------------------------------------
</Table>
As of October 31, 2009, the Fund held the following foreign currencies:
<Table>
<Caption>
CURRENCY COST VALUE
Australian Dollar AUD 1,108 USD 954 USD 998
- ----------------------------------------------------------------------------------------------------
Brazilian Real BRL 1 1 1
- ----------------------------------------------------------------------------------------------------
Turkish Lira YTL 6,000 3,798 3,991
- ----------------------------------------------------------------------------------------------------
Total USD 4,753 USD 4,990
- ----------------------------------------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street is the custodian of the cash and the securities of the Fund.
Custodial fees are charged to the Fund based on the market value of securities
in the Fund and the number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of U.S. Government
securities were $8,907 and $9,003, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $242,903 and $182,664, respectively.
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 214,269 $ 2,072,965
Shares issued to
shareholders in
reinvestment of dividends 110,654 1,051,399
Shares redeemed (295,230) (2,759,104)
-------------------------
Net increase in shares
outstanding before
conversion 29,693 365,260
Shares converted into
Investor Class (See Note
1) 123,684 1,163,206
Shares converted from
Investor Class (See Note
1) (147,335) (1,531,293)
-------------------------
Net increase (decrease) 6,042 $ (2,827)
=========================
Period ended October 31,
2008 (a):
Shares sold 460,861 $ 5,118,838
Shares issued to
shareholders in
reinvestment of dividends 52,591 544,395
Shares redeemed (264,625) (2,779,976)
-------------------------
Net increase in shares
outstanding before
conversion 248,827 2,883,257
Shares converted into
Investor Class (See Note
1) 1,460,537 16,144,606
Shares converted from
Investor Class (See Note
1) (139,571) (1,458,463)
-------------------------
Net increase 1,569,793 $ 17,569,400
=========================
(a) Investor Class shares were first offered on
February 28, 2008.
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 4,886,173 $ 50,787,761
Shares issued to
shareholders in
reinvestment of dividends 372,136 3,540,480
Shares redeemed (2,199,153) (21,143,948)
-------------------------
Net increase in shares
outstanding before
conversion 3,059,156 33,184,293
Shares converted into Class
A (See Note 1) 270,327 2,699,414
Shares converted from Class
A (See Note 1) (50,745) (476,185)
-------------------------
Net increase 3,278,738 $ 35,407,522
=========================
Year ended October 31, 2008:
Shares sold 1,712,333 $ 19,078,353
Shares issued to
shareholders in
reinvestment of dividends
and distributions 588,304 6,477,205
Shares redeemed (5,169,258) (54,184,103)
-------------------------
Net decrease in shares
outstanding before
conversion (2,868,621) (28,628,545)
Shares converted into Class
A (See Note 1) 284,176 3,049,715
Shares converted from Class
A (See Note 1) (1,416,051) (15,592,376)
-------------------------
Net decrease (4,000,496) $(41,171,206)
=========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 317,717 $ 3,090,164
Shares issued to
shareholders in
reinvestment of dividends 128,574 1,195,355
Shares redeemed (555,948) (5,146,836)
-------------------------
Net decrease in shares
outstanding before
conversion (109,657) (861,317)
Shares converted from Class
B (See Note 1) (197,883) (1,855,142)
-------------------------
Net decrease (307,540) $ (2,716,459)
=========================
Year ended October 31, 2008:
Shares sold 321,100 $ 3,507,746
Shares issued to
shareholders in
reinvestment of dividends
and distributions 180,175 1,955,791
Shares redeemed (900,354) (9,647,430)
-------------------------
Net decrease in shares
outstanding before
conversion (399,079) (4,183,893)
Shares converted from Class
B (See Note 1) (196,767) (2,143,482)
-------------------------
Net decrease (595,846) $ (6,327,375)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 2,886,858 $ 29,096,911
Shares issued to
shareholders in
reinvestment of dividends 141,385 1,330,159
Shares redeemed (1,216,447) (11,146,418)
-------------------------
Net increase 1,811,796 $ 19,280,652
=========================
Year ended October 31, 2008:
Shares sold 691,238 $ 7,502,171
Shares issued to
shareholders in
reinvestment of dividends
and distributions 178,021 1,931,330
Shares redeemed (1,336,692) (13,970,477)
-------------------------
Net decrease (467,433) $ (4,536,976)
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 352,539 $ 3,439,579
Shares issued to
shareholders in
reinvestment of dividends 9,862 102,014
Shares redeemed (7,951) (82,772)
-------------------------
Net increase 354,450 $ 3,458,821
=========================
Year ended October 31, 2008:
Shares sold 344 $ 3,907
Shares issued to
shareholders in
reinvestment of dividends
and distributions 198 2,150
Shares redeemed (2,045) (23,010)
-------------------------
Net decrease (1,503) $ (16,953)
=========================
</Table>
32 MainStay Global High Income Fund
NOTE 10--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 11--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Global High Income Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2009, 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, 2009, 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 Global High Income Fund of The MainStay Funds as of October 31, 2009,
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 23, 2009
34 MainStay Global High Income Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Global High Income Fund ("Fund")
and New York Life Investment Management LLC ("New York Life Investments"), and
the Subadvisory Agreement between New York Life Investments and MacKay Shields
LLC ("MacKay Shields") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group of Funds, including
the
mainstayinvestments.com 35
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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order
36 MainStay Global High Income Fund
for New York Life Investments to continue to provide high-quality ongoing
services to the Fund. The Board noted, for example, increased costs borne by New
York Life Investments and its affiliates due to new and ongoing regulatory and
compliance requirements. The Board also noted that the Fund benefits from the
allocation of certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MacKay Shields on fees charged 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 explanations from New York Life Investments and MacKay
Shields about the different scope of services provided to retail mutual funds as
compared with other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most
mainstayinvestments.com 37
significant "other expenses" are transfer agent fees. Transfer agent fees are
charged to the Fund based on the number of shareholder accounts (a "per-account"
fee) as compared with certain other fees (e.g., management fees), which are
charged based on the Fund's average net assets. The Board took into account
information from New York Life Investments showing that the Fund's transfer
agent fee schedule is reasonable, including industry data showing that the per-
account fees that NYLIM Service Company ("NSC"), the Fund's transfer agent,
charges the Fund are within the range of per-account fees charged by transfer
agents to other mutual funds. In addition, the Board particularly considered
representations from New York Life Investments that the MainStay Group of Funds'
transfer agent fee structure is designed to allow NSC to provide transfer agent
services to the Funds essentially "at cost," and that NSC historically has
realized only very modest profitability from providing transfer agent services
to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to modify
the expense limitation arrangements on the Fund's share classes to decrease the
amount of New York Life Investments' subsidization of class expenses. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
modify the expense limitations on the Fund's share classes in order to reduce
the amount of class expenses subsidized by New York Life Investments. The Board
acknowledged that New York Life Investments may recoup amounts waived or
reimbursed under contractual expense limitations if such action does not cause a
share class to exceed an expense limitation, and the recoupment is made during
the term of the agreement. The Board further acknowledged that New York Life
Investments may determine voluntarily to waive expenses of Fund share classes
without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
38 MainStay Global High Income Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2009,
should be multiplied by 92.6% to arrive at the amount eligible for qualified
interest income.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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 39
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Chief Executive Officer,
Director since 2008 (20 NYLIFE Distributors LLC and
portfolios). Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
40 MainStay Global High Income Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 41
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
42 MainStay Global High Income Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 43
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
44 MainStay Global High Income Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017053 (RECYCLE LOGO) MS283-09 MSGH11-12/09
20
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 16
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 23
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 32
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 33
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 37
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 37
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 37
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 38
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 5.69% 3.62% 4.92%
Excluding sales charges 10.67 4.58 5.40
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY GOVERNMENT U.S. GOVERNMENT
FUND BOND INDEX
------------------- ----------------
10/31/99 9550 10000
10238 10804
11686 12433
12236 13229
12472 13613
12920 14271
12997 14405
13550 15065
14183 15946
14602 17034
10/31/09 16160 18235
</Table>
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 5.73% 3.66% 4.94%
Excluding sales charges 10.71 4.62 5.42
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY GOVERNMENT U.S. GOVERNMENT
FUND BOND INDEX
------------------- ----------------
10/31/99 23875 25000
25594 27009
29216 31082
30590 33073
31179 34033
32301 35678
32492 36014
33875 37662
35458 39866
36566 42584
10/31/09 40483 45588
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
With sales charges 4.62% 3.45% 4.62%
Excluding sales charges 9.62 3.80 4.62
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY GOVERNMENT U.S. GOVERNMENT
FUND BOND INDEX
------------------- ----------------
10/31/99 10000 10000
10646 10804
12066 12433
12539 13229
12670 13613
13040 14271
13017 14405
13486 15065
13994 15946
14331 17034
10/31/09 15710 18235
</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.
Class A shares generally have a $25,000 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, the minimum initial investment is $15,000. Investor Class
shares and Class A shares are sold with a maximum initial sales charge of
4.50% 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 Manager 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
existing expense limitations and the recoupment is made within the term of
the agreement. Any recoupment amount is generally applied within a fiscal
year. This agreement expires on February 28, 2011.
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--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
With sales charges 8.75% 3.80% 4.62%
Excluding sales charges 9.75 3.80 4.62
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY GOVERNMENT U.S. GOVERNMENT
FUND BOND INDEX
------------------- ----------------
10/31/99 10000 10000
10646 10804
12066 12433
12539 13229
12670 13613
13040 14271
13017 14405
13470 15065
13994 15946
14314 17034
10/31/09 15710 18235
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------
11.21% 5.16% 5.83%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY GOVERNMENT U.S. GOVERNMENT
FUND BOND INDEX
------------------- ----------------
10/31/99 10000 10000
10754 10804
12318 12433
12926 13229
13191 13613
13710 14271
13858 14405
14520 15065
15291 15946
15854 17034
10/31/09 17632 18235
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Barclays Capital U.S. Government Bond Index(4) 7.05% 5.02% 6.19%
Average Lipper general U.S. government fund(5) 10.36 4.01 5.24
</Table>
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 I shares, first offered on January 2, 2004,
include the historical performance of Class B shares through January 1, 2004,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. The Barclays Capital U.S. Government Bond Index is comprised of publicly
issued, nonconvertible, domestic debt of the U.S. government or any of its
agencies, quasi-federal corporations, or corporate debt guaranteed by the
U.S. government. Total returns assume the reinvestment of all income and
capital gains. The Barclays Capital U.S. Government Bond Index is the Fund's
broad-based securities market index for comparison purposes. An investment
cannot be made directly in an index.
5. The average Lipper general U.S. government fund is representative of funds
that invest primarily in U.S. government and agency issues. This benchmark is
a product of Lipper Inc. 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 Government Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GOVERNMENT FUND (UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,027.40 $5.47 $1,019.80 $5.45
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,028.20 $4.86 $1,020.40 $4.84
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,022.50 $9.28 $1,016.00 $9.25
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,022.40 $9.28 $1,016.00 $9.25
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,029.80 $3.07 $1,022.20 $3.06
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.07% for Investor Class, 0.95% for Class A, 1.82% for Class B and Class C
and 0.60% for Class I) multiplied by the average account value over the
period, divided by 365 and multiplied by 184 (to reflect the one-half year
period). The table above represents the actual expenses incurred during the
one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
U.S. Government & Federal Agencies 93.7
Short-Term Investment 17.4
Asset-Backed Securities 2.8
Mortgage-Backed Securities 1.5
Municipal Bond 0.5
Futures Contracts (0.1)
Liabilities in Excess of Cash and Other
Assets (15.8)
</Table>
See Portfolio of Investments beginning on page 11 for specific holdings within
these categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. United States Treasury Note, 4.75%, due
8/15/17
2. Government National Mortgage Association
(Mortgage Pass-Through Security), 5.50%,
due 7/1/36 TBA
3. Government National Mortgage Association
(Mortgage Pass-Through Security), 6.50%,
due 1/1/34 TBA
4. Government National Mortgage Association
(Mortgage Pass-Through Security), 6.00%,
due 6/1/36 TBA
5. Government National Mortgage Association
(Mortgage Pass-Through Security), 5.00%,
due 12/1/37 TBA
6. Federal National Mortgage Association
(Mortgage Pass-Through Security), 5.50%,
due 6/1/33 TBA
7. Federal National Mortgage Association
(Mortgage Pass-Through Security), 4.50%,
due 7/1/18
8. United States Treasury Bond, 8.75%, due
8/15/20
9. Overseas Private Investment Corporation,
5.142%, due 12/15/23
10. Federal Home Loan Bank, 5.50%, due
7/15/36
</Table>
8 MainStay Government Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS GARY GOODENOUGH AND JAMES RAMSAY, CFA,
OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY GOVERNMENT FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Government Fund returned 10.67% for
Investor Class shares, 10.71% for Class A shares, 9.62% for Class B shares and
9.75% for Class C shares for the 12 months ended October 31, 2009. Over the same
period, the Fund's Class I shares returned 11.21%. Investor Class, Class
A and Class I shares outperformed--and Class B and Class C shares
underperformed--the 10.36% return of the average Lipper(1) general U.S.
government fund. All share classes outperformed the 7.05% return of the Barclays
Capital U.S. Government Bond Index,(2) for
the 12-month reporting period. The Barclays Capital U.S. Government Bond Index
is the Fund's broad-based securities-market index. See pages 5 and 6 for Fund
returns with sales charges.
WHAT FACTORS CONTRIBUTED TO THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund's performance relative to its peers and the Barclays Capital U.S.
Government Bond Index benefited from an underweight position in U.S. Treasury
securities. Relative performance also benefited from an overweight position in
mortgage-backed securities issued by government-sponsored and government-related
entities. An overweight position in bank debentures guaranteed by the Federal
Deposit Insurance Corporation (FDIC) also helped. During the reporting period,
we were able to add incremental yield by emphasizing higher-coupon mortgage-
backed securities and by maintaining a small position in asset-backed
securities.
HOW DID THE FUND INVEST DURING THE REPORTING PERIOD?
During the reporting period, the Federal Reserve formally adopted and
implemented quantitative easing, a way to expand the money supply through direct
security purchases. Policy makers intended to purchase $300 billion of longer-
term Treasurys, $1.25 trillion of agency mortgage-backed securities, and $200
million of agency debt. In tandem, the Treasury Department expanded its
liquidity facilities, such as TALF (Term Asset-Backed Securities Loan Facility),
to support the secondary markets crucial to consumer and business lending. Given
the impressive size of these initiatives and the liquidity they would impart,
investors expected risk premiums to contract for non-Treasury fixed-income
sectors. Newly enacted fiscal stimulus was also a catalyst for narrower
spreads.(3)
To attempt to take advantage of the government's actions, we maintained healthy
exposure in the Fund to non-Treasury sectors backed by a government seal,
including agency mortgage pass-throughs(4) and federally guaranteed bank
debentures. We suspected, however, that the sudden willingness to accept higher
risk on improved market sentiment might be an overreaction, particularly if
expectations of a swift economic recovery were not fulfilled. With that
possibility in mind, we positioned the Fund for a flatter yield curve,(5) or a
smaller difference in the yields on longer- and shorter-term bonds.
Interest-rate volatility quieted under the Federal Reserve's resolve to maintain
the targeted federal funds rate in a near-zero range. This gave us the
confidence to weight mortgage-backed securities at levels neutral to the
Barclays Capital U.S. Government
- ----------
The values of debt securities fluctuate depending on various factors, including
interest rates, issuer creditworthiness, liquidity, market conditions and
maturities. Investments in the Fund are not guaranteed, even though the
principal or income of some of the Fund's investments is guaranteed by the U.S.
government or its agencies or instrumentalities. The principal risk of mortgage
dollar rolls is that the security the Fund receives at the end of the
transaction may be worth less than the security the Fund sold to the same
counterparty at the beginning of the transaction. The principal risk of
mortgage-related and asset-backed securities is that the underlying debt may be
prepaid ahead of schedule if interest rates fall, thereby reducing the value of
the Fund's investments. If interest rates rise, there may be fewer prepayments,
which would cause the average bond maturity to rise and increase the potential
for the Fund to lose money. The principal risk of transactions involving when-
issued securities is that the security will be worth less when it is issued or
received than the price the Fund agreed to pay when it made the commitment. The
Fund may invest in derivatives, which may increase the volatility of the Fund's
net asset value and may result in a loss to the Fund. The Fund may experience a
portfolio turnover of more than 100% and may generate taxable short-term capital
gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Barclays Capital U.S.
Government Bond Index.
3. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
4. Pass-through mortgages consist of a residential-mortgage-loan pool in which
homeowners' monthly payments of principal, interest and prepayments pass from
the original bank through a government agency or investment bank to
investors.
5. The yield curve is a line that plots the yields of various securities of
similar quality--typically U.S. Treasury issues--across a range of
maturities. The U.S. Treasury yield curve serves as a benchmark for other
debt and is used in economic forecasting.
mainstayinvestments.com 9
Bond Index and to emphasize higher-coupon securities within the sector that
offered better-than-average yields. The higher yields helped compensate for the
risk of unpredictable cash flows. That risk is diminished when interest-rate
volatility is subdued and Treasurys remain range-bound.
WHICH FIXED-INCOME SECTORS CONTRIBUTED MOST POSITIVELY TO THE FUND'S PERFORMANCE
DURING THE REPORTING PERIOD?
The Fund's sizable exposure to bank debentures guaranteed by the FDIC was a
positive contributor, as spreads narrowed toward levels consistent with
debentures issued by government-sponsored enterprises Fannie Mae and Freddie
Mac.
The Fund benefited by maintaining the majority of its exposure to residential
mortgage-backed securities in agency residential-mortgage pass-through
securities. We prudently decided to hold the majority of the portfolio's agency
mortgage pass-through exposure in the center of the coupon stack--or coupons of
5% to 6.5%--for securities backed by 30-year mortgages. Within that range, we
favored higher coupons for their better yield. We also overweighted securities
backed by 15-year mortgages for their superior convexity.(6) The Fund
strengthened its results by de-emphasizing collateralized mortgage obligations
(CMOs), because the market appeared to prefer liquid securities over structured
products during the reporting period.
An overweight position in asset-backed securities also contributed positively to
the Fund's results. In late 2008 and early 2009 illiquidity and risk aversion
hampered the sector's performance. During the second half of the reporting
period, however, asset-backed securities rebounded from their earlier levels.
WHAT INVESTMENT DECISIONS DETRACTED MOST FROM THE FUND'S RESULTS DURING THE
REPORTING PERIOD?
The Fund had only a modest allocation to Treasury Inflation Protected Securities
(TIPS). This strategy detracted from the Fund's results when TIPS out- performed
nominal Treasurys during the reporting period.
We positioned the Fund for a narrowing of the yield spread between two-year
Treasurys and 10-year Treasurys. Expectations of improved economic growth and
higher inflation, however, lead the yield spread to widen. As a result, the
Fund's flattening bias detracted from performance.
WHAT WAS THE FUND'S DURATION(7) DURING THE REPORTING PERIOD?
We maintained an intermediate duration for the Fund near 4.0 years, making
modest tactical adjustments depending on the direction we believed interest
rates were likely to move over the near- to medium-term. Given the drop in
Treasury yields during the reporting period, the Fund would have benefited more
from a longer duration.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the reporting period, we shifted exposure from mortgage pass-through
securities issued by Fannie Mae to similar-coupon securities issued by Ginnie
Mae. We viewed Ginnie Mae mortgage-backed securities as attractively priced in
comparison with securities issued by Fannie Mae. The pricing relationship,
however, was slow to realign and the trade modestly detracted from the Fund's
performance.
We sold Treasurys and bank debentures guaranteed by the FDIC to purchase
mortgage-backed securities. This trade enhanced the Fund's yield while position-
ing the Fund for tighter mortgage spreads as the Federal Reserve and U.S.
Treasury expanded their sponsorship of the sector.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund had underweight positions in U.S. Treasurys and
agency debentures and an overweight exposure to residential mortgage-backed
securities backed by single- and multi-family properties. As of the same date,
the Fund was modestly overweight in asset-backed securities.
- ----------
6. Convexity is a measure of the relationship between bond prices and yields. It
shows how duration will change as interest rates vary. Convexity may help
measure and manage the market risk of a fixed-income portfolio.
7. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
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.
10 MainStay Government Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 98.5%+
ASSET-BACKED SECURITIES 2.8%
- ----------------------------------------------------------------
CREDIT CARDS 0.5%
Chase Issuance Trust
Series 2006-C4, Class C4
0.535%, due 1/15/14 (a) $ 1,000,000 $ 955,366
Citibank Credit Card Issuance
Trust
Series 2006-C4, Class C4
0.464%, due 1/9/12 (a) 615,000 612,555
-------------
1,567,921
-------------
DIVERSIFIED FINANCIAL SERVICES 0.9%
Massachusetts RRB Special
Purpose Trust
Series 2001-1, Class A
6.53%, due 6/1/15 2,644,556 2,898,314
-------------
HOME EQUITY 0.6%
Citicorp Residential Mortgage
Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (b) 930,404 910,886
Series 2006-1, Class A3
5.706%, due 7/25/36 (b) 1,190,000 1,136,734
-------------
2,047,620
-------------
UTILITIES 0.8%
Atlantic City Electric
Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 2,275,000 2,546,414
-------------
Total Asset-Backed Securities
(Cost $8,651,000) 9,060,269
-------------
MORTGAGE-BACKED SECURITIES 1.5%
- ----------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 1.5%
Banc of America Commercial
Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 1,740,964 1,756,123
Citigroup Mortgage Loan
Trust, Inc.
Series 2006-AR6, Class 1A1
6.045%, due 8/25/36 (a) 944,965 786,649
Four Times Square Trust
Series 2006-4TS, Class A
5.401%, due 12/13/28 (c) 620,000 528,041
GS Mortgage Securities Corp.
II
Series 2001-ROCK, Class A1
6.22%, due 5/3/18 (c) 393,241 398,558
Mortgage Equity Conversion
Asset Trust
Series 2007-FF2, Class A
0.95%, due 2/25/42
(a)(c)(d)(e) 1,550,971 1,450,158
-------------
Total Mortgage-Backed
Securities
(Cost $5,253,824) 4,919,529
-------------
MUNICIPAL BOND 0.5%
- ----------------------------------------------------------------
TEXAS 0.5%
Harris County Texas
Industrial Development
Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 1,720,000 1,721,101
-------------
Total Municipal Bond
(Cost $1,723,462) 1,721,101
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 93.7%
- ----------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATION) 0.4%
Series 2006-B1, Class AB
6.00%, due 6/25/16 1,246,415 1,296,950
-------------
FANNIE MAE GRANTOR TRUST (COLLATERALIZED MORTGAGE OBLIGATION)
1.2%
Series 2003-T1, Class B
4.491%, due 11/25/12 3,865,000 4,038,606
-------------
FANNIE MAE STRIP (COLLATERALIZED MORTGAGE OBLIGATIONS) 0.1%
Series 360, Class 2, IO
5.00%, due 8/1/35 (f) 1,980,758 385,801
Series 361, Class 2, IO
6.00%, due 10/1/35 (f) 350,661 64,925
-------------
450,726
-------------
FEDERAL HOME LOAN BANK 5.1%
5.00%, due 11/17/17 2,825,000 3,088,389
5.125%, due 8/14/13 5,140,000 5,719,417
V 5.50%, due 7/15/36 7,425,000 8,004,692
-------------
16,812,498
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION 0.5%
4.75%, due 11/17/15 1,615,000 1,774,674
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) 6.5%
3.00%, due 8/1/10 2,250,166 2,264,277
4.316%, due 3/1/35 (a) 101,440 105,248
5.00%, due 1/1/20 959,214 1,024,116
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding
short-term investment. 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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (CONTINUED)
5.00%, due 6/1/33 $ 3,896,365 $ 4,056,844
5.00%, due 8/1/33 3,039,505 3,162,919
5.00%, due 5/1/36 3,354,244 3,482,052
5.04%, due 6/1/35 (a) 1,652,630 1,729,233
5.50%, due 1/1/21 2,059,412 2,199,687
5.50%, due 11/1/35 1,708,294 1,804,413
5.50%, due 11/1/36 626,323 660,683
5.657%, due 2/1/37 (a) 330,182 348,300
6.50%, due 4/1/37 555,102 596,018
-------------
21,433,790
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 6.7%
2.50%, due 5/15/14 4,650,000 4,659,049
2.75%, due 3/13/14 5,025,000 5,099,511
4.625%, due 5/1/13 2,990,000 3,156,244
5.375%, due 6/12/17 4,675,000 5,286,027
6.625%, due 11/15/30 3,100,000 3,890,937
-------------
22,091,768
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 36.1%
3.616%, due 4/1/34 (a) 1,075,605 1,105,763
4.048%, due 11/1/34 (a) 440,825 449,793
V 4.50%, due 7/1/18 9,976,836 10,573,941
4.50%, due 11/1/18 6,444,199 6,829,879
4.50%, due 6/1/23 7,319,224 7,620,038
5.00%, due 9/1/17 3,386,497 3,617,166
5.00%, due 9/1/20 581,007 617,313
5.00%, due 5/1/35 TBA (g) 2,170,000 2,249,340
5.00%, due 6/1/35 3,539,885 3,681,404
5.00%, due 1/1/36 890,305 925,342
5.00%, due 2/1/36 4,722,223 4,908,059
5.00%, due 5/1/36 4,589,821 4,770,446
5.00%, due 6/1/36 1,823,017 1,893,050
5.00%, due 9/1/36 1,133,937 1,178,561
5.50%, due 1/1/17 256,872 276,616
5.50%, due 2/1/17 5,398,547 5,807,174
5.50%, due 6/1/19 2,042,945 2,192,314
5.50%, due 11/1/19 2,189,654 2,349,748
5.50%, due 4/1/21 4,330,937 4,629,996
V 5.50%, due 6/1/33 11,287,610 11,942,121
5.50%, due 11/1/33 3,348,102 3,542,242
5.50%, due 12/1/33 6,984,854 7,389,870
5.50%, due 6/1/34 1,452,208 1,535,052
5.50%, due 12/1/34 887,347 937,968
5.50%, due 3/1/35 3,018,176 3,190,355
5.50%, due 12/1/35 845,588 893,166
5.50%, due 4/1/36 3,073,517 3,246,452
5.50%, due 7/1/37 817,894 862,252
6.00%, due 12/1/16 466,889 504,381
6.00%, due 11/1/32 1,652,945 1,776,488
6.00%, due 1/1/33 1,312,127 1,408,557
6.00%, due 3/1/33 1,317,241 1,411,577
6.00%, due 9/1/34 389,031 416,285
6.00%, due 9/1/35 3,709,806 3,962,736
6.00%, due 10/1/35 920,591 982,205
6.00%, due 6/1/36 3,202,291 3,411,613
6.00%, due 11/1/36 3,144,372 3,349,908
6.00%, due 4/1/37 1,142,295 1,210,537
6.50%, due 10/1/31 794,857 861,811
6.50%, due 2/1/37 753,124 809,620
-------------
119,321,139
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 17.1%
V 5.00%, due 12/1/37 TBA
(g) 12,270,000 12,691,780
V 5.50%, due 7/1/36 TBA
(g) 12,730,000 13,426,178
6.00%, due 8/15/32 1,353,068 1,452,860
6.00%, due 12/15/32 728,976 782,188
V 6.00%, due 6/1/36 TBA
(g) 12,435,000 13,204,416
6.50%, due 8/15/28 470,119 508,665
6.50%, due 4/15/31 1,161,691 1,257,005
V 6.50%, due 1/1/34 TBA
(g) 12,590,000 13,372,365
-------------
56,695,457
-------------
HVIDE VAN OMMEREN TANKERS LLC 1.7%
Series I
7.54%, due 12/14/23 (h) 2,295,000 2,817,411
Series II
7.54%, due 12/14/23 (h) 2,299,000 2,822,321
-------------
5,639,732
-------------
V OVERSEAS PRIVATE INVESTMENT CORPORATION 2.5%
5.142%, due 12/15/23 (h) 7,677,667 8,159,594
-------------
TENNESSEE VALLEY AUTHORITY 4.2%
4.65%, due 6/15/35 (h) 5,605,000 5,190,465
4.75%, due 8/1/13 (h) 4,700,000 5,108,656
6.25%, due 12/15/17 (h) 2,980,000 3,464,742
-------------
13,763,863
-------------
UNITED STATES TREASURY BONDS 3.9%
4.25%, due 5/15/39 1,240,000 1,242,907
4.50%, due 8/15/39 1,900,000 1,984,907
6.25%, due 8/15/23 515,000 638,680
6.25%, due 5/15/30 455,000 583,324
V 8.75%, due 8/15/20 5,860,000 8,546,447
-------------
12,996,265
-------------
</Table>
12 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
UNITED STATES TREASURY NOTES 7.1%
2.00%, due 7/15/14 T.I.P.S.
(i) $ 4,579,440 $ 4,830,238
3.625%, due 8/15/19 4,360,000 4,443,795
V 4.75%, due 8/15/17 12,930,000 14,373,518
-------------
23,647,551
-------------
UNITED STATES TREASURY STRIP PRINCIPAL 0.6%
(zero coupon), due 8/15/28 4,665,000 2,030,926
-------------
Total U.S. Government &
Federal Agencies
(Cost $298,838,621) 310,153,539
-------------
Total Long-Term Bonds
(Cost $314,466,907) 325,854,438
-------------
SHORT-TERM INVESTMENT 17.4%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 17.4%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$57,578,894
(Collateralized by a United
States Treasury Bill with a
rate of
0.105% and a maturity date
of
3/18/10, with a Principal
Amount of $58,755,000 and a
Market Value of
$58,731,498) 57,578,846 57,578,846
-------------
Total Short-Term Investment
(Cost $57,578,846) 57,578,846
-------------
Total Investments
(Cost $372,045,753) (l) 115.9% 383,433,284
Liabilities in Excess of
Cash and Other Assets (15.9) (52,488,493)
----- ------------
Net Assets 100.0% $ 330,944,791
===== ============
</Table>
<Table>
<Caption>
UNREALIZED
CONTRACTS APPRECIATION
LONG (DEPRECIATION) (J)
FUTURES CONTRACTS (0.1%)
- ----------------------------------------------------------
United States Treasury
Notes
December 2009 (10 Year)
(k) 162 $345,030
--------
Total Futures Contracts
Long
(Settlement Value
$19,214,719) 345,030
--------
</Table>
<Table>
<Caption>
UNREALIZED
CONTRACTS APPRECIATION
SHORT (DEPRECIATION) (J)
United States Treasury
Note
December 2009 (2 Year)
(k) (321) $(587,791)
---------
Total Futures Contracts
Short
(Settlement Value
$69,852,610) (587,791)
---------
Total Futures Contracts
(Settlement Value
$50,637,891) $(242,761)
=========
</Table>
<Table>
+++ On a daily basis New York Life
Investments 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) Floating rate. Rate shown is the rate in
effect at October 31, 2009.
(b) Subprime mortgage investment and other
asset-backed securities. The total market
value of these securities at October 31,
2009 is $2,047,620, which represents 0.6%
of the Fund's net assets.
(c) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(d) Fair valued security. The total market
value of this security at October 31,
2009 is $1,450,158, which represents 0.4%
of the Fund's net assets.
(e) Illiquid security. The total market
value of this security at October 31,
2009 is $1,450,158, which represents 0.4%
of the Fund's net assets.
(f) Collateralized Mortgage Obligation
Interest Only Strip - Pays a fixed or
variable rate of interest based on
mortgage loans or mortgage pass-through
securities. The principal amount of the
underlying pool represents the notional
amount on which the current interest is
calculated. The value of these stripped
securities may be particularly sensitive
to changes in prevailing interest rates
and are typically more sensitive to
changes in prepayment rates than
traditional mortgage-backed securities.
(g) TBA: Securities purchased on a forward
commitment basis with an approximate
principal amount and maturity date. The
actual principal amount and maturity date
will be determined upon settlement. The
market value of these securities at
October 31, 2009 is $54,944,079, which
represents 16.6% of the Fund's net
assets. All or a portion of these
securities were acquired under a mortgage
dollar roll agreement.
(h) United States Government Guaranteed
Security.
(i) Treasury Inflation Protected Security -
Pays a fixed rate of interest on a
principal amount that is continuously
adjusted for inflation based on the
Consumer Price Index-Urban Consumers.
(j) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2009.
(k) At October 31, 2009, cash in the amount
of $86,161 is segregated as collateral
for futures contracts with the broker.
(l) At October 31, 2009, cost is $372,060,948
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $13,237,402
Gross unrealized depreciation (1,865,066)
-----------
Net unrealized appreciation $11,372,336
===========
</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, 2009 (CONTINUED)
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets and liabilities.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Long-Term Bonds
Asset-Backed Securities $ -- $ 9,060,269 $ -- $ 9,060,269
Mortgage-Backed Securities -- 3,469,371 1,450,158 4,919,529
Municipal Bond -- 1,721,101 -- 1,721,101
U.S. Government & Federal Agencies -- 310,153,539 -- 310,153,539
-------- ------------ ---------- ------------
Total Long-Term Bonds -- 324,404,280 1,450,158 325,854,438
-------- ------------ ---------- ------------
Short-Term Investment
Repurchase Agreement -- 57,578,846 -- 57,578,846
-------- ------------ ---------- ------------
Total Investments in Securities -- 57,578,846 1,450,158 383,433,284
-------- ------------ ---------- ------------
Other Financial Instruments
Futures Contracts Long (a) 345,030 -- -- 345,030
-------- ------------ ---------- ------------
Total Investments and Other Financial
Instruments $345,030 $381,983,126 $1,450,158 $383,778,314
======== ============ ========== ============
</Table>
(a) The value listed for these securities reflects unrealized appreciation as
shown on the Portfolio of Investments.
LIABILITY VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Other Financial Instruments
Futures Contracts Short (a) $(587,791) $ -- $ -- $ (587,791)
--------- --------------- ------------ -------------
Total Other Financial Instruments $(587,791) $-- $-- $(587,791)
========= =============== ============ =============
</Table>
(a) The value listed for these securities reflects unrealized depreciation as
shown on the Portfolio of Investments.
14 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
Following is a reconciliation of investments in which significant unobservable
inputs (Level 3) were used in determining value:
<Table>
<Caption>
BALANCE CHANGE IN NET NET
AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS
INVESTMENTS OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET NET IN TO OUT OF
IN SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3
Long-Term Bonds
Mortgage-Backed
Securities
Commercial Mortgage
Loans
(Collateralized
Mortgage
Obligations)
$1,574,654 $642 $1,569 ($28,826) $-- ($97,881) $-- $--
---------- ---- ------ -------- --- -------- --- ---
Total $1,574,654 $642 $1,569 ($28,826) $-- ($97,881) $-- $--
========== ==== ====== ======== === ======== === ===
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
BALANCE INVESTMENTS
AS OF STILL HELD AT
INVESTMENTS OCTOBER 31, OCTOBER 31,
IN SECURITIES 2009 2009 (A)
Long-Term Bonds
Mortgage-Backed
Securities
Commercial Mortgage
Loans
(Collateralized
Mortgage
Obligations)
$1,450,158 ($31,662)
---------- --------
Total $1,450,158 ($31,662)
========== ========
</Table>
(a) Included in "Net change in unrealized appreciation (depreciation) on
investments" in the Statement of Operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $314,466,907) $325,854,438
Repurchase agreement, at value
(identified cost $57,578,846) 57,578,846
Cash collateral on deposit at
broker 86,161
Receivables:
Investment securities sold 8,467,302
Interest 2,119,496
Fund shares sold 696,321
Variation margin on futures
contracts 33,938
Other assets 29,777
------------
Total assets 394,866,279
------------
LIABILITIES:
Payables:
Investment securities purchased 62,972,245
Fund shares redeemed 352,366
Transfer agent (See Note 3) 169,254
NYLIFE Distributors (See Note 3) 119,738
Manager (See Note 3) 114,206
Shareholder communication 41,102
Professional fees 37,789
Custodian 7,037
Trustees 1,147
Accrued expenses 4,935
Dividend payable 101,669
------------
Total liabilities 63,921,488
------------
Net assets $330,944,791
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 379,412
Additional paid-in capital 319,745,166
------------
320,124,578
Accumulated undistributed net
investment loss (115,095)
Accumulated net realized loss on
investments and futures
transactions (209,462)
Net unrealized appreciation on
investments and futures contracts 11,144,770
------------
Net assets $330,944,791
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 63,590,704
============
Shares of beneficial interest
outstanding 7,270,476
============
Net asset value per share
outstanding $ 8.75
Maximum sales charge (4.50% of
offering price) 0.41
------------
Maximum offering price per share
outstanding $ 9.16
============
CLASS A
Net assets applicable to
outstanding shares $187,770,630
============
Shares of beneficial interest
outstanding 21,538,577
============
Net asset value per share
outstanding $ 8.72
Maximum sales charge (4.50% of
offering price) 0.41
------------
Maximum offering price per share
outstanding $ 9.13
============
CLASS B
Net assets applicable to
outstanding shares $ 45,178,063
============
Shares of beneficial interest
outstanding 5,184,324
============
Net asset value and offering price
per share outstanding $ 8.71
============
CLASS C
Net assets applicable to
outstanding shares $ 32,659,499
============
Shares of beneficial interest
outstanding 3,749,222
============
Net asset value and offering price
per share outstanding $ 8.71
============
CLASS I
Net assets applicable to
outstanding shares $ 1,745,895
============
Shares of beneficial interest
outstanding 198,628
============
Net asset value and offering price
per share outstanding $ 8.79
============
</Table>
16 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest $13,937,165
-----------
EXPENSES:
Manager (See Note 3) 2,141,305
Transfer agent--Investor Class
(See Note 3) 230,707
Transfer agent--Class A (See Note
3) 457,836
Transfer agent--Classes B and C
(See Note 3) 302,768
Transfer agent--Class I (See Note
3) 3,462
Distribution/Service--Investor
Class (See Note 3) 160,198
Distribution/Service--Class A (See
Note 3) 492,626
Service--Class B (See Note 3) 129,911
Service--Class C (See Note 3) 80,213
Distribution--Class B (See Note 3) 389,732
Distribution--Class C (See Note 3) 240,640
Shareholder communication 113,786
Professional fees 101,356
Registration 93,150
Custodian 27,332
Trustees 16,129
Miscellaneous 26,145
-----------
Total expenses before waiver 5,007,296
Expense waiver from Manager
(See Note 3) (1,021,029)
-----------
Net expenses 3,986,267
-----------
Net investment income 9,950,898
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on:
Security transactions 7,018,193
Futures transactions (841,998)
-----------
Net realized gain on investments and
futures transactions 6,176,195
-----------
Net change in unrealized
depreciation on:
Investments 17,188,370
Futures contracts (242,761)
-----------
Net change in unrealized
depreciation on investments and
futures contracts 16,945,609
-----------
Net realized and unrealized gain on
investments and futures
transactions 23,121,804
-----------
Net increase in net assets resulting
from
operations $33,072,702
===========
</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
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 9,950,898 $ 11,687,882
Net realized gain on
investments and futures
transactions 6,176,195 1,835,262
Net change in unrealized
depreciation on investments
and futures contracts 16,945,609 (5,735,004)
----------------------------
Net increase in net assets
resulting from operations 33,072,702 7,788,140
----------------------------
Dividends to shareholders:
From net investment income:
Investor Class (1,944,256) (1,344,796)
Class A (6,270,796) (8,368,824)
Class B (1,196,023) (1,635,949)
Class C (741,560) (498,514)
Class I (56,363) (4,768)
----------------------------
Total dividends to
shareholders (10,208,998) (11,852,851)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 84,709,615 119,891,831
Net asset value of shares
issued to shareholders in
reinvestment of dividends 8,439,872 10,127,792
Cost of shares redeemed (107,961,395) (88,709,511)
----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions (14,811,908) 41,310,112
----------------------------
Net increase in net
assets 8,051,796 37,245,401
NET ASSETS:
Beginning of year 322,892,995 285,647,594
----------------------------
End of year $ 330,944,791 $322,892,995
============================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of year $ (115,095) $ 117,432
============================
</Table>
18 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
---------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
---------------------------
2009 2008
Net asset value at beginning of
period $ 8.16 $ 8.41
------- -------
Net investment income 0.26 (a) 0.22 (a)
Net realized and unrealized gain
(loss) on investments 0.59 (0.26)
------- -------
Total from investment operations 0.85 (0.04)
------- -------
Less dividends:
From net investment income (0.26) (0.21)
------- -------
Net asset value at end of period $ 8.75 $ 8.16
======= =======
Total investment return (b) 10.67% (0.57%)(c)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.99% 3.89% ++
Net expenses 1.04% 1.07% ++
Expenses (before
waiver/reimbursement) 1.34% 1.38% ++
Portfolio turnover rate 103%(d) 51% (d)
Net assets at end of period (in
000's) $63,591 $61,147
</Table>
<Table>
<Caption>
CLASS B
----------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning of
period $ 8.13 $ 8.20 $ 8.19 $ 8.17 $ 8.39
------- ------- ------- ------- --------
Net investment income 0.19 (a) 0.26 (a) 0.28 (a) 0.26 (a) 0.20
Net realized and unrealized gain
(loss) on investments 0.59 (0.06) 0.02 0.03 (0.21)
------- ------- ------- ------- --------
Total from investment operations 0.78 0.20 0.30 0.29 (0.01)
------- ------- ------- ------- --------
Less dividends:
From net investment income (0.20) (0.27) (0.29) (0.27) (0.21)
------- ------- ------- ------- --------
Net asset value at end of period $ 8.71 $ 8.13 $ 8.20 $ 8.19 $ 8.17
======= ======= ======= ======= ========
Total investment return (b) 9.62% 2.41% 3.77% 3.60% (0.17%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.24% 3.18% 3.41% 3.29% 2.34%
Net expenses 1.79% 1.79% 1.80% 1.80% 1.80%
Expenses (before
waiver/reimbursement) 2.09% 2.10% 2.10% 2.09% 2.09%
Portfolio turnover rate 103%(d) 51%(d) 11% 83%(d) 164% (d)
Net assets at end of period (in
000's) $45,178 $51,826 $50,123 $64,246 $274,566
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(c) Total return is not annualized.
(d) The portfolio turnover rates not including mortgage dollar rolls were 45%,
43%, 32% and 31% for the years ended October 31, 2009, 2008, 2006 and 2005,
respectively.
</Table>
20 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 8.13 $ 8.21 $ 8.19 $ 8.18 $ 8.40
-------- -------- -------- -------- -------
0.27 (a) 0.33 (a) 0.34 (a) 0.33 (a) 0.26
0.59 (0.07) 0.03 0.01 (0.21)
-------- -------- -------- -------- -------
0.86 0.26 0.37 0.34 0.05
-------- -------- -------- -------- -------
(0.27) (0.34) (0.35) (0.33) (0.27)
-------- -------- -------- -------- -------
$ 8.72 $ 8.13 $ 8.21 $ 8.19 $ 8.18
======== ======== ======== ======== =======
10.71% 3.12% 4.67% 4.26% 0.59%
3.11% 4.00% 4.16% 4.04% 3.09%
0.92% 0.97% 1.05% 1.05% 1.05%
1.21% 1.28% 1.35% 1.34% 1.34%
103%(d) 51%(d) 11% 83%(d) 164%(d)
$187,771 $182,621 $227,896 $239,392 $76,816
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
2009 2008 2007 2006 2005
$ 8.12 $ 8.20 $ 8.18 $ 8.17 $ 8.39
------- ------- ------ ------ ------
0.19 (a) 0.26 (a) 0.28 (a) 0.26 (a) 0.20
0.60 (0.07) 0.03 0.02 (0.21)
------- ------- ------ ------ ------
0.79 0.19 0.31 0.28 (0.01)
------- ------- ------ ------ ------
(0.20) (0.27) (0.29) (0.27) (0.21)
------- ------- ------ ------ ------
$ 8.71 $ 8.12 $ 8.20 $ 8.18 $ 8.17
======= ======= ====== ====== ======
9.75% 2.28% 3.89% 3.48% (0.17%)
2.23% 3.16% 3.41% 3.29% 2.34%
1.80% 1.80% 1.80% 1.80% 1.80%
2.09% 2.11% 2.10% 2.09% 2.09%
103%(d) 51%(d) 11% 83%(d) 164% (d)
$32,659 $25,967 $7,621 $5,684 $7,772
</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>
CLASS I
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 8.19 $ 8.26 $ 8.24 $ 8.21 $ 8.41
------ ------ ------ ------ ------
Net investment income 0.30 (a) 0.35 (a) 0.40 (a) 0.35 (a) 0.37
Net realized and
unrealized gain (loss)
on investments 0.61 (0.04) 0.02 0.03 (0.28)
------ ------ ------ ------ ------
Total from investment
operations 0.91 0.31 0.42 0.38 0.09
------ ------ ------ ------ ------
Less dividends:
From net investment
income (0.31) (0.38) (0.40) (0.35) (0.29)
------ ------ ------ ------ ------
Net asset value at end of
period $ 8.79 $ 8.19 $ 8.26 $ 8.24 $ 8.21
====== ====== ====== ====== ======
Total investment return
(b) 11.21% 3.68% 5.31% 4.78% 1.08%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 3.52% 4.24% 4.84% 4.52% 3.47%
Net expenses 0.51% 0.40% 0.42% 0.57% 0.67%
Expenses (before
waiver/reimburse-
ment) 0.97% 0.99% 1.00% 0.86% 0.96%
Portfolio turnover rate 103%(d) 51%(d) 11% 83%(d) 164%(d)
Net assets at end of
period (in 000's) $1,746 $1,332 $ 7 $ 1 $ 16
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(c) Total return is not annualized.
(d) The portfolio turnover rates not including mortgage dollar rolls were 45%,
43%, 32% and 31% for the years ended October 31, 2009, 2008, 2006 and 2005,
respectively.
</Table>
22 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Government Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on May 1,
1986. Class C shares commenced operations on September 1, 1998. Class I shares
commenced operations on January 2, 2004. Investor Class shares commenced
operations on February 28, 2008. Investor Class and Class A shares are offered
at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred sales charge may be imposed on
redemptions made within one year of purchase of Class C shares. Class I shares
are offered at NAV and 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 and service 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 a high level of current income,
consistent with safety of principal.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any (as defined in Note 3(A)),
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"). Investments in other mutual funds are valued at their NAVs
as of the close of the New York Stock Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund held
securities with a value of $1,450,158 that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2009, maximized the use of observable inputs and minimized the
use of unobservable inputs. The Fund may have utilized some of the following
fair value techniques: multi-dimensional relational pricing models, option
adjusted spread pricing and estimating the price that would have prevailed in a
liquid market for an international equity security given information available
at the time of evaluation, when there are significant events after the close of
local foreign markets. For the year ended October 31, 2009, there have been no
changes to the fair value methodologies.
Generally, a security is considered illiquid if it cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued. Its illiquidity might prevent the sale of such security at a time when
the Manager or Subadvisor, if any, as defined might wish to sell, and these
securities could have the effect of decreasing the overall level of a Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, requiring a Fund to rely on judgments
that may be somewhat subjective in determining value, which could vary from the
amount that a Fund could realize upon disposition. Difficulty in selling
illiquid securities may result in a loss or may be costly to the Fund. Under the
supervision of the Board of Trustees, the Manager or Subadvisor, if any,
determines the liquidity of a Fund's investments; in doing so, the Manager or
Subadvisor, if any, may consider various factors, including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective purchasers, (3)
the dealer undertakings to make a market, and (4) the nature of the security and
the market in which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Illiquid
securities generally will be valued in such manner, as the Board of Trustees in
good faith deems appropriate to reflect their fair market value.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at NAV, 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. Interest
income is accrued as earned using the effective interest rate method. Discounts
and premiums on securities purchased, other than short-term investments, 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
24 MainStay Government Fund
security, over the period to the first date of call. Discounts and premiums on
short-term investments are accreted and amortized, respectively, on the
straight-line method. Income from payment-in-kind securities is recorded daily
based on the effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares 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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(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 financial
instrument (i.e., foreign currency, interest rate, security, or securities
index.) The Fund is subject to interest rate risk in the normal course of
investing in these transactions. 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 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 have minimal counterparty risk as they are
conducted through regulated exchanges that guarantee the futures against default
by the counterparty. The Fund invests in futures contracts to help manage the
duration and yield curve of the portfolio while minimizing the exposure to wider
bid/ask spreads in traditional bonds. The Fund's investment in futures contracts
and other derivatives may increase the volatility of the Fund's NAV and may
result in a loss to the Fund.
(I) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. The Fund maintains liquid assets from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the risk that the MBS returned to the Fund at the end of the roll, while
substantially similar, could be inferior to what was initially sold to the
counterparty.
(J) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(K) CONCENTRATION OF RISK. The ability of issuers of debt securities held by
the Fund to meet their obligations may be affected by economic or political
developments in a specific country, industry or region.
(L) 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.
(M) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
Fair Value of Derivative instruments as of October 31, 2009.
ASSET DERIVATIVES
<Table>
<Caption>
STATEMENT OF INTEREST
ASSETS AND RATE
LIABILITIES CONTRACTS
LOCATION RISK TOTAL
Net Assets--
unrealized
appreciation on
Futures contracts investments and
(a) futures contracts $345,030 $345,030
--------------------
Total Fair Value $345,030 $345,030
====================
</Table>
(a) Includes cumulative appreciation of futures contracts as reported in
Portfolio of Investments. Only current day's variation margin is reported
within the Statement of Assets & Liabilities.
LIABILITY DERIVATIVES
<Table>
<Caption>
STATEMENT OF INTEREST
ASSETS AND RATE
LIABILITIES CONTRACTS
LOCATION RISK TOTAL
Net Assets--
unrealized
appreciation on
Futures contracts investments and
(a) futures contracts $(587,791) $(587,791)
---------------------
Total Fair Value $(587,791) $(587,791)
=====================
</Table>
(a) Includes cumulative depreciation of futures as reported in Portfolio of
Investments. Only current day's variation margin is reported within the
Statement of Assets & Liabilities.
26 MainStay Government Fund
The effect of derivative instruments on the Statement of Operations for the year
ended October 31, 2009.
REALIZED GAIN (LOSS)
<Table>
<Caption>
INTEREST
STATEMENT RATE
OF OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net realized gain
(loss) on futures
Futures Contracts transactions $(841,998) $(841,998)
---------------------
Total Realized
Gain (Loss) $(841,998) $(841,998)
=====================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
INTEREST
STATEMENT RATE
OF OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net change in
unrealized
appreciation
Futures Contracts (depreciation) on
futures contracts $(242,761) $(242,761)
---------------------
Total Change in
Appreciation
(Depreciation) $(242,761) $(242,761)
=====================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
INTEREST
RATE
CONTRACTS
RISK TOTAL
Futures Contracts Long 162 162
(2)
Futures Contracts (321) (321)
Short (2)
</Table>
(1) Amounts disclosed represent, the weighted average held during the twelve-
month period.
(2) Amount(s) represent(s) number of contracts.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and
an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to
the Fund and is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between New York Life Investments and the Subadvisor,
New York Life Investments pays for the services of the Subadvisor.
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:
0.60% on assets up to $500 million; 0.575% on assets from $500 million to $1
billion; and 0.55% on assets in excess of $1 billion, plus a fee for fund
accounting services previously provided by New York Life Investments under a
separate fund accounting agreement. New York Life Investments has contractually
agreed to waive its management fee to 0.50% on assets up to $500 million; 0.475%
on assets from $500 million to $1 billion; and to 0.45% on assets in excess of
$1 billion.
Effective August 1, 2009, New York Life Investments has entered into a written
expense limitation agreement, under which it has agreed to waive a portion of
the management fee or reimburse expenses to the extent necessary to ensure that
the total ordinary operating expenses (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) for the
Fund's Class A shares do not exceed 1.03% of its average daily net assets. New
York Life Investments will apply an equivalent waiver or reimbursement, in an
equal amount of basis points, to the other share classes of the Fund. The
expense limitation agreement may be modified or terminated only with the
approval of the Board of Trustees. Under the expense limitation agreement, New
York Life Investments 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 existing expense limitations and the
recoupment is made within the term of the agreement. Any recoupment amount is
generally applied within a fiscal year. This agreement was set to expire on July
31, 2010. On December 11, 2009, the Board of Trustees approved an extension of
the agreement to February 28, 2011.
Prior to August 1, 2009, New York Life Investments had a written expense
limitation agreement under which it agreed to waive a portion of the management
fee or reimburse expenses to the extent necessary to ensure that the total
ordinary operating expenses of the appropriate class of shares did not exceed
the following percentages of average daily net assets: Investor Class, 1.15%;
Class A, 1.05%; Class B, 1.90%; Class C, 1.90%; and Class I, 0.40%.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $2,141,305 and waived expenses in the amount of
$1,021,029.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has
entered into a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund
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 Investor Class and Class A shares at an annual
rate of 0.25% of the average daily net assets of the Investor Class and Class A
shares for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, Class B and Class C shares of the
Fund pay the Distributor a monthly distribution fee at an 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 an annual rate of 0.25% of the average daily NAV 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
$12,291 and $33,407, respectively for the year ended October 31, 2009. 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 $77,
$1,192, $82,765 and $6,696 respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $994,773.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 205 0.0%++
- -------------------------------------------------
Class C 125 0.0++
- -------------------------------------------------
Class I 1,286 0.1
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $17,914.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(450,455) $(101,668) $11,372,336 $10,820,213
- ------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to Futures contracts marked to market, premium amortization and
wash sale deferrals.
The other temporary differences are primarily due to dividend payable.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2009 are not affected.
28 MainStay Government Fund
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$25,573 $65,137 $(90,710)
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydowns gain (loss).
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $450,455 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. No capital gain distributions shall be made until
any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2014 $ 59
2015 391
- ------------------------------------
Total $450
- ------------------------------------
</Table>
The Fund utilized $5,996,917 of capital loss carryforwards during the year ended
October 31, 2009.
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distribution paid from:
Ordinary Income $10,208,998 $11,852,851
- -----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of U.S. Government
securities were $322,869 and $279,469, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $59,672 and $65,437, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 807,031 $ 6,978,011
Shares issued to
shareholders in
reinvestment of dividends 208,230 1,800,449
Shares redeemed (1,299,088) (11,209,739)
-------------------------
Net decrease in shares
outstanding before
conversion (283,827) (2,431,279)
Shares converted into
Investor Class (See Note
1) 449,634 3,874,448
Shares converted from
Investor Class (See Note
1) (393,079) (3,424,421)
-------------------------
Net decrease (227,272) $ (1,981,252)
=========================
Period ended October 31,
2008 (a):
Shares sold 1,279,036 $ 10,698,391
Shares issued to
shareholders in
reinvestment of dividends 148,466 1,229,989
Shares redeemed (769,140) (6,412,328)
-------------------------
Net increase in shares
outstanding before
conversion 658,362 5,516,052
Shares converted into
Investor Class (See Note
1) 7,195,812 60,814,414
Shares converted from
Investor Class (See Note
1) (356,426) (2,981,459)
-------------------------
Net increase 7,497,748 $ 63,349,007
=========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 5,595,487 $ 48,373,913
Shares issued to
shareholders in
reinvestment of dividends 594,745 5,125,361
Shares redeemed (7,990,962) (68,713,916)
-------------------------
Net decrease in shares
outstanding before
conversion (1,800,730) (15,214,642)
Shares converted into Class
A
(See Note 1) 975,401 8,419,780
Shares converted from Class
A
(See Note 1) (99,773) (866,754)
-------------------------
Net decrease (925,102) $ (7,661,616)
=========================
Year ended October 31, 2008:
Shares sold 7,597,458 $ 63,493,082
Shares issued to
shareholders in
reinvestment of dividends 859,598 7,148,881
Shares redeemed (7,554,369) (62,887,830)
-------------------------
Net increase in shares
outstanding before
conversion 902,687 7,754,133
Shares converted into Class
A
(See Note 1) 862,898 7,188,662
Shares converted from Class
A
(See Note 1) (7,067,799) (59,611,916)
-------------------------
Net decrease (5,302,214) $(44,669,121)
=========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 1,379,738 $ 11,849,845
Shares issued to
shareholders in
reinvestment of dividends 121,091 1,042,823
Shares redeemed (1,760,605) (15,118,893)
-------------------------
Net decrease in shares
outstanding before
conversion (259,776) (2,226,225)
Shares converted from Class
B
(See Note 1) (933,209) (8,003,053)
-------------------------
Net decrease (1,192,985) $(10,229,278)
=========================
Year ended October 31, 2008:
Shares sold 2,347,675 $ 19,595,403
Shares issued to
shareholders in
reinvestment of dividends 174,664 1,451,422
Shares redeemed (1,604,437) (13,362,831)
-------------------------
Net increase in shares
outstanding before
conversion 917,902 7,683,994
Shares converted from Class
B
(See Note 1) (650,194) (5,409,701)
-------------------------
Net increase 267,708 $ 2,274,293
=========================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 1,830,576 $ 15,752,695
Shares issued to
shareholders in
reinvestment of dividends 48,474 417,395
Shares redeemed (1,326,630) (11,406,279)
-------------------------
Net increase 552,420 $ 4,763,811
=========================
Year ended October 31, 2008:
Shares sold 2,958,867 $ 24,715,399
Shares issued to
shareholders in
reinvestment of dividends 35,284 292,732
Shares redeemed (726,669) (6,016,010)
-------------------------
Net increase 2,267,482 $ 18,992,121
=========================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 204,101 $ 1,755,151
Shares issued to shareholders
in reinvestment of dividends 6,201 53,844
Shares redeemed (174,284) (1,512,568)
----------------------
Net increase 36,018 $ 296,427
======================
Year ended October 31, 2008:
Shares sold 164,808 $ 1,389,556
Shares issued to shareholders
in reinvestment of dividends 581 4,768
Shares redeemed (3,664) (30,512)
----------------------
Net increase 161,725 $ 1,363,812
======================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being
30 MainStay Government Fund
distributed to shareholders who held shares of the Equity Index Fund between
March 2002 and June 2004, without any material financial impact to New York Life
Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Government Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Government Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
32 MainStay Government Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Government Fund ("Fund") and New
York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and MacKay Shields LLC
("MacKay Shields") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group of Funds, including
the privilege of
mainstayinvestments.com 33
exchanging investments between the same class of shares without the imposition
of a sales charge, as described more fully in the Fund's prospectus.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for
34 MainStay Government Fund
example, increased costs borne by New York Life Investments and its affiliates
due to new and ongoing regulatory and compliance requirements. The Board also
noted that the Fund benefits from the allocation of certain fixed costs across
the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund. The Board also
considered the impact of the Fund's expense limitation arrangements pursuant to
which New York Life Investments has agreed to limit the Fund's total ordinary
operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MacKay Shields on fees charged 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 explanations from New York Life Investments and MacKay
Shields about the different scope of services provided to retail mutual funds as
compared with other investment advisory clients.
mainstayinvestments.com 35
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
modify the expense limitations on the Fund's share classes in order to increase
the amount of class expenses subsidized by New York Life Investments. The Board
acknowledged that New York Life Investments may recoup amounts waived or
reimbursed under contractual expense limitations if such action does not cause a
share class to exceed an expense limitation, and the recoupment is made during
the term of the agreement. The Board further acknowledged that New York Life
Investments may determine voluntarily to waive expenses of Fund share classes
without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
36 MainStay Government Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2009,
should be multiplied by 97.5% to arrive at the amount eligible for qualified
interest income.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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 37
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
38 MainStay Government Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
40 MainStay Government Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 41
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
42 MainStay Government Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017131 (RECYCLE LOGO) MS283-09 MSG11-12/09
07
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 25
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 31
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 41
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 42
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 46
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 46
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 46
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 47
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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.
A 2% REDEMPTION FEE WILL BE IMPOSED ON REDEMPTIONS MADE WITHIN 60 DAYS OF
PURCHASE. PERFORMANCE DATA SHOWN DOES NOT REFLECT THIS FEE, WHICH WOULD LOWER
PERFORMANCE.
INVESTOR CLASS SHARES(2)--MAXIMUM 4.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 26.64% 4.23% 6.01%
Excluding sales charges 32.60 5.20 6.50
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH CREDIT SUISSE
YIELD CORPORATE HIGH YIELD
BOND FUND INDEX
--------------- -------------
10/31/99 9550 10000
10/31/00 9660 9923
10/31/01 9149 9960
10/31/02 8602 9953
10/31/03 12368 13085
10/31/04 13918 14781
10/31/05 14734 15304
10/31/06 16146 16878
10/31/07 17343 18177
10/31/08 13521 13656
10/31/09 17930 19478
</Table>
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 26.76% 4.26% 6.03%
Excluding sales charges 32.74 5.23 6.52
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH CREDIT SUISSE
YIELD CORPORATE HIGH YIELD
BOND FUND INDEX
--------------- -------------
10/31/99 23875 25000
10/31/00 24151 24808
10/31/01 22873 24900
10/31/02 21506 24884
10/31/03 30920 32712
10/31/04 34795 36952
10/31/05 36835 38259
10/31/06 40365 42195
10/31/07 43356 45442
10/31/08 33817 34139
10/31/09 44888 48695
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 26.57% 4.14% 5.71%
Excluding sales charges 31.57 4.44 5.71
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH CREDIT SUISSE
YIELD CORPORATE HIGH YIELD
BOND FUND INDEX
--------------- -------------
10/31/99 10000 10000
10/31/00 10035 9923
10/31/01 9426 9960
10/31/02 8817 9953
10/31/03 12567 13085
10/31/04 14031 14781
10/31/05 14738 15304
10/31/06 16052 16878
10/31/07 17089 18177
10/31/08 13249 13656
10/31/09 17431 19478
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. Investor Class shares and
Class A shares are sold with a maximum initial sales charge of 4.50% 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.
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.
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 --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 30.57% 4.43% 5.71%
Excluding sales charges 31.57 4.43 5.71
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH CREDIT SUISSE
YIELD CORPORATE HIGH YIELD
BOND FUND INDEX
--------------- -------------
10/31/99 10000 10000
10/31/00 10035 9923
10/31/01 9426 9960
10/31/02 8817 9953
10/31/03 12567 13085
10/31/04 14031 14781
10/31/05 14738 15304
10/31/06 16051 16878
10/31/07 17115 18177
10/31/08 13248 13656
10/31/09 17429 19478
</Table>
CLASS I SHARES(3)--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
32.84% 5.49% 6.78%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH CREDIT SUISSE
YIELD CORPORATE HIGH YIELD
BOND FUND INDEX
--------------- -------------
10/31/99 10000 10000
10/31/00 10139 9923
10/31/01 9615 9960
10/31/02 9073 9953
10/31/03 13074 13085
10/31/04 14744 14781
10/31/05 15647 15304
10/31/06 17215 16878
10/31/07 18505 18177
10/31/08 14501 13656
10/31/09 19264 19478
</Table>
CLASS R2 SHARES(4)--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
32.31% 5.14% 6.41%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH CREDIT SUISSE
YIELD CORPORATE HIGH YIELD
BOND FUND INDEX
--------------- -------------
10/31/99 10000 10000
10/31/00 10101 9923
10/31/01 9550 9960
10/31/02 8991 9953
10/31/03 12898 13085
10/31/04 14495 14781
10/31/05 15324 15304
10/31/06 16799 16878
10/31/07 18001 18177
10/31/08 14074 13656
10/31/09 18621 19478
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- --------------------------------------------------------------------
Credit Suisse High Yield Index(5) 42.64% 5.67% 6.89%
Average Lipper high current yield fund(6) 35.59 4.08 4.71
</Table>
3. Performance figures for Class I shares, first offered to the public on
January 2, 2004, include the historical performance of Class B shares through
January 1, 2004, adjusted for differences in certain contractual expenses and
fees. Unadjusted, the performance shown for Class I shares might have been
lower.
4. Class R2 shares were first offered to the public on December 14, 2007, but
did not commence investment operations until May 1, 2008. Performance figures
for Class R2 shares include historic performance of Class B shares through
April 30, 2008, adjusted for differences in certain contractual expenses and
fees. Unadjusted, the performance shown for Class R2 shares might have been
lower.
5. The Credit Suisse High Yield Index is a market-weighted index that includes
publicly traded bonds rated below BBB by Standard & Poor's and below Baa by
Moody's. Total returns assume reinvestment of all income and capital gains.
The Credit Suisse High Yield Index is the Fund's broad-based securities
market index for comparison purposes. An investment cannot be made directly
in an index.
6. The average Lipper high current yield fund is representative of funds that
aim at high (relative) current yield from fixed income securities, have no
quality or maturity restrictions, and tend to invest in lower-grade debt
issues. This benchmark is a product of Lipper Inc. 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.
6 MainStay High Yield Corporate Bond Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY HIGH YIELD CORPORATE BOND
FUND (UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,215.30 $ 6.20 $1,019.60 $5.65
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,217.70 $ 5.87 $1,019.90 $5.35
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,213.10 $10.32 $1,015.90 $9.40
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,213.10 $10.43 $1,015.80 $9.50
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,219.30 $ 4.53 $1,021.10 $4.13
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,214.50 $ 6.53 $1,019.30 $5.95
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.11% for Investor Class, 1.05% for Class A, 1.85% for Class B, 1.87% for
Class C, 0.81% for Class I and 1.17% for Class R2) multiplied by the average
account value over the period, divided by 365 and multiplied by 184 (to
reflect the one-half year period). The table above represents the actual
expenses incurred during the one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Corporate Bonds 74.2
Yankee Bonds 9.0
Short-Term Investment 8.8
Loan Assignments & Participations 5.4
Cash and Other Assets, Less Liabilities 1.2
Foreign Bond 0.4
Convertible Preferred Stock 0.3
Preferred Stocks 0.3
Common Stocks 0.2
Convertible Bonds 0.2
Asset-Backed Security 0.0
Warrants 0.0
</Table>
See Portfolio of Investments beginning on page 11 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN ISSUERS HELD AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Ford Motor Credit Co. LLC,
5.549%-12.00%, due 1/15/10-5/15/15
2. HCA, Inc., 1.783%-9.875%, due
9/1/10-4/15/19
3. Georgia-Pacific Corp., 7.00%-8.875%, due
5/15/11-5/15/31
4. Charter Communications Operating LLC,
6.25%-10.375%, due 4/30/12-4/30/14
5. Goodyear Tire & Rubber Co. (The),
5.01%-10.50%, due 12/1/09-5/15/16
6. Nova Chemicals Corp., 4.538%-8.625%, due
1/15/12-11/1/19
7. American Real Estate Partners,
L.P./American Real Estate Finance Corp.,
7.125%-8.125%, due 6/1/12-2/15/13
8. GMAC LLC, 6.75%-8.00%, due
1/19/10-11/1/31
9. Intelsat Subsidiary Holding Co., Ltd.,
8.50%-8.875%, due 1/15/13-1/15/15
10. Texas Competitive Electric Holdings Co.
LLC, 3.745%, due 10/10/14
</Table>
8 MainStay High Yield Corporate Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGER J. MATTHEW PHILO, CFA OF MACKAY SHIELDS
LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY HIGH YIELD CORPORATE BOND FUND PERFORM RELATIVE TO ITS PEERS
AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay High Yield Corporate Bond Fund returned
32.60% for Investor Class shares, 32.74% for Class A shares, 31.57% for Class B
shares and 31.57% for Class C shares for the 12 months ended October 31, 2009.
Over the same per-iod, the Fund's Class I shares returned 32.84% and Class R2
shares returned 32.31%. All share classes underperformed the 35.59% return of
the average Lipper(1) high current yield fund and the 42.64% return of the
Credit Suisse High Yield Index(2) for the 12 months ended October 31, 2009. The
Credit Suisse High Yield Index is the Fund's broad-based securities-market
index. See pages 5 and 6 for Fund returns with sales charges.
WHAT FACTORS INFLUENCED THE HIGH-YIELD CORPORATE BOND MARKET AS A WHOLE DURING
THE REPORTING PERIOD?
The high-yield corporate bond market's positive performance was driven by a
combination of attractive valuations, increased perception of reduced systemic
risk and the growing belief that the economic recession was over. During the
reporting period, riskier high-yield bonds significantly outperformed higher-
quality bonds.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund's performance relative to its benchmark and peers resulted from our
bottom-up investment style, which focused on individual companies to determine
risk-group weightings in the context of yield spreads(3) as compared to
historical levels. Because we anticipated prolonged economic weakness, we
positioned the Fund conservatively at the beginning of the reporting period. The
Fund's largest industry exposures were in defensive areas, such as health care,
energy and utilities. Within each industry, the Fund's investments were focused
on higher-quality companies.
During the reporting period, investor sentiment improved dramatically. The
federal government's sweeping actions--which included cutting short-term
interest rates, expanding support to financial companies and extending loans to
the auto industry--reduced fears of major systemic risk. In addition, certain
economic data led some to conclude that the economy was close to a bottom.
Our outlook did not significantly change during the reporting period. Based on
our interaction with many of the companies in which the Fund invests, we
continued to believe that the recent recession would be longer and more severe
than the market seemed to be reflecting. While the Fund held some positions
rated CCC,(4) it remained underweight in these higher-risk securities relative
to the market. This conservative stance detracted from the Fund's relative
performance during the 12-month reporting period.
WHAT WERE SOME OF THE INDUSTRY POSITIONS OR SPECIFIC HOLDINGS THAT HAD A
MEANINGFUL IMPACT ON THE FUND'S ABSOLUTE PERFORMANCE DURING THE REPORTING
PERIOD?
Investments in the energy, transportation and health care industries were the
most significant positive contributors to the Fund's absolute performance during
the reporting period. The Fund's overweight position in energy, specifically in
exploration and production companies, added to the Fund's performance. Within
transportation, automotive
- ----------
The values of debt securities fluctuate depending on various factors, including
interest rates, issuer creditworthiness, liquidity, market conditions and
maturities. Investments in common stocks and other equity securities are
particularly subject to the risk of changing economic, stock market, industry
and company conditions and the risks inherent in management's ability to
anticipate such changes that can adversely affect the value of the Fund's
holdings. High-yield debt securities ("junk bonds") are generally considered
speculative because they present a greater risk of loss than higher-quality debt
securities and may be subject to greater price volatility. Foreign securities
may be subject to greater risks than U.S. investments, including currency
fluctuations, less-liquid trading markets, greater price volatility, political
and economic instability, less publicly available information, and changes in
tax or currency laws or monetary policy. These risks are likely to be greater in
emerging markets than in developed markets.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Credit Suisse High Yield
Index.
3. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
4. Debt rated CCC by Standard & Poor's is deemed by Standard & Poor's to be
currently vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor. It is the opinion of
Standard & Poor's that in the event of adverse business, financial or
economic conditions, the obligor is not likely to have the capacity to meet
its financial commitment on the obligation. When applied to Fund holdings,
ratings are based solely on the creditworthiness of the bonds in the
portfolio and are not meant to represent the security or safety of the Fund.
mainstayinvestments.com 9
investments were the top contributors, led by Ford Motor Company and KAR
Holdings.
HOW DID YOU POSITION THE FUND FROM AN INDUSTRY PERSPECTIVE?
During the reporting period, we increased the Fund's overweight position in
transportation. Most auto companies were expecting further recovery as increased
production replenished inventories depleted by strong "Cash for Clunkers"
related sales.
The Fund maintained an overweight position in health care, but we reduced the
position during the reporting period. Several health care companies advanced
during the high-yield corporate bond market rally. We also decreased the Fund's
exposure to the media and information technology industries during the reporting
period.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the reporting period, the Fund established positions in financing company
Harley-Davidson Funding and insurance broker Willis North America. Both are
large, high-quality companies whose bonds were trading at what we believed to be
extremely attractive valuations. In addition, the Fund purchased bonds issued by
Tyson Foods, one of the nation's largest meat processors. All of these purchases
had a positive impact on the Fund's performance. The Fund's position in bank
debt of wireless communications service provider Alltel was retired by the
company following the acquisition of Alltel by Verizon. During the reporting
period, the Fund sold its holdings in aeronautics and defense company Hawker
Beechcraft at a loss.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund remained underweight relative to the Credit
Suisse High Yield Index in credit risk. Many additions to the Fund during the
reporting period were higher-quality non-investment-grade securities or bonds
rated BB.(5) In light of market volatility and the Fund's underweight position
in lower-rated non-investment-grade securities relative to the Credit Suisse
High Yield Index, New York Life Investments,(6) the Fund's Manager, is
evaluating the appropriate dividend level for this Fund going forward.
- ----------
5. Debt rated BB by Standard & Poor's is deemed by Standard & Poor's to be less
vulnerable to nonpayment than other speculative issues. In the opinion of
Standard & Poor's, however, debt rated BB faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation. When applied to Fund holdings, ratings are
based solely on the creditworthiness of the bonds in the portfolio and are
not meant to represent the security or safety of the Fund.
6. "New York Life Investments" is a service mark used by New York Life
Investment Management LLC.
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 High Yield Corporate Bond Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 89.2%+
ASSET-BACKED SECURITY 0.0%++
- ------------------------------------------------------------------------------------------
ELECTRIC 0.0%++
Reliant Energy Mid-Atlantic Power Holdings LLC
9.237%, due 7/2/17 $ 520,555 $ 556,994
--------------
Total Asset-Backed Security
(Cost $479,810) 556,994
--------------
CONVERTIBLE BONDS 0.2%
- ------------------------------------------------------------------------------------------
INTERNET 0.0%++
At Home Corp.
4.75%, due 12/31/49 (a)(b)(c)(d) 61,533,853 6,154
--------------
REAL ESTATE INVESTMENT TRUSTS 0.1%
Host Hotels & Resorts, L.P.
3.25%, due 4/15/24 (e) 3,870,000 3,870,000
--------------
RETAIL 0.1%
Penske Auto Group, Inc.
3.50%, due 4/1/26 5,695,000 5,744,831
--------------
Total Convertible Bonds
(Cost $6,574,801) 9,620,985
--------------
CORPORATE BONDS 74.2%
- ------------------------------------------------------------------------------------------
ADVERTISING 1.1%
Interpublic Group of Cos., Inc.
6.25%, due 11/15/14 20,420,000 19,118,225
Jostens Intermediate Holding Corp.
7.625%, due 10/1/12 11,577,000 11,649,356
Lamar Media Corp.
6.625%, due 8/15/15 16,883,000 16,123,265
Series C
6.625%, due 8/15/15 2,765,000 2,612,925
7.25%, due 1/1/13 4,715,000 4,632,488
9.75%, due 4/1/14 8,650,000 9,515,000
--------------
63,651,259
--------------
AEROSPACE & DEFENSE 0.4%
BE Aerospace, Inc.
8.50%, due 7/1/18 8,490,000 8,829,600
L-3 Communications Corp.
6.125%, due 7/15/13 3,535,000 3,561,513
7.625%, due 6/15/12 11,535,000 11,681,494
--------------
24,072,607
--------------
AGRICULTURE 0.6%
Alliance One International, Inc.
10.00%, due 7/15/16 (e) 10,780,000 11,211,200
Reynolds American, Inc.
7.625%, due 6/1/16 8,155,000 8,784,207
7.75%, due 6/1/18 10,705,000 11,565,993
--------------
31,561,400
--------------
AIRLINES 0.3%
DAE Aviation Holdings, Inc.
11.25%, due 8/1/15 (e) 13,130,000 10,766,600
Delta Air Lines, Inc. (Escrow Shares)
(zero coupon), due 12/27/49 (c)(f) 5,175,000 51,750
2.875%, due 2/6/24 (c)(f) 7,201,000 79,211
2.875%, due 2/18/49 (c)(e)(f) 4,190,000 46,090
8.00%, due 6/3/23 (c)(f) 13,575,000 149,325
8.00%, due 6/3/49 (c)(f) 10,459,000 115,049
8.30%, due 12/15/29 (c)(f) 11,297,000 112,970
9.25%, due 3/15/49 (c)(f) 9,000,000 90,000
9.75%, due 5/15/49 (c)(f) 2,115,000 21,150
10.00%, due 8/15/49 (c)(f) 8,195,000 81,950
10.375%, due 12/15/22 (c)(f) 15,160,000 151,600
10.375%, due 2/1/49 (c)(f) 6,515,000 65,150
Northwest Airlines, Inc.
Series 2001-1, Class 1B
7.691%, due 10/1/18 3,186,155 2,501,131
Series 2002-1, Class IC2
9.055%, due 5/20/12 4,394,947 3,515,958
Northwest Airlines, Inc. (Escrow Shares)
7.625%, due 11/15/23 (c)(f) 11,810,900 28,937
7.875%, due 12/31/49 (c)(f) 8,723,000 9,595
8.70%, due 3/15/49 (c)(f) 445,000 489
8.875%, due 6/1/49 (c)(f) 5,229,300 5,752
9.875%, due 3/15/37 (c)(f) 18,534,200 20,388
10.00%, due 2/1/49 (c)(f) 14,683,200 16,152
--------------
17,829,247
--------------
APPAREL 0.3%
Unifi, Inc.
11.50%, due 5/15/14 19,709,000 18,526,460
--------------
AUTO MANUFACTURERS 0.7%
Ford Holdings LLC
9.30%, due 3/1/30 8,400,000 7,266,000
Ford Motor Co.
6.50%, due 8/1/18 2,645,000 2,116,000
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest issuers held, as of October 31, 2009, excluding
short-term investment. 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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
AUTO MANUFACTURERS (CONTINUED)
Harley-Davidson Funding Corp.
5.25%, due 12/15/12 (e) $ 250,000 $ 250,775
6.80%, due 6/15/18 (e) 32,439,000 32,244,236
--------------
41,877,011
--------------
AUTO PARTS & EQUIPMENT 2.7%
Allison Transmission, Inc.
11.25%, due 11/1/15 (e)(g) 6,910,000 6,840,900
American Tire Distributors, Inc.
6.539%, due 4/1/12 (h) 4,635,000 3,945,544
10.75%, due 4/1/13 7,245,000 6,746,906
Cooper Tire & Rubber Co.
7.625%, due 3/15/27 4,680,000 3,837,600
FleetPride Corp.
11.50%, due 10/1/14 (e) 17,535,000 15,803,419
V Goodyear Tire & Rubber Co. (The)
5.01%, due 12/1/09 (h) 33,035,000 33,035,000
7.857%, due 8/15/11 4,760,000 4,843,300
8.625%, due 12/1/11 15,723,000 16,214,344
10.50%, due 5/15/16 16,585,000 17,953,262
Johnson Controls, Inc.
5.25%, due 1/15/11 7,520,000 7,784,659
7.70%, due 3/1/15 5,405,000 5,997,669
Lear Corp.
8.75%, due 12/1/16 (c) 15,444,000 10,501,920
Tenneco Automotive, Inc.
8.625%, due 11/15/14 3,655,000 3,444,837
10.25%, due 7/15/13 5,427,000 5,589,810
Tenneco, Inc.
8.125%, due 11/15/15 10,891,000 10,673,180
--------------
153,212,350
--------------
BANKS 1.6%
CapitalSource, Inc.
12.75%, due 7/15/14 (e) 19,350,000 19,640,250
V GMAC LLC
6.75%, due 12/1/14 (e) 29,300,000 26,589,750
7.25%, due 3/2/11 (e) 5,558,000 5,460,735
7.75%, due 1/19/10 (e) 2,775,000 2,775,000
8.00%, due 11/1/31 (e) 32,005,000 27,364,275
Zions BanCorp.
7.75%, due 9/23/14 10,364,000 9,275,780
--------------
91,105,790
--------------
BEVERAGES 0.7%
Constellation Brands, Inc.
7.25%, due 9/1/16 1,150,000 1,152,875
7.25%, due 5/15/17 12,389,000 12,419,972
8.125%, due 1/15/12 3,376,000 3,397,100
8.375%, due 12/15/14 247,000 260,585
Cott Beverages USA, Inc.
8.00%, due 12/15/11 21,899,000 21,926,374
--------------
39,156,906
--------------
BIOTECHNOLOGY 0.4%
Bio-Rad Laboratories, Inc.
7.50%, due 8/15/13 1,420,000 1,441,300
8.00%, due 9/15/16 (e) 7,810,000 8,044,300
Talecris Biotherapeutics Holdings Corp.
7.75%, due 11/15/16 (e) 13,555,000 13,724,438
--------------
23,210,038
--------------
BUILDING MATERIALS 1.2%
Building Materials Corp. of America
7.75%, due 8/1/14 10,592,000 10,433,120
Compression Polymers Corp.
10.50%, due 7/1/13 5,660,000 4,811,000
CRH America, Inc.
5.625%, due 9/30/11 3,550,000 3,748,864
Owens Corning, Inc
7.00%, due 12/1/36 2,245,000 1,882,022
Texas Industries, Inc.
7.25%, due 7/15/13 35,482,000 34,772,360
USG Corp.
9.75%, due 8/1/14 (e) 11,270,000 11,833,500
--------------
67,480,866
--------------
CHEMICALS 1.7%
Huntsman International LLC
5.50%, due 6/30/16 (e) 3,676,000 3,179,740
Mosaic Global Holdings, Inc.
7.375%, due 12/1/14 (e) 3,900,000 4,151,628
7.625%, due 12/1/16 (e) 5,090,000 5,479,604
Nalco Co.
7.75%, due 11/15/11 11,727,000 11,741,659
8.25%, due 5/15/17 (e) 2,390,000 2,509,500
Olin Corp.
8.875%, due 8/15/19 2,800,000 2,933,000
Phibro Animal Health Corp.
10.00%, due 8/1/13 (e) 17,013,000 17,013,000
13.00%, due 8/1/14 (e) 4,095,000 4,013,100
Terra Capital, Inc.
7.75%, due 11/1/19 (e) 17,220,000 17,306,100
Tronox Worldwide LLC/Tronox Finance Corp.
9.50%, due 12/1/12 (c) 29,371,000 18,430,302
Westlake Chemical Corp.
6.625%, due 1/15/16 7,870,000 7,417,475
--------------
94,175,108
--------------
</Table>
12 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
COAL 0.3%
Peabody Energy Corp.
5.875%, due 4/15/16 $ 1,845,000 $ 1,798,875
6.875%, due 3/15/13 3,765,000 3,802,650
7.375%, due 11/1/16 2,185,000 2,206,850
7.875%, due 11/1/26 7,080,000 6,903,000
--------------
14,711,375
--------------
COMMERCIAL SERVICES 2.3%
Cardtronics, Inc.
9.25%, due 8/15/13 16,565,000 16,813,475
Corrections Corp. of America
6.25%, due 3/15/13 1,384,000 1,377,080
7.75%, due 6/1/17 6,990,000 7,199,700
El Comandante Capital Corp.
(Escrow Shares)
(zero coupon), due 12/31/50 (a)(b)(f) 21,941,051 1,579,756
Ford Holdings, Inc.
9.375%, due 3/1/20 750,000 644,062
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 14,650,000 14,283,750
iPayment, Inc.
9.75%, due 5/15/14 16,404,000 11,974,920
Knowledge Learning Corp., Inc.
7.75%, due 2/1/15 (e) 24,640,000 24,054,800
Language Line, Inc.
11.125%, due 6/15/12 18,829,000 19,370,334
Lender Processing Services, Inc.
8.125%, due 7/1/16 10,600,000 11,156,500
Quebecor World, Inc. (Litigation Recovery
Trust-Escrow Shares)
6.50%, due 8/1/49 (a)(b)(f) 460,000 23,920
9.75%, due 1/15/49 (a)(b)(e)(f) 26,020,000 1,353,040
Rural/Metro Operating Co. LLC & Rural/Metro
Delaware, Inc.
9.875%, due 3/15/15 12,020,000 12,050,050
Service Corp. International
7.625%, due 10/1/18 6,850,000 6,798,625
--------------
128,680,012
--------------
COMPUTERS 0.6%
SunGard Data Systems, Inc.
4.875%, due 1/15/14 12,070,000 10,863,000
10.625%, due 5/15/15 (e) 19,260,000 20,752,650
--------------
31,615,650
--------------
DISTRIBUTION & WHOLESALE 0.3%
ACE Hardware Corp.
9.125%, due 6/1/16 (e) 15,913,000 16,947,345
--------------
DIVERSIFIED FINANCIAL SERVICES 1.8%
AmeriCredit Corp.
8.50%, due 7/1/15 15,705,000 14,841,225
Ford Motor Credit Co.
9.875%, due 8/10/11 22,150,000 22,656,681
Global Cash Acceptance/Global Cash Finance Corp.
8.75%, due 3/15/12 818,000 813,910
Janus Capital Group, Inc.
6.125%, due 9/15/11 2,020,000 2,009,122
6.50%, due 6/15/12 4,324,000 4,302,371
6.95%, due 6/15/17 26,050,000 24,763,156
LaBranche & Co., Inc.
11.00%, due 5/15/12 10,010,000 9,622,113
Nuveen Investments, Inc.
5.00%, due 9/15/10 1,272,000 1,240,200
10.50%, due 11/15/15 (e) 10,260,000 9,080,100
Premium Asset Trust/GEFA
0.513%, due 9/28/10 (e)(h) 15,665,000 14,881,750
--------------
104,210,628
--------------
ELECTRIC 4.4%
AES Corp. (The)
8.75%, due 5/15/13 (e) 8,911,000 9,111,497
9.75%, due 4/15/16 (e) 13,825,000 15,069,250
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 14,912,252 14,614,007
Calpine Construction Finance Co., L.P./CCFC
Finance Corp.
8.00%, due 6/1/16 (e) 32,940,000 33,434,100
Calpine Corp.
7.25%, due 10/15/17 (e) 37,579,000 35,418,207
Energy Future Holdings Corp.
10.875%, due 11/1/17 25,445,000 17,684,275
ESI Tractebel Acquisition Corp.
Class B
7.99%, due 12/30/11 4,687,000 4,687,000
Ipalco Enterprises, Inc.
7.25%, due 4/1/16 (e) 2,800,000 2,821,000
8.625%, due 11/14/11 10,090,000 10,367,475
NRG Energy, Inc.
7.25%, due 2/1/14 14,805,000 14,693,962
7.375%, due 2/1/16 1,090,000 1,083,188
Orion Power Holdings, Inc.
12.00%, due 5/1/10 18,114,000 18,702,705
PNM Resources, Inc.
9.25%, due 5/15/15 8,710,000 8,993,075
Public Service Co. of New Mexico
7.95%, due 5/15/18 8,760,000 8,953,938
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
ELECTRIC (CONTINUED)
Reliant Energy Mid-Atlantic Power Holdings LLC
Series C
9.681%, due 7/2/26 $ 3,700,000 $ 3,885,000
Reliant Energy, Inc.
7.625%, due 6/15/14 4,685,000 4,567,875
7.875%, due 6/15/17 47,255,000 46,309,900
--------------
250,396,454
--------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.5%
Belden, Inc.
7.00%, due 3/15/17 12,530,000 12,091,450
9.25%, due 6/15/19 (e) 15,000,000 16,050,000
--------------
28,141,450
--------------
ENERGY--ALTERNATE SOURCES 0.3%
Headwaters, Inc.
11.375%, due 11/1/14 (e) 15,460,000 15,498,650
Salton Sea Funding Corp.
Series E
8.30%, due 5/30/11 (b) 15,461 16,177
--------------
15,514,827
--------------
ENTERTAINMENT 3.0%
American Casino & Entertainment Properties LLC
11.00%, due 6/15/14 (e) 17,420,000 15,329,600
Chukchansi Economic
Development Authority
8.00%, due 11/15/13 (e) 6,480,000 4,212,000
FireKeepers Development Authority
13.875%, due 5/1/15 (e) 2,410,000 2,602,800
Isle of Capri Casinos, Inc.
7.00%, due 3/1/14 15,333,000 13,684,702
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 19,485,000 17,731,350
Mohegan Tribal Gaming Authority
6.125%, due 2/15/13 2,750,000 2,186,250
6.875%, due 2/15/15 2,380,000 1,570,800
8.00%, due 4/1/12 19,055,000 16,196,750
Peninsula Gaming LLC
8.375%, due 8/15/15 (e) 8,960,000 8,892,800
10.75%, due 8/15/17 (e) 8,570,000 8,505,725
Penn National Gaming, Inc.
6.75%, due 3/1/15 19,010,000 18,154,550
6.875%, due 12/1/11 13,640,000 13,605,900
8.75%, due 8/15/19 (e) 5,045,000 4,931,488
Pinnacle Entertainment, Inc.
8.25%, due 3/15/12 8,761,000 8,761,000
8.625%, due 8/1/17 (e) 7,320,000 7,283,400
Seneca Gaming Corp.
7.25%, due 5/1/12 10,078,000 9,725,270
Speedway Motorsports, Inc.
6.75%, due 6/1/13 2,340,000 2,304,900
8.75%, due 6/1/16 (e) 11,035,000 11,531,575
United Artists Theatre Circuit, Inc.
Series BA7
9.30%, due 7/1/15 (a)(b) 1,616,754 970,052
--------------
168,180,912
--------------
ENVIRONMENTAL CONTROLS 0.5%
Clean Harbors, Inc.
7.625%, due 8/15/16 (e) 9,620,000 9,860,500
Geo Sub Corp.
11.00%, due 5/15/12 21,865,000 20,006,475
--------------
29,866,975
--------------
FINANCE--AUTO LOANS 2.2%
V Ford Motor Credit Co. LLC
5.549%, due 6/15/11 (h) 2,790,000 2,706,300
5.70%, due 1/15/10 1,825,000 1,825,856
7.25%, due 10/25/11 27,690,000 27,158,269
7.375%, due 2/1/11 6,870,000 6,897,191
7.50%, due 8/1/12 11,930,000 11,618,090
7.875%, due 6/15/10 22,710,000 22,931,423
8.00%, due 6/1/14 37,860,000 36,811,051
12.00%, due 5/15/15 13,415,000 15,107,557
--------------
125,055,737
--------------
FINANCE--OTHER SERVICES 1.1%
V American Real Estate Partners, L.P./American
Real Estate
Finance Corp.
7.125%, due 2/15/13 39,835,000 39,137,887
8.125%, due 6/1/12 26,125,000 26,125,000
--------------
65,262,887
--------------
FOOD 1.4%
American Stores Co.
8.00%, due 6/1/26 17,044,000 15,339,600
ASG Consolidated LLC/ASG Finance, Inc.
11.50%, due 11/1/11 8,574,000 8,381,085
Ingles Markets, Inc.
8.875%, due 5/15/17 6,725,000 6,893,125
M-Foods Holding, Inc.
9.75%, due 10/1/13 (e) 10,350,000 10,686,375
Stater Brothers Holdings
7.75%, due 4/15/15 5,132,000 5,067,850
8.125%, due 6/15/12 475,000 477,375
Tyson Foods, Inc.
7.85%, due 4/1/16 9,015,000 9,240,375
8.25%, due 10/1/11 3,410,000 3,597,550
</Table>
14 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
FOOD (CONTINUED)
Tyson Foods, Inc. (continued)
10.50%, due 3/1/14 $ 18,230,000 $ 20,782,200
Tyson Fresh Meats, Inc.
7.95%, due 2/1/10 710,000 714,634
--------------
81,180,169
--------------
FOREST PRODUCTS & PAPER 2.7%
Bowater, Inc.
9.375%, due 12/15/21 (c) 28,888,000 7,799,760
Domtar Corp.
7.875%, due 10/15/11 24,579,000 25,562,160
V Georgia-Pacific Corp.
7.00%, due 1/15/15 (e) 5,760,000 5,817,600
7.125%, due 1/15/17 (e) 6,845,000 6,913,450
7.25%, due 6/1/28 2,370,000 2,156,700
7.75%, due 11/15/29 1,174,000 1,097,690
8.00%, due 1/15/24 17,193,000 17,364,930
8.125%, due 5/15/11 23,640,000 24,585,600
8.875%, due 5/15/31 29,615,000 30,355,375
Georgia-Pacific LLC
8.25%, due 5/1/16 (e) 4,398,000 4,661,880
9.50%, due 12/1/11 3,000,000 3,240,000
Weyerhaeuser Co.
6.95%, due 10/1/27 3,695,000 3,283,857
7.375%, due 10/1/19 13,935,000 14,364,477
7.375%, due 3/15/32 1,655,000 1,518,411
8.50%, due 1/15/25 4,130,000 4,130,215
--------------
152,852,105
--------------
HAND & MACHINE TOOLS 0.3%
Baldor Electric Co.
8.625%, due 2/15/17 8,521,000 8,776,630
Thermadyne Holdings Corp.
10.50%, due 2/1/14 7,325,000 6,409,375
--------------
15,186,005
--------------
HEALTH CARE--PRODUCTS 1.7%
Biomet, Inc.
10.00%, due 10/15/17 10,140,000 10,963,875
10.375%, due 10/15/17 (g) 4,990,000 5,370,488
11.625%, due 10/15/17 15,965,000 17,501,631
Cooper Cos., Inc. (The)
7.125%, due 2/15/15 7,335,000 7,114,950
Hanger Orthopedic Group, Inc.
10.25%, due 6/1/14 17,895,000 18,968,700
Invacare Corp.
9.75%, due 2/15/15 17,120,000 18,104,400
ReAble Therapeutics Finance LLC/ReAble
Therapeutics
Finance Corp.
11.75%, due 11/15/14 18,274,000 18,274,000
Universal Hospital Services, Inc.
4.635%, due 6/1/15 (h) 930,000 781,200
8.50%, due 6/1/15 (g) 1,705,000 1,687,950
--------------
98,767,194
--------------
HEALTH CARE--SERVICES 3.5%
Alliance Imaging, Inc.
Series B
7.25%, due 12/15/12 29,996,000 29,246,100
Centene Corp.
7.25%, due 4/1/14 6,047,000 5,941,178
Community Health Systems, Inc.
8.875%, due 7/15/15 19,255,000 19,832,650
DaVita, Inc.
6.625%, due 3/15/13 14,620,000 14,400,700
V HCA, Inc.
5.75%, due 3/15/14 5,065,000 4,710,450
6.25%, due 2/15/13 3,000,000 2,902,500
6.30%, due 10/1/12 26,547,000 26,016,060
6.375%, due 1/15/15 6,784,000 6,343,040
6.75%, due 7/15/13 9,545,000 9,282,512
7.19%, due 11/15/15 5,345,000 4,998,922
7.875%, due 2/1/11 1,600,000 1,632,000
8.50%, due 4/15/19 (e) 15,775,000 16,721,500
8.75%, due 9/1/10 2,860,000 2,910,050
9.00%, due 12/15/14 1,595,000 1,607,186
9.875%, due 2/15/17 (e) 3,645,000 3,918,375
Psychiatric Solutions, Inc.
7.75%, due 7/15/15 8,832,000 8,699,520
Skilled Healthcare Group, Inc.
11.00%, due 1/15/14 5,899,000 6,134,960
Sun Healthcare Group, Inc.
9.125%, due 4/15/15 13,175,000 13,339,687
Vanguard Health Holding Co. II LLC
9.00%, due 10/1/14 18,625,000 19,370,000
--------------
198,007,390
--------------
HOLDING COMPANY--DIVERSIFIED 0.3%
Leucadia National Corp.
8.125%, due 9/15/15 14,255,000 14,433,188
--------------
HOME FURNISHING 0.1%
Sealy Mattress Co.
10.875%, due 4/15/16 (e) 7,610,000 8,523,200
--------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
HOUSEHOLD PRODUCTS & WARES 0.4%
ACCO Brands Corp.
10.625%, due 3/15/15 (e) $ 870,000 $ 930,900
Jarden Corp.
7.50%, due 5/1/17 13,325,000 13,125,125
Libbey Glass, Inc.
8.26%, due 6/1/11 (h) 8,286,000 8,016,705
--------------
22,072,730
--------------
INSURANCE 1.9%
AIG SunAmerica Global Financing VI
6.30%, due 5/10/11 (e) 14,221,000 13,981,305
Crum & Forster Holdings Corp.
7.75%, due 5/1/17 37,380,000 35,230,650
HUB International Holdings, Inc.
9.00%, due 12/15/14 (e) 27,840,000 26,587,200
Lumbermens Mutual Casualty Co.
8.30%, due 12/1/37 (c)(e) 8,525,000 85,250
8.45%, due 12/1/97 (c)(e) 2,575,000 25,750
9.15%, due 7/1/26 (c)(e) 42,123,000 421,230
USI Holdings Corp.
4.315%, due 11/15/14 (e)(h) 6,375,000 5,259,375
9.75%, due 5/15/15 (e) 11,390,000 10,137,100
Willis North America, Inc.
6.20%, due 3/28/17 16,830,000 16,464,570
--------------
108,192,430
--------------
INTERNET 0.5%
Expedia, Inc.
7.456%, due 8/15/18 7,795,000 8,243,212
8.50%, due 7/1/16 (e) 17,094,000 17,905,965
--------------
26,149,177
--------------
IRON & STEEL 0.4%
Allegheny Ludlum Corp.
6.95%, due 12/15/25 16,350,000 14,485,103
Allegheny Technologies, Inc.
8.375%, due 12/15/11 2,460,000 2,605,526
9.375%, due 6/1/19 7,475,000 8,501,841
--------------
25,592,470
--------------
LEISURE TIME 0.3%
Brunswick Corp./DE
11.25%, due 11/1/16 (e) 13,960,000 15,216,400
Town Sports International Holdings, Inc.
11.00%, due 2/1/14 4,645,000 2,450,238
--------------
17,666,638
--------------
LODGING 1.3%
Boyd Gaming Corp.
6.75%, due 4/15/14 2,375,000 2,149,375
7.75%, due 12/15/12 8,750,000 8,684,375
Gaylord Entertainment Co.
6.75%, due 11/15/14 1,789,000 1,645,880
Majestic Star Casino LLC
9.50%, due 10/15/10 (c) 7,690,000 5,094,625
MGM Mirage, Inc.
13.00%, due 11/15/13 (e) 8,673,000 9,843,855
MTR Gaming Group, Inc.
Series B
9.00%, due 6/1/12 1,845,000 1,531,350
San Pasqual Casino
8.00%, due 9/15/13 (e) 250,000 237,500
Seminole Hard Rock Entertainment, Inc./Seminole
Hard Rock International LLC
2.799%, due 3/15/14 (e)(h) 16,105,000 12,964,525
Starwood Hotels & Resorts Worldwide, Inc.
6.25%, due 2/15/13 7,995,000 7,955,025
6.75%, due 5/15/18 16,605,000 15,982,312
7.875%, due 5/1/12 9,080,000 9,443,200
--------------
75,532,022
--------------
MACHINERY--CONSTRUCTION & MINING 0.1%
Terex Corp.
10.875%, due 6/1/16 7,415,000 8,008,200
--------------
MEDIA 2.7%
V Charter Communications Operating LLC
10.00%, due 4/30/12 (e) 31,784,000 32,260,760
10.375%, due 4/30/14 (e) 15,560,000 15,832,300
CSC Holdings, Inc.
6.75%, due 4/15/12 21,995,000 22,874,800
8.50%, due 4/15/14 (e) 7,185,000 7,589,156
CW Media Holdings, Inc.
13.50%, due 8/15/15 (e)(g) 5,290,000 5,395,800
HSN, Inc.
11.25%, due 8/1/16 19,525,000 21,282,250
ION Media Networks, Inc.
9.041%, due 1/15/13 (c)(e) 6,391,039 103,854
Morris Publishing Group LLC
7.00%, due 8/1/13 (c) 20,894,000 5,850,320
Rainbow National Services LLC
8.75%, due 9/1/12 (e) 10,205,000 10,358,075
10.375%, due 9/1/14 (e) 24,935,000 26,181,750
Vertis, Inc.
18.50%, due 10/1/12 (g) 11,330,445 6,005,136
Ziff Davis Media, Inc.
8.801%, due 7/15/11 (a)(b) 3,589,979 861,595
--------------
154,595,796
--------------
</Table>
16 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
METAL FABRICATE & HARDWARE 0.4%
Mueller Water Products, Inc.
7.375%, due 6/1/17 $ 16,230,000 $ 14,038,950
Neenah Foundary Co.
9.50%, due 1/1/17 16,650,000 8,408,250
--------------
22,447,200
--------------
MINING 1.0%
Freeport-McMoRan Copper & Gold, Inc.
3.881%, due 4/1/15 (h) 4,095,000 4,140,127
8.25%, due 4/1/15 11,275,000 12,092,437
8.375%, due 4/1/17 27,610,000 29,680,750
Vulcan Materials Co.
7.00%, due 6/15/18 8,060,000 8,659,084
--------------
54,572,398
--------------
MISCELLANEOUS--MANUFACTURING 1.0%
Actuant Corp.
6.875%, due 6/15/17 11,640,000 10,970,700
Polypore, Inc.
8.75%, due 5/15/12 15,705,000 15,587,212
RBS Global, Inc./Rexnord Corp.
9.50%, due 8/1/14 18,442,000 18,257,580
Sally Holdings LLC
9.25%, due 11/15/14 7,550,000 7,852,000
SPX Corp.
7.625%, due 12/15/14 5,235,000 5,392,050
--------------
58,059,542
--------------
OFFICE FURNISHINGS 0.2%
Interface, Inc.
11.375%, due 11/1/13 (e) 8,690,000 9,385,200
--------------
OIL & GAS 8.6%
Atlas Energy Operating Co. LLC/Atlas Energy
Finance Corp.
12.125%, due 8/1/17 8,475,000 9,237,750
Berry Petroleum Co.
10.25%, due 6/1/14 9,915,000 10,609,050
Chaparral Energy, Inc.
8.50%, due 12/1/15 18,583,000 16,260,125
8.875%, due 2/1/17 15,635,000 13,719,712
Chesapeake Energy Corp.
6.375%, due 6/15/15 4,512,000 4,297,680
6.50%, due 8/15/17 31,665,000 29,685,937
6.625%, due 1/15/16 13,135,000 12,626,019
6.875%, due 11/15/20 3,325,000 3,059,000
7.50%, due 9/15/13 1,265,000 1,283,975
7.50%, due 6/15/14 740,000 747,400
Comstock Resources, Inc.
6.875%, due 3/1/12 7,805,000 7,765,975
Concho Resources, Inc./Midland TX
8.625%, due 10/1/17 3,515,000 3,620,450
Denbury Resources, Inc.
7.50%, due 12/15/15 1,715,000 1,715,000
9.75%, due 3/1/16 6,435,000 6,901,538
Forest Oil Corp.
7.25%, due 6/15/19 18,185,000 16,957,512
7.75%, due 5/1/14 335,000 330,813
8.00%, due 12/15/11 10,275,000 10,557,562
Frontier Oil Corp.
6.625%, due 10/1/11 5,735,000 5,770,844
8.50%, due 9/15/16 11,060,000 11,281,200
Hilcorp Energy I, L.P./Hilcorp Finance Co.
7.75%, due 11/1/15 (e) 14,581,000 13,924,855
9.00%, due 6/1/16 (e) 9,005,000 9,005,000
Holly Corp.
9.875%, due 6/15/17 (e) 18,030,000 18,661,050
KCS Energy, Inc.
7.125%, due 4/1/12 8,650,000 8,606,750
Kerr-McGee Corp.
6.95%, due 7/1/24 1,765,000 1,868,325
Linn Energy LLC
9.875%, due 7/1/18 13,660,000 13,933,200
11.75%, due 5/15/17 (e) 13,400,000 14,890,750
Mariner Energy, Inc.
7.50%, due 4/15/13 17,480,000 17,043,000
Newfield Exploration Co.
6.625%, due 9/1/14 5,215,000 5,149,813
6.625%, due 4/15/16 9,820,000 9,672,700
7.125%, due 5/15/18 19,975,000 20,049,906
Parker Drilling Co.
9.625%, due 10/1/13 9,710,000 9,807,100
Penn Virginia Corp.
10.375%, due 6/15/16 11,560,000 12,427,000
PetroHawk Energy Corp.
7.875%, due 6/1/15 6,695,000 6,761,950
9.125%, due 7/15/13 1,155,000 1,195,425
10.50%, due 8/1/14 7,425,000 8,093,250
Petroquest Energy, Inc.
10.375%, due 5/15/12 23,808,000 23,450,880
Plains Exploration & Production Co.
7.00%, due 3/15/17 8,505,000 8,079,750
10.00%, due 3/1/16 15,715,000 16,815,050
Pride International, Inc.
7.375%, due 7/15/14 13,860,000 14,275,800
Range Resources Corp.
6.375%, due 3/15/15 5,000,000 4,900,000
7.375%, due 7/15/13 775,000 788,563
7.50%, due 5/15/16 4,485,000 4,496,213
8.00%, due 5/15/19 11,655,000 12,092,062
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
OIL & GAS (CONTINUED)
SandRidge Energy, Inc.
8.00%, due 6/1/18 (e) $ 8,780,000 $ 8,692,200
Stone Energy Corp.
6.75%, due 12/15/14 8,685,000 7,208,550
8.25%, due 12/15/11 8,360,000 8,025,600
United Refining Co.
10.50%, due 8/15/12 7,175,000 6,170,500
Venoco, Inc.
8.75%, due 12/15/11 6,289,000 6,446,225
W&T Offshore, Inc.
8.25%, due 6/15/14 (e) 9,465,000 8,731,462
Whiting Petroleum Corp.
7.00%, due 2/1/14 15,685,000 15,626,181
7.25%, due 5/1/13 7,095,000 7,103,869
--------------
490,420,521
--------------
OIL & GAS SERVICES 0.3%
Allis-Chalmers Energy, Inc.
9.00%, due 1/15/14 8,715,000 7,364,175
Complete Production Services, Inc.
8.00%, due 12/15/16 11,900,000 11,275,250
--------------
18,639,425
--------------
PACKAGING & CONTAINERS 1.9%
Ball Corp.
6.875%, due 12/15/12 28,355,000 28,355,000
7.125%, due 9/1/16 10,625,000 10,864,063
7.375%, due 9/1/19 10,800,000 11,043,000
Crown Americas LLC/Crown Americas Capital Corp.
7.625%, due 11/15/13 1,575,000 1,614,375
Greif, Inc.
7.75%, due 8/1/19 (e) 8,100,000 8,302,500
Owens-Brockway Glass Container, Inc.
6.75%, due 12/1/14 22,565,000 22,508,587
7.375%, due 5/15/16 4,910,000 4,959,100
Plastipak Holdings, Inc.
10.625%, due 8/15/19 (e) 13,025,000 14,262,375
Silgan Holdings, Inc.
7.25%, due 8/15/16 (e) 8,740,000 8,871,100
--------------
110,780,100
--------------
PHARMACEUTICALS 0.8%
Catalent Pharma Solutions, Inc.
10.25%, due 4/15/15 (g) 25,135,387 21,867,787
NBTY, Inc.
7.125%, due 10/1/15 13,595,000 13,289,112
Valeant Pharmaceuticals International
8.375%, due 6/15/16 (e) 5,885,000 6,017,413
Warner Chilcott Corp.
8.75%, due 2/1/15 3,686,000 3,815,010
--------------
44,989,322
--------------
PIPELINES 2.7%
ANR Pipeline Co.
7.375%, due 2/15/24
11.50%, beginning 11/1/11 2,555,000 2,827,151
9.625%, due 11/1/21 19,281,000 26,734,206
Cedar Brakes II LLC
9.875%, due 9/1/13 (e) 14,633,581 14,816,208
Copano Energy LLC
8.125%, due 3/1/16 390,000 381,225
Copano Energy LLC/Copano Energy Finance Corp.
7.75%, due 6/1/18 21,920,000 21,098,000
El Paso Natural Gas Co.
7.50%, due 11/15/26 6,029,000 6,555,531
7.625%, due 8/1/10 8,175,000 8,149,502
8.375%, due 6/15/32 11,060,000 13,148,194
MarkWest Energy Partners, L.P./MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 7,625,000 7,243,750
8.50%, due 7/15/16 25,155,000 25,532,325
8.75%, due 4/15/18 10,521,000 10,757,723
Regency Energy Partners/Regency Energy Finance
Corp.
8.375%, due 12/15/13 9,194,000 9,423,850
Southern Natural Gas Co.
7.35%, due 2/15/31 1,895,000 2,025,272
8.00%, due 3/1/32 1,420,000 1,625,532
Tennessee Gas Pipeline Co.
7.625%, due 4/1/37 3,265,000 3,669,997
--------------
153,988,466
--------------
REAL ESTATE INVESTMENT TRUSTS 1.3%
Host Hotels & Resorts, L.P.
6.875%, due 11/1/14 6,500,000 6,353,750
Host Marriott, L.P.
6.375%, due 3/15/15 4,370,000 4,173,350
Series Q
6.75%, due 6/1/16 23,205,000 22,102,762
Series M
7.00%, due 8/15/12 5,232,000 5,251,620
</Table>
18 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 $ 18,365,000 $ 17,951,788
Trustreet Properties, Inc.
7.50%, due 4/1/15 19,240,000 20,391,918
--------------
76,225,188
--------------
RETAIL 2.2%
Amerigas Partners, L.P.
7.25%, due 5/20/15 2,000,000 1,970,000
AmeriGas Partners, L.P./AmeriGas Eagle Finance
Corp.
7.125%, due 5/20/16 2,925,000 2,851,875
Asbury Automotive Group, Inc.
7.625%, due 3/15/17 3,343,000 3,008,700
8.00%, due 3/15/14 13,396,000 12,793,180
AutoNation, Inc.
2.284%, due 4/15/13 (h) 1,360,000 1,285,200
7.00%, due 4/15/14 16,798,000 17,007,975
J.C. Penney Corp., Inc.
7.125%, due 11/15/23 11,460,000 10,829,700
Limited Brands, Inc.
6.125%, due 12/1/12 3,100,000 3,084,500
8.50%, due 6/15/19 (e) 8,450,000 8,872,500
Penske Auto Group, Inc.
7.75%, due 12/15/16 14,280,000 13,780,200
Rite Aid Corp.
7.50%, due 3/1/17 4,718,000 4,222,610
8.625%, due 3/1/15 11,919,000 9,773,580
9.375%, due 12/15/15 1,160,000 962,800
9.75%, due 6/12/16 923,000 996,840
Sally Holdings LLC/Sally Capital, Inc.
10.50%, due 11/15/16 500,000 530,000
Star Gas Partners, L.P./Star Gas Finance Co.
Series B
10.25%, due 2/15/13 23,620,000 23,856,200
Susser Holdings LLC/Susser
Finance Corp.
10.625%, due 12/15/13 7,091,000 7,339,185
Wendy's International, Inc.
6.25%, due 11/15/11 3,770,000 3,864,250
--------------
127,029,295
--------------
SOFTWARE 0.4%
Open Solutions, Inc.
9.75%, due 2/1/15 (e) 6,100,000 4,087,000
SS&C Technologies, Inc.
11.75%, due 12/1/13 15,440,000 16,212,000
--------------
20,299,000
--------------
TELECOMMUNICATIONS 5.2%
Alcatel-Lucent USA, Inc.
6.45%, due 3/15/29 35,373,000 27,767,805
American Tower Corp.
7.25%, due 5/15/19 (e) 7,425,000 8,148,938
CC Holdings GS V LLC/Crown Castle GS III Corp.
7.75%, due 5/1/17 (e) 33,700,000 35,385,000
Centennial Cellular Operating Co./Centennial
Communications Corp.
10.125%, due 6/15/13 20,977,000 21,658,752
Centennial Communications Corp./Cellular Operating
Co. LLC/Puerto Rico Operations
8.125%, due 2/1/14 2,385,000 2,465,494
Crown Castle International Corp.
7.125%, due 11/1/19 17,630,000 17,365,550
9.00%, due 1/15/15 10,080,000 10,634,400
DigitalGlobe, Inc.
10.50%, due 5/1/14 (e) 10,000,000 10,800,000
GCI, Inc.
7.25%, due 2/15/14 12,360,000 11,958,300
8.625%, due 11/15/19 (e) 20,585,000 20,585,000
GeoEye, Inc.
9.625%, due 10/1/15 (e) 11,190,000 11,553,675
iPCS, Inc.
2.406%, due 5/1/13 (h) 2,210,000 1,933,750
Lucent Technologies, Inc.
6.50%, due 1/15/28 15,100,000 11,853,500
PAETEC Holding Corp.
9.50%, due 7/15/15 9,815,000 8,980,725
Qwest Communications
International, Inc.
7.25%, due 2/15/11 9,345,000 9,345,000
Qwest Corp.
7.50%, due 10/1/14 4,400,000 4,444,000
8.875%, due 3/15/12 13,755,000 14,477,137
SBA Telecommunications, Inc.
8.25%, due 8/15/19 (e) 14,955,000 15,627,975
Sprint Nextel Corp.
8.375%, due 8/15/17 51,060,000 49,272,900
--------------
294,257,901
--------------
TEXTILES 0.8%
INVISTA
9.25%, due 5/1/12 (e) 43,530,000 43,965,300
--------------
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
TRANSPORTATION 0.6%
KAR Holdings, Inc.
8.75%, due 5/1/14 $ 9,635,000 $ 9,743,394
10.00%, due 5/1/15 23,250,000 23,831,250
--------------
33,574,644
--------------
TRUCKING & LEASING 0.2%
Greenbrier Cos., Inc.
8.375%, due 5/15/15 13,126,000 10,123,428
--------------
Total Corporate Bonds
(Cost $4,111,359,617) 4,219,958,938
--------------
FOREIGN BOND 0.4%
- ------------------------------------------------------------------------------------------
MEDIA 0.4%
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 22,825,000 24,065,340
--------------
Total Foreign Bond
(Cost $18,022,346) 24,065,340
--------------
LOAN ASSIGNMENTS & PARTICIPATIONS 5.4% (I)
- ------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE 0.2%
DAE Aviation Holdings, Inc.
Tranche B2 Term Loan
4.01%, due 7/31/14 $ 5,782,879 5,378,078
Tranche B1 Term Loan
4.04%, due 7/31/14 5,911,101 5,497,324
--------------
10,875,402
--------------
AUTO MANUFACTURERS 0.5%
Ford Motor Co.
Term Loan
3.288%, due 12/16/13 32,963,014 29,301,021
--------------
AUTO PARTS & EQUIPMENT 0.1%
FleetPride Corp.
Term Loan
3.539%, due 6/6/13 7,684,375 6,224,344
--------------
BEVERAGES 0.0%++
Dean Foods Co.
Tranche A Term Loan
0.904%, due 4/2/12 2,461,768 2,309,958
--------------
COMMERCIAL SERVICES 0.3%
Lender Processing Services, Inc.
Term Loan A
2.493%, due 7/2/13 18,993,333 18,850,883
--------------
COMPUTERS 0.1%
SunGard Data Systems, Inc.
Tranche A
1.994%, due 2/28/14 5,454,649 5,103,506
--------------
DIVERSIFIED FINANCIAL SERVICES 0.5%
DaimlerChrysler Financial Services Americas LLC
2nd Lien Term Loan
6.75%, due 8/3/12 31,045,000 27,973,749
--------------
ELECTRIC 1.1%
Calpine Corp.
First Priority Term Loan
3.165%, due 3/29/14 8,164,371 7,495,913
V Texas Competitive Electric Holdings Co. LLC
Term Loan B2
3.745%, due 10/10/14 32,034,091 24,761,360
Term Loan B3
3.745%, due 10/10/14 39,471,635 30,223,194
--------------
62,480,467
--------------
HEALTH CARE--SERVICES 1.0%
Community Health Systems, Inc.
Delayed Draw Term Loan
2.493%, due 7/25/14 1,909,800 1,778,263
Term Loan
2.61%, due 7/25/14 27,441,149 25,551,140
V HCA, Inc.
Term Loan A
1.783%, due 11/16/12 5,861,098 5,454,484
Term Loan B
2.533%, due 11/18/13 23,543,200 21,898,449
--------------
54,682,336
--------------
MACHINERY 0.0%++
BHM Technologies LLC
Exit Term Loan B
8.50%, due 11/26/13 (a)(b) 8,209,723 2,421,868
--------------
MEDIA 1.0%
V Charter Communications
Operating LLC
Replacement Term Loan
6.25%, due 3/6/14 29,739,318 26,961,874
Nielsen Finance LLC
Class A Term Loan
2.244%, due 8/9/13 30,112,434 27,962,737
--------------
54,924,611
--------------
</Table>
20 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
RETAIL 0.3%
Toys 'R' Us (Delaware), Inc.
Term Loan
5.244%, due 1/19/13 $ 17,115,000 $ 15,553,256
--------------
TELECOMMUNICATIONS 0.3%
Qwest Corp.
Term Loan B
6.95%, due 6/30/10 18,000,000 18,022,500
--------------
Total Loan Assignments & Participations
(Cost $331,583,604) 308,723,901
--------------
YANKEE BONDS 9.0% (J)
- ------------------------------------------------------------------------------------------
BUILDING MATERIALS 0.3%
Lafarge S.A.
6.50%, due 7/15/16 10,240,000 10,688,532
7.125%, due 7/15/36 7,377,000 7,419,012
--------------
18,107,544
--------------
CHEMICALS 1.2%
V Nova Chemicals Corp.
4.538%, due 11/15/13 (h) 24,840,000 22,356,000
6.50%, due 1/15/12 3,740,000 3,665,200
8.375%, due 11/1/16 (e) 13,850,000 13,919,250
8.625%, due 11/1/19 (e) 27,935,000 28,284,187
--------------
68,224,637
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.2%
Digicel, Ltd.
9.25%, due 9/1/12 (e) 11,815,000 11,992,225
--------------
ELECTRIC 0.2%
Intergen N.V.
9.00%, due 6/30/17 (e) 11,083,000 11,526,320
--------------
ELECTRONICS 0.2%
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14 13,315,000 10,984,875
--------------
ENTERTAINMENT 0.3%
Galaxy Entertainment Finance Co., Ltd.
9.875%, due 12/15/12 (e) 19,730,000 19,335,400
--------------
FOREST PRODUCTS & PAPER 0.7%
Catalyst Paper Corp.
Series D
8.625%, due 6/15/11 7,675,000 4,835,250
PE Paper Escrow GmbH
12.00%, due 8/1/14 (e) 10,410,000 11,398,950
Smurfit Capital Funding PLC
7.50%, due 11/20/25 26,050,000 20,579,500
--------------
36,813,700
--------------
HEALTH CARE--PRODUCTS 0.4%
DJO Finance LLC/DJO Finance Corp.
10.875%, due 11/15/14 20,197,000 21,055,372
--------------
INSURANCE 0.4%
Allied World Assurance Co. Holdings, Ltd.
7.50%, due 8/1/16 6,540,000 6,820,331
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 8,207,000 7,960,790
7.75%, due 7/15/37 4,810,000 4,377,100
8.30%, due 4/15/26 5,395,000 5,125,250
--------------
24,283,471
--------------
LEISURE TIME 0.3%
Willis Group Holdings, Ltd. (Trinity Acquisition,
Ltd.)
12.875%, due 12/31/16 (a)(b)(e) 12,185,000 16,442,013
--------------
MEDIA 1.4%
CanWest, L.P.
9.25%, due 8/1/15 (c)(e) 3,135,000 627,000
Quebecor Media, Inc.
7.75%, due 3/15/16 36,570,000 36,112,874
Sun Media Corp.
7.625%, due 2/15/13 40,000 34,400
Videotron Ltee
6.875%, due 1/15/14 2,851,000 2,851,000
9.125%, due 4/15/18 29,300,000 31,717,250
9.125%, due 4/15/18 (e) 5,935,000 6,424,638
--------------
77,767,162
--------------
MISCELLANEOUS--MANUFACTURING 0.1%
Tyco Electronics Group S.A.
6.00%, due 10/1/12 6,810,000 7,253,345
--------------
OIL & GAS 0.0%++
Anadarko Finance Co.
7.50%, due 5/1/31 1,017,000 1,122,568
--------------
PHARMACEUTICALS 0.2%
Angiotech Pharmaceuticals, Inc.
4.111%, due 12/1/13 (h) 11,280,000 9,362,400
--------------
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
TELECOMMUNICATIONS 2.8%
Inmarsat Finance PLC
10.375%, due 11/15/12 $ 22,335,000 $ 23,060,887
V Intelsat Subsidiary Holding Co., Ltd.
8.50%, due 1/15/13 34,040,000 34,167,650
8.875%, due 1/15/15 (e) 8,610,000 8,642,288
8.875%, due 1/15/15 13,690,000 13,809,787
Millicom International Cellular S.A.
10.00%, due 12/1/13 25,130,000 25,978,137
Nortel Networks, Ltd.
6.875%, due 9/1/23 (c) 3,000,000 1,020,000
10.125%, due 7/15/13 (c) 3,780,000 2,164,050
10.75%, due 7/15/16 (c) 31,524,000 18,047,490
Rogers Communications, Inc.
8.00%, due 12/15/12 1,180,000 1,214,810
9.625%, due 5/1/11 10,427,000 11,535,599
Satelites Mexicanos S.A. de C.V.
9.033%, due 11/30/11 (h) 1,926,800 1,734,120
Virgin Media Finance PLC
9.125%, due 8/15/16 8,680,000 8,940,400
9.50%, due 8/15/16 10,315,000 10,908,113
--------------
161,223,331
--------------
TRANSPORTATION 0.3%
CEVA Group PLC
10.00%, due 9/1/14 (e) 10,180,000 9,518,300
Kansas City Southern de Mexico S.A. de C.V.
7.375%, due 6/1/14 6,619,000 6,254,955
--------------
15,773,255
--------------
Total Yankee Bonds
(Cost $490,963,396) 511,267,618
--------------
Total Long-Term Bonds
(Cost $4,958,983,574) 5,074,193,776
--------------
<Caption>
SHARES
COMMON STOCKS 0.2%
- ------------------------------------------------------------------------------------------
AIRLINES 0.0%++
Delta Air Lines, Inc. (f) 5,233 37,364
--------------
COMMERCIAL SERVICES 0.0%++
World Color Press, Inc. (f) 174,495 1,570,455
--------------
MACHINERY 0.0%++
BHM Technologies Holdings, Inc. (a)(b) 537,143 5,371
--------------
MEDIA 0.0%++
Adelphia Contingent Value Vehicle (a)(b)(f) 15,507,390 155,074
--------------
SOFTWARE 0.0%++
QuadraMed Corp. (b)(f) 268,509 1,960,116
--------------
TELECOMMUNICATIONS 0.2%
Loral Space & Communications, Ltd. (f) 328,889 8,689,247
Remote Dynamics, Inc. (f) 18 0 (k)
--------------
8,689,247
--------------
Total Common Stocks
(Cost $57,828,190) 12,417,627
--------------
CONVERTIBLE PREFERRED STOCK 0.3%
- ------------------------------------------------------------------------------------------
SOFTWARE 0.3%
QuadraMed Corp.
5.50% (b)(d) 950,000 14,506,500
--------------
Total Convertible Preferred Stock
(Cost $22,798,000) 14,506,500
--------------
PREFERRED STOCKS 0.3%
- ------------------------------------------------------------------------------------------
MACHINERY 0.0%++
BHM Technologies Holdings, Inc.
10.00% (a)(b) 6,430 64
--------------
REAL ESTATE INVESTMENT TRUSTS 0.3%
Sovereign Real Estate Investment Corp.
12.00% (b)(e) 18,108 19,058,670
--------------
Total Preferred Stocks
(Cost $16,260,073) 19,058,734
--------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS 0.0%++
- ------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 0.0%++
World Color Press, Inc.
Strike Price $13.00
Expires 7/20/14 (f) 98,897 404,489
Strike Price $16.30
Expires 7/20/14 (f) 98,897 288,779
--------------
Total Warrants
(Cost $3,822,044) 693,268
--------------
</Table>
22 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 8.8%
- ------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 8.8%
State Street Bank and Trust Co. 0.01%, dated
10/30/09
due 11/2/09
Proceeds at Maturity $499,950,138
(Collateralized by United States Treasury Bills
with rates of 0.048% and 0.07% and maturity
dates of 1/14/10 and 2/11/10, with a Principal
Amount of $510,030,000 and a Market Value of
$509,949,585) $499,949,721 $ 499,949,721
--------------
Total Short-Term Investment
(Cost $499,949,721) 499,949,721
--------------
Total Investments
(Cost $5,559,641,602) (l) 98.8% 5,620,819,626
Cash and Other Assets,
Less Liabilities 1.2 67,905,038
----- ------------
Net Assets 100.0% $5,688,724,664
===== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Fair valued security. The total market
value of these securities at October 31,
2009 is $23,818,907, which represents
0.4% of the Fund's net assets.
(b) Illiquid security. The total market
value of these securities at October 31,
2009 is $59,360,370, which represents
1.0% of the Fund's net assets.
(c) Issue in default.
(d) Restricted security.
(e) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(f) Non-income producing security.
(g) PIK ("Payment in Kind")--interest or
dividend payment is made with additional
securities.
(h) Floating rate. Rate shown is the rate in
effect at October 31, 2009.
(i) Floating Rate Loan--generally pays
interest at rates which are periodically
re-determined at a margin above the
London Inter-Bank Offered Rate ("LIBOR")
or other short-term rates. The rate shown
is the rate(s) in effect at October 31,
2009. Floating Rate Loans are generally
considered restrictive in that the Fund
is ordinarily contractually obligated to
receive consent from the Agent Bank
and/or borrower prior to disposition of a
Floating Rate Loan.
(j) Yankee Bond--dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(k) Less than one dollar.
(l) At October 31, 2009, cost is
$5,568,277,829 for federal income tax
purposes and net unrealized appreciation
is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 329,813,910
Gross unrealized depreciation (277,272,113)
============
Net unrealized appreciation $ 52,541,797
============
</Table>
The following abbreviation is used in the above portfolio:
C$--Canadian Dollar
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Long-Term Bonds
Asset-Backed Security $ -- $ 556,994 $ -- $ 556,994
Convertible Bonds (a) -- 9,614,831 6,154 9,620,985
Corporate Bonds (b) -- 4,215,170,575 4,788,363 4,219,958,938
Foreign Bond -- 24,065,340 -- 24,065,340
Loan Assignments & Participations (c) -- 306,302,033 2,421,868 308,723,901
Yankee Bonds (d) -- 494,825,605 16,442,013 511,267,618
----------- -------------- ------------------ --------------
Total Long-Term Bonds -- 5,050,535,378 23,658,398 5,074,193,776
----------- -------------- ------------------ --------------
Common Stocks (e) 12,257,182 -- 160,445 12,417,627
Convertible Preferred Stock 14,506,500 -- -- 14,506,500
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Preferred Stocks (f) $19,058,670 $ -- $ 64 $ 19,058,734
Warrants 693,268 -- -- 693,268
Short-Term Investment
Repurchase Agreement -- 499,949,721 -- 499,949,721
----------- -------------- ------------------ --------------
Total Investments in Securities $46,515,620 $5,550,485,099 $23,818,907 $5,620,819,626
=========== ============== ================== ==============
</Table>
(a) The level 3 security valued at $6,154 is held in Internet within the
Convertible Bonds section of the Portfolio of Investments.
(b) The level 3 securities valued at $2,956,716, $970,052 and $861,595 are held
in Commercial Services, Entertainment and Media, respectively, within the
Corporate Bonds section of the Portfolio of Investments.
(c) The level 3 security valued at $2,421,868 is held in Machinery within the
Loan Assignments & Participations section of the Portfolio of Investments.
(d) The level 3 security valued at $16,442,013 is held in Leisure Time within
the Yankee Bonds section of the Portfolio of Investments.
(e) The level 3 securities valued at $5,371 and $155,074 are held in Machinery
and Media, respectively, within the Common Stocks section of the Portfolio
of Investments.
(f) The level 3 security valued at $64 is held in Machinery within the Preferred
Stock section of the Portfolio of Investments.
The following is a reconciliation of investments in which significant
unobservable inputs (Level 3) were used in determining value:
ASSET VALUATION INPUTS
<Table>
<Caption>
BALANCE CHANGE IN NET NET
AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS
INVESTMENTS OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET NET IN TO OUT OF
IN SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3
Long-Term Bonds
Corporate Bonds
Commercial
Services $ 1,579,756 $ -- $ -- $ 1,376,960 $ -- $ -- $-- $--
Entertainment 1,083,258 36,391 39,639 (560) -- (188,676) -- --
Media 3,602,177 689 337,394 (2,611,220) 343,445 (810,890) -- --
Convertible Bonds
Internet 6,153 -- -- 1 -- -- -- --
Loan Assignments &
Participations
Machinery -- -- -- (17,669,132) 20,091,000 -- -- --
Yankee Bonds
Leisure Time -- -- -- 4,257,013 12,185,000 -- -- --
Common Stocks
Advertising 104 -- (104) -- -- -- -- --
Commercial
Services 84,344 -- (23,048,641) 22,964,297 -- -- -- --
Machinery -- -- -- 5,371 -- -- -- --
Media 5,698,095 -- (18,548,475) 13,005,454 -- -- -- --
Preferred Stocks
Machinery -- -- -- 64 -- -- -- --
Warrants
Media 46,626 -- (4,097) (42,529) -- -- -- --
----------- ------- ------------- ------------ ----------- ---------- --- ---
Total $12,100,513 $37,080 ($41,224,284) $ 21,285,719 $32,619,445 ($999,566) $-- $--
=========== ======= ============= ============ =========== ========== === ===
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
BALANCE INVESTMENTS
AS OF STILL HELD AT
INVESTMENTS OCTOBER 31, OCTOBER 31,
IN SECURITIES 2009 2009 (A)
Long-Term Bonds
Corporate Bonds
Commercial
Services $ 2,956,716 $ 1,376,960
Entertainment 970,052 (36,391)
Media 861,595 (2,138,179)
Convertible Bonds
Internet 6,154 1
Loan Assignments &
Participations
Machinery 2,421,868 (23,056,172)
Yankee Bonds
Leisure Time 16,442,013 4,257,013
Common Stocks
Advertising -- --
Commercial
Services -- --
Machinery 5,371 5,371
Media 155,074 13,005,454
Preferred Stocks
Machinery 64 64
Warrants
Media -- --
----------- ------------
Total $23,818,907 $ (6,585,879)
=========== ============
</Table>
(a) Included in "Net change in unrealized depreciation on investments and
unfunded commitments" in the Statement of Operations.
24 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $5,559,641,602) $5,620,819,626
Cash denominated in foreign
currencies (identified cost
$694,951) 791,124
Receivables:
Dividends and interest 118,056,029
Fund shares sold 26,393,008
Investment securities sold 20,101,778
Other assets 146,148
--------------
Total assets 5,786,307,713
--------------
LIABILITIES:
Unrealized depreciation on
unfunded commitments 533,625
Payables:
Investment securities purchased 54,443,123
Fund shares redeemed 24,949,091
Manager (See Note 3) 2,687,905
NYLIFE Distributors (See Note 3) 1,655,795
Transfer agent (See Note 3) 1,581,276
Professional fees 534,811
Shareholder communication 414,315
Custodian 34,645
Trustees 16,045
Accrued expenses 27,156
Dividend payable 10,705,262
--------------
Total liabilities 97,583,049
--------------
Net assets $5,688,724,664
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 10,238,715
Additional paid-in capital 6,513,120,716
--------------
6,523,359,431
Accumulated distributions in
excess of net investment income (28,095,666)
Accumulated net realized loss on
investments and foreign currency
transactions (867,288,304)
Net unrealized appreciation on
investments 61,178,024
Net unrealized depreciation on
unfunded commitments (533,625)
Net unrealized appreciation on
translation of other assets and
liabilities in foreign
currencies 104,804
--------------
Net assets $5,688,724,664
==============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 265,506,714
==============
Shares of beneficial interest
outstanding 47,404,995
==============
Net asset value per share
outstanding $ 5.60
Maximum sales charge (4.50% of
offering price) 0.26
--------------
Maximum offering price per share
outstanding $ 5.86
==============
CLASS A
Net assets applicable to
outstanding shares $3,169,961,536
==============
Shares of beneficial interest
outstanding 570,346,090
==============
Net asset value per share
outstanding $ 5.56
Maximum sales charge (4.50% of
offering price) 0.26
--------------
Maximum offering price per share
outstanding $ 5.82
==============
CLASS B
Net assets applicable to
outstanding shares $ 453,918,414
==============
Shares of beneficial interest
outstanding 81,995,748
==============
Net asset value and offering price
per share outstanding $ 5.54
==============
CLASS C
Net assets applicable to
outstanding shares $ 651,208,826
==============
Shares of beneficial interest
outstanding 117,593,139
==============
Net asset value and offering price
per share outstanding $ 5.54
==============
CLASS I
Net assets applicable to
outstanding shares $1,141,889,472
==============
Shares of beneficial interest
outstanding 205,409,993
==============
Net asset value and offering price
per share outstanding $ 5.56
==============
CLASS R2
Net assets applicable to
outstanding shares $ 6,239,702
==============
Shares of beneficial interest
outstanding 1,121,570
==============
Net asset value and offering price
per share outstanding $ 5.56
==============
</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
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 386,608,569
Dividends 1,742,353
Income from securities
loaned--net 29,825
--------------
Total income 388,380,747
--------------
EXPENSES:
Manager (See Note 3) 23,719,546
Transfer agent--Investor Class
(See Note 3) 596,153
Transfer agent--Class A (See
Note 3) 4,477,543
Transfer agent--Classes B and C
(See Note 3) 2,272,096
Transfer agent--Classes I and R2
(See Note 3) 1,394,200
Distribution/Service--Investor
Class (See Note 3) 561,624
Distribution/Service--Class A
(See Note 3) 5,928,514
Service--Class B (See Note 3) 1,052,601
Service--Class C (See Note 3) 1,088,266
Distribution/Service--Class R2
(See Note 3) 5,790
Distribution--Class B (See Note
3) 3,157,803
Distribution--Class C (See Note
3) 3,264,797
Shareholder communication 1,307,856
Professional fees 1,003,127
Registration 213,505
Trustees 197,854
Custodian 123,372
Shareholder service--Class R2
(See Note 3) 2,316
Miscellaneous 201,776
--------------
Total expenses 50,568,739
--------------
Net investment income 337,812,008
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized loss on:
Security transactions $ (269,048,840)
Foreign currency transactions (335,452)
--------------
Net realized loss on investments
and foreign currency
transactions (269,384,292)
--------------
Net change in unrealized
depreciation on:
Investments and unfunded
commitments 1,213,156,467
Translation of other assets and
liabilities in foreign
currencies 263,832
--------------
Net change in unrealized
depreciation on investments,
unfunded commitments and foreign
currency transactions 1,213,420,299
--------------
Net realized and unrealized gain
on investments, unfunded
commitments and foreign currency
transactions 944,036,007
--------------
Net increase in net assets
resulting from operations $1,281,848,015
==============
</Table>
26 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 337,812,008 $ 297,699,145
Net realized loss on
investments and foreign
currency transactions (269,384,292) (82,236,499)
Net change in unrealized
appreciation
(depreciation) on
investments, unfunded
commitments and foreign
currency transactions 1,213,420,299 (1,161,568,634)
---------------------------------
Net increase (decrease)
in net assets resulting
from operations 1,281,848,015 (946,105,988)
---------------------------------
Dividends and distributions to shareholders:
From net investment income:
Investor Class (18,662,710) (10,306,868)
Class A (201,436,732) (180,897,572)
Class B (31,927,411) (41,712,167)
Class C (33,178,703) (24,044,538)
Class I (64,555,801) (39,100,496)
Class R2 (195,078) (1,209)
---------------------------------
(349,956,435) (296,062,850)
---------------------------------
Return of capital:
Investor Class (1,357,164) (315,923)
Class A (14,648,602) (5,544,831)
Class B (2,321,781) (1,278,552)
Class C (2,412,776) (737,008)
Class I (4,694,537) (1,198,500)
Class R2 (14,186) (37)
---------------------------------
(25,449,046) (9,074,851)
---------------------------------
Total dividends and
distributions to
shareholders (375,405,481) (305,137,701)
---------------------------------
Capital share transactions:
Net proceeds from sale of
shares $ 2,292,373,937 $ 1,094,308,642
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 265,187,116 216,335,785
Cost of shares redeemed
(a) (1,028,314,564) (1,368,617,284)
---------------------------------
Increase (decrease) in
net assets derived
from capital share
transactions 1,529,246,489 (57,972,857)
---------------------------------
Net increase (decrease)
in net assets 2,435,689,023 (1,309,216,546)
NET ASSETS:
Beginning of year 3,253,035,641 4,562,252,187
---------------------------------
End of year $ 5,688,724,664 $ 3,253,035,641
=================================
Accumulated distributions
in excess of net
investment income at end
of year $ (28,095,666) $ (14,731,278)
=================================
</Table>
(a) Cost of shares redeemed net of redemption fees of $323,837 for the year
ended October 31, 2009 and $359,519 for the year ended October 31, 2008 (See
Note (2L)).
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
27
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
-------------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
-------------------------------
2009 2008
Net asset value at beginning of
period $ 4.63 $ 5.97
-------- --------
Net investment income 0.40 (a) 0.28 (a)
Net realized and unrealized gain
(loss) on investments 1.01 (1.33)
Net realized and unrealized gain
(loss) on foreign currency
transactions 0.00 ++ 0.00 ++
-------- --------
Total from investment operations 1.41 (1.05)
-------- --------
Less dividends and distributions:
From net investment income (0.41) (0.28)
Return of capital (0.03) (0.01)
-------- --------
Total dividends and distributions (0.44) (0.29)
-------- --------
Redemption fee (a) 0.00 ++ 0.00 ++
-------- --------
Net asset value at end of period $ 5.60 $ 4.63
======== ========
Total investment return (b) 32.60% (18.54%)(e)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 8.18% 7.31% ++
Net expenses 1.15% 1.16% ++
Expenses (before reimbursement) 1.15% 1.16% ++
Portfolio turnover rate 41% 29%
Net assets at end of period (in
000's) $265,507 $201,850
</Table>
<Table>
<Caption>
CLASS B
----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning
of period $ 4.57 $ 6.31 $ 6.30 $ 6.19 $ 6.30
-------- -------- -------- ---------- ----------
Net investment income 0.36 (a) 0.38 (a) 0.40 (a) 0.38 (a) 0.40
Net realized and unrealized
gain (loss) on investments 1.00 (1.73) 0.00 ++ 0.15 (d) (0.08)
Net realized and unrealized
gain (loss) on foreign
currency transactions 0.00 ++ 0.00 ++ 0.00 ++ (0.00)++ 0.00 ++
-------- -------- -------- ---------- ----------
Total from investment
operations 1.36 (1.35) 0.40 0.53 0.32
-------- -------- -------- ---------- ----------
Less dividends and
distributions:
From net investment income (0.36) (0.38) (0.39) (0.37) (0.43)
Return of capital (0.03) (0.01) -- (0.05) --
-------- -------- -------- ---------- ----------
Total dividends and
distributions (0.39) (0.39) (0.39) (0.42) (0.43)
-------- -------- -------- ---------- ----------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- -------- ---------- ----------
Net asset value at end of
period $ 5.54 $ 4.57 $ 6.31 $ 6.30 $ 6.19
======== ======== ======== ========== ==========
Total investment return (b) 31.57% (22.47%) 6.46% 8.92%(c)(d) 5.04%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 7.49% 6.53% 6.19% 6.02% 6.35%
Net expenses 1.91% 1.86% 1.79% 1.81% 1.77%
Expenses (before
reimbursement) 1.91% 1.86% 1.79% 1.82%(c) 1.77%
Portfolio turnover rate 41% 29% 49% 58% 35%
Net assets at end of period
(in 000's) $453,918 $431,398 $811,937 $1,067,018 $2,486,331
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I and Class R2 shares are
not subject to sales charges.
(c) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(e) Total return is not annualized.
</Table>
28 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 4.60 $ 6.35 $ 6.33 $ 6.22 $ 6.32
---------- ---------- ---------- ---------- ----------
0.40 (a) 0.43 (a) 0.45 (a) 0.42 (a) 0.45
1.00 (1.74) 0.01 0.15 (d) (0.09)
0.00 ++ 0.00++ 0.00 ++ (0.00)++ 0.00 ++
---------- ---------- ---------- ---------- ----------
1.40 (1.31) 0.46 0.57 0.36
---------- ---------- ---------- ---------- ----------
(0.41) (0.43) (0.44) (0.41) (0.46)
(0.03) (0.01) -- (0.05) --
---------- ---------- ---------- ---------- ----------
(0.44) (0.44) (0.44) (0.46) (0.46)
---------- ---------- ---------- ---------- ----------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
---------- ---------- ---------- ---------- ----------
$ 5.56 $ 4.60 $ 6.35 $ 6.33 $ 6.22
========== ========== ========== ========== ==========
32.74% (22.00%) 7.41% 9.58%(c)(d) 5.86%
8.19% 7.33% 6.95% 6.77% 7.10%
1.08% 1.07% 1.04% 1.06% 1.02%
1.08% 1.07% 1.04% 1.07%(c) 1.02%
41% 29% 49% 58% 35%
$3,169,962 $1,835,090 $2,887,965 $2,806,800 $1,381,080
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
2009 2008 2007 2006 2005
$ 4.57 $ 6.31 $ 6.30 $ 6.19 $ 6.30
-------- -------- -------- -------- --------
0.36 (a) 0.38 (a) 0.40 (a) 0.38 (a) 0.40
1.00 (1.73) 0.00 ++ 0.15 (d) (0.09)
0.00 ++ 0.00 ++ 0.00 ++ (0.00)++ 0.00 ++
-------- -------- -------- -------- --------
1.36 (1.35) 0.40 0.53 0.31
-------- -------- -------- -------- --------
(0.36) (0.38) (0.39) (0.37) (0.42)
(0.03) (0.01) -- (0.05) --
-------- -------- -------- -------- --------
(0.39) (0.39) (0.39) (0.42) (0.42)
-------- -------- -------- -------- --------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- -------- -------- --------
$ 5.54 $ 4.57 $ 6.31 $ 6.30 $ 6.19
======== ======== ======== ======== ========
31.57% (22.60%) 6.63% 8.91%(c)(d) 5.04%
7.29% 6.54% 6.20% 6.02% 6.35%
1.90% 1.86% 1.79% 1.81% 1.77%
1.90% 1.86% 1.79% 1.82%(c) 1.77%
41% 29% 49% 58% 35%
$651,209 $276,418 $422,348 $421,855 $401,923
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
29
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 4.60 $ 6.35 $ 6.34 $ 6.22 $ 6.32
---------- -------- -------- -------- -------
Net investment income 0.41 (a) 0.44 (a) 0.47 (a) 0.44 (a) 0.48
Net realized and
unrealized gain (loss)
on investments 1.00 (1.73) 0.00 ++ 0.16 (0.10)
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.00 ++ 0.00 ++ 0.00 ++ (0.00)++ 0.00 ++
---------- -------- -------- -------- -------
Total from investment
operations 1.41 (1.29) 0.47 0.60 0.38
---------- -------- -------- -------- -------
Less dividends and
distributions:
From net investment
income (0.42) (0.45) (0.46) (0.43) (0.48)
Return of capital (0.03) (0.01) -- (0.05) --
---------- -------- -------- -------- -------
Total dividends and
distributions (0.45) (0.46) (0.46) (0.48) (0.48)
---------- -------- -------- -------- -------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
---------- -------- -------- -------- -------
Net asset value at end of
period $ 5.56 $ 4.60 $ 6.35 $ 6.34 $ 6.22
========== ======== ======== ======== =======
Total investment return
(b) 32.84% (21.63%) 7.49% 10.02%(c)(d)6.12%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 8.38% 7.57% 7.26% 7.03% 7.31%
Net expenses 0.83% 0.87% 0.79% 0.80% 0.81%
Expenses (before
reimbursement) 0.83% 0.87% 0.79% 0.81% 0.81%
Portfolio turnover rate 41% 29% 49% 58% 35%
Net assets at end of
period (in 000's) $1,141,889 $508,239 $440,002 $117,032 $68,659
</Table>
<Table>
<Caption>
CLASS R2
--------------------------
MAY 1
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
--------------------------
2009 2008
Net asset value at
beginning of period $ 4.60 $ 5.99
------ -------
Net investment income 0.39 (a) 0.21 (a)
Net realized and
unrealized gain (loss)
on investments 1.01 (1.38)
Net realized and
unrealized gain on
foreign currency
transactions 0.00 ++ 0.00 ++
------ -------
Total from investment
operations 1.40 (1.17)
------ -------
Less dividends and
distributions:
From net investment
income (0.41) (0.21)
Return of capital (0.03) (0.01)
------ -------
Total dividends and
distributions (0.44) (0.22)
------ -------
Redemption fee (a) 0.00 ++ 0.00 ++
------ -------
Net asset value at end of
period $ 5.56 $ 4.60
====== =======
Total investment return
(b) 32.31% (20.13%)(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 7.59% 7.48% ++
Net expenses 1.18% 1.20% ++
Expenses (before
reimbursement) 1.18% 1.20% ++
Portfolio turnover rate 41% 29%
Net assets at end of
period (in 000's) $6,240 $ 41
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I and Class R2 shares are
not subject to sales charges.
(c) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(e) Total return is not annualized.
</Table>
30 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay High Yield Corporate Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on May 1,
1986. Class C shares commenced operations on September 1, 1998. Class I shares
commenced operations on January 2, 2004. Class R2 shares were first offered to
the public on December 14, 2007, but did not commence operations until May 1,
2008. Investor Class shares commenced operations on February 28, 2008. Investor
Class and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I and Class R2 shares are offered at NAV and 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 and service fee rates than Investor Class, Class A and Class R2
shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act.
Class I shares are not subject to a distribution or service fee. Class R2 shares
are authorized to pay a shareholder service fee 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 R2 shares.
The Fund's investment objective is to seek maximum current income through
investment in a diversified portfolio of high-yield debt securities. Capital
appreciation is a secondary objective.
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 (as defined in Note 3(A)),
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. Investments in other mutual funds are valued at
their NAVs as of the close of the New York Stock Exchange on the valuation date.
Loan assignments, participations and commitments are valued at the average of
bid quotations obtained from a pricing service. The Trust has engaged an
independent pricing service to provide market value quotations from dealers in
loans.
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 ("short-term investments") 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
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2009, the
Fund held securities with a value of $23,818,907 that were valued in such a
manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issuer in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3(A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures. At October 31, 2009, foreign securities
held by the Fund were not fair valued.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2009, maximized the use of observable inputs and minimized the
use of unobservable inputs. The Fund may have utilized some of the following
fair value techniques: multi-dimensional relational pricing models, option
adjusted spread pricing and estimating the price that would have prevailed in a
liquid market for an international equity security given information available
at the time of evaluation, when there are significant events after the close of
local foreign markets. For the year ended October 31, 2009, there have been no
changes to the fair value methodologies.
Generally, a security is considered illiquid if it cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued. Its illiquidity might prevent the sale of such security at a time when
the Manager or Subadvisor, if any, as defined might wish to sell, and these
securities could have the effect of decreasing the overall level of a Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, requiring a Fund to rely on judgments
that may be somewhat subjective in determining value, which could vary from the
amount that a Fund could realize upon disposition. Difficulty in selling
illiquid securities may result in a loss or may be costly to the Fund. Under the
supervision of the Board of Trustees, the Manager or Subadvisor, if any,
determines the liquidity of a Fund's investments; in doing so, the Manager or
Subadvisor, if any, may consider various factors, including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective purchasers, (3)
the dealer undertakings to make a market, and (4) the nature of the security and
the market in which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Illiquid
securities generally will be valued in such manner, as the Board of Trustees in
good faith deems appropriate to reflect their fair market value.
32 MainStay High Yield Corporate Bond Fund
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at NAV, 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 securities
purchased, other than short-term investments, 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
investments 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.
The Fund may place a debt obligation on non-accrual status and reduce related
interest income by ceasing current accruals and writing off interest receivables
when the collection of all or a portion of interest has become doubtful based on
consistently applied procedures. A debt obligation is removed from non-accrual
status when the issuer resumes interest payments or when collectibility of
interest is reasonably assured.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and 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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations
("loans") are agreements to make money available (a "commitment") to a borrower
in a specified amount, at a
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
specified rate and within a specified time. Such loans are typically senior,
secured and collateralized in nature. The Fund records an investment when the
borrower withdraws money and records interest as earned. These loans pay
interest at rates that are periodically reset by reference to a base lending
rate plus a spread. These base lending rates are generally the prime rate
offered by a designated U.S. bank or the London InterBank Offered Rate
("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants become insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are marked to
market and recorded in the Statement of Assets and Liabilities. (See Note 5.)
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(J) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(K) 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 7.)
(L) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase for any class. The redemption fee is designed to offset brokerage
commissions and other costs associated with short-term trading and is not
assessed on shares acquired through the reinvestment of dividends or
distributions paid by the Fund. The redemption fees are included in the
Statement of Changes in Net Assets' shares redeemed amount and retained by the
Fund.
(M) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes
called "junk bonds"),
34 MainStay High Yield Corporate Bond Fund
which are generally considered speculative because they present a greater risk
of loss, including default, than higher quality debt securities. These
securities pay investors a premium--a high interest rate or yield--because of
the increased risk of loss. These securities can also be subject to greater
price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific country, industry or region.
(N) 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.
(O) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
Fair value of derivative instruments as of October 31, 2009
ASSET DERIVATIVES
<Table>
<Caption>
STATEMENT OF
ASSETS AND EQUITY
LIABILITIES CONTRACTS
LOCATION RISK TOTAL
Investment in
securities,
Warrants at value $693,268 $693,268
- -----------------------------------------------------------------
Total Fair Value $693,268 $693,268
=========================
</Table>
The effect of derivatives instruments on the Statement of Operations for the
year ended October 31, 2009
REALIZED GAIN (LOSS)
<Table>
<Caption>
STATEMENT OF EQUITY
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net realized gain
(loss) on security
Warrants transactions $(4,097) $(4,097)
- ------------------------------------------------------------
Total Realized Gain (Loss) $(4,097) $(4,097)
=========================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
STATEMENT OF EQUITY
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net change in
unrealized
appreciation
(depreciation) on
security
Warrants transactions $(3,171,305) $(3,171,305)
-------------------------
Total Change in
Appreciation
(Depreciation) $(3,171,305) $(3,171,305)
=========================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
EQUITY
CONTRACTS
RISK TOTAL
Warrants (2) 75,101 75,101
</Table>
(1) Amount disclosed represents the weighted average held during the twelve-
month period.
(2) Amount(s) represent(s) number of contracts or number of shares/units.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and
an indirect, wholly-owned subsidiary of
mainstayinvestments.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
New York Life, serves as Subadvisor to the Fund and is responsible for the day-
to-day portfolio management of the Fund. Pursuant to the terms of an Amended and
Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life
Investments and the Subadvisor, New York Life Investments pays for the services
of the Subadvisor.
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:
0.60% on assets up to $500 million, 0.55% on assets from $500 million to $5
billion and 0.525% on assets in excess of $5 billion, plus a fee for fund
accounting services previously provided by New York Life Investments under a
separate accounting agreement.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $23,719,546.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV 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.
In accordance with the Shareholder Services Plan for the Class R2 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 R2 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 R2 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
$83,548 and $1,093,667, respectively, for the year ended October 31, 2009 . 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
$81, $21,626, $466,664 and $139,344, respectively, for the year ended October
31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $8,739,992.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 254,627 0.0%++
- -------------------------------------------------
Class C 114 0.0++
- -------------------------------------------------
Class I 4,487,913 0.4
- -------------------------------------------------
Class R2 26,246 0.4
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $195,506.
36 MainStay High Yield Corporate Bond Fund
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(862,798,662) $(10,705,263) $38,869,158 $(834,634,767)
- ---------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals, premium amortization adjustments,
partnership adjustments and adjustments as a result of securities in default.
The other temporary differences are primarily due to distribution payable and
defaulted bond interest.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$24,229,085 $83,828,010 $(108,057,095)
- --------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, foreign currency gain (loss), paydown gain (loss), adjustments as a
result of consent payments and return of capital distributions.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $862,798,662 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2010 $169,120
2011 306,034
2014 34,845
2016 84,576
2017 268,224
- ------------------------------------
Total $862,799
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $349,956,435 $296,062,850
Return of Capital 25,449,046 9,074,851
- -------------------------------------------------------
Total $375,405,481 $305,137,701
- -------------------------------------------------------
</Table>
NOTE 5--COMMITMENTS AND CONTINGENCIES:
At October 31, 2009, the Fund had unfunded loan commitments pursuant to the
following loan agreements:
<Table>
<Caption>
UNFUNDED UNREALIZED
BORROWER COMMITMENT DEPRECIATION
BHM Technologies LLC
Revolver A due 11/26/10 $ 1,095,000 $ (12,319)
- ------------------------------------------------------
BHM Technologies LLC
Revolver B due 11/26/10 5,005,000 (56,306)
- ------------------------------------------------------
Lender Processing
Services, Inc. Revolver
due 7/2/13 5,166,667 (465,000)
- ------------------------------------------------------
Total $11,266,667 $(533,625)
- ------------------------------------------------------
</Table>
The commitment is available until maturity date of the security.
NOTE 6--FOREIGN CURRENCY TRANSACTIONS:
As of October 31, 2009, the Fund held the following foreign currency:
<Table>
<Caption>
CURRENCY COST VALUE
Canadian Dollar CAD 856,035 USD 694,951 USD 791,124
- -----------------------------------------------------------
</Table>
mainstayinvestments.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--RESTRICTED SECURITIES:
As of October 31, 2009, the Fund held the following restricted securities:
<Table>
<Caption>
DATE(S) OF PRINCIPAL 10/31/09 PERCENTAGE OF
SECURITY ACQUISITION AMOUNT/SHARES COST VALUE NET ASSETS
At Home Corp.
Convertible Bond 4.75%, due
12/31/49 7/25/01 $61,533,853 $ 0 $ 6,154 0.0%++
- ---------------------------------------------------------------------------------------------------------
QuadraMed Corp.
Convertible Preferred Stock
5.50% 6/16/04 950,000 22,798,000 14,506,500 0.3
- ---------------------------------------------------------------------------------------------------------
Total $22,798,000 $14,512,654 0.3%
- ---------------------------------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
NOTE 8--CUSTODIAN:
State Street is the custodian of the cash and the 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 9--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 10--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $2,879,040 and $1,544,976, respectively.
NOTE 11--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 7,474,779 $ 36,392,998
Shares issued to
shareholders in
reinvestment of
dividends 3,560,027 17,263,693
Shares redeemed (7,329,380) (35,058,492)
-----------------------------
Net increase in shares
outstanding before
conversion 3,705,426 18,598,199
Shares converted into
Investor Class (See Note
1) 5,370,988 25,224,728
Shares converted from
Investor Class (See Note
1) (5,295,364) (27,168,518)
-----------------------------
Net increase 3,781,050 $ 16,654,409
=============================
Period ended October 31, 2008 (a):
Shares sold 4,557,981 $ 26,497,030
Shares issued to
shareholders in
reinvestment of
dividends 1,631,896 9,176,570
Shares redeemed (5,564,259) (31,581,862)
-----------------------------
Net increase in shares
outstanding before
conversion 625,618 4,091,738
Shares converted into
Investor Class (See Note
1) 45,857,130 268,437,800
Shares converted from
Investor Class (See Note
1) (2,858,803) (16,336,797)
-----------------------------
Net increase 43,623,945 $ 256,192,741
=============================
(a) Investor Class shares were first offered on February
28, 2008.
</Table>
38 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 242,801,884 $1,165,347,013
Shares issued to
shareholders in
reinvestment of
dividends 31,379,867 152,076,855
Shares redeemed (117,461,324) (566,849,942)
-----------------------------
Net increase in shares
outstanding before
conversion 156,720,427 750,573,926
Shares converted into
Class A (See Note 1) 16,413,917 80,507,811
Shares converted from
Class A (See Note 1) (2,089,045) (9,581,698)
-----------------------------
Net increase 171,045,299 $ 821,500,039
=============================
Year ended October 31, 2008:
Shares sold 91,709,161 $ 530,946,871
Shares issued to
shareholders in
reinvestment of
dividends 22,806,805 131,870,658
Shares redeemed (141,198,113) (817,912,644)
-----------------------------
Net decrease in shares
outstanding before
conversion (26,682,147) (155,095,115)
Shares converted into
Class A (See Note 1) 15,310,981 89,852,082
Shares converted from
Class A (See Note 1) (44,367,759) (257,708,595)
-----------------------------
Net decrease (55,738,925) $ (322,951,628)
=============================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 14,445,487 $ 68,012,697
Shares issued to
shareholders in
reinvestment of
dividends 5,009,794 23,866,848
Shares redeemed (17,356,879) (81,542,132)
-----------------------------
Net increase in shares
outstanding before
conversion 2,098,402 10,337,413
Shares converted from
Class B (See Note 1) (14,473,228) (68,982,323)
-----------------------------
Net decrease (12,374,826) $ (58,644,910)
=============================
Year ended October 31, 2008:
Shares sold 6,132,253 $ 35,711,486
Shares issued to
shareholders in
reinvestment of
dividends 5,017,413 28,939,798
Shares redeemed (31,105,623) (179,967,645)
-----------------------------
Net decrease in shares
outstanding before
conversion (19,955,957) (115,316,361)
Shares converted from
Class B (See Note 1) (14,287,468) (84,244,490)
-----------------------------
Net decrease (34,243,425) $ (199,560,851)
=============================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 68,447,828 $ 328,094,877
Shares issued to
shareholders in
reinvestment of
dividends 4,426,577 21,598,153
Shares redeemed (15,724,607) (75,733,952)
-----------------------------
Net increase 57,149,798 $ 273,959,078
=============================
Year ended October 31, 2008:
Shares sold 13,274,273 $ 76,853,924
Shares issued to
shareholders in
reinvestment of
dividends 2,587,539 14,868,368
Shares redeemed (22,299,748) (127,662,758)
-----------------------------
Net decrease (6,437,936) $ (35,940,466)
=============================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 139,507,704 $ 688,573,602
Shares issued to
shareholders in
reinvestment of
dividends 10,230,251 50,186,636
Shares redeemed (54,838,101) (268,508,467)
-----------------------------
Net increase 94,899,854 $ 470,251,771
=============================
Year ended October 31, 2008:
Shares sold 72,666,498 $ 424,248,877
Shares issued to
shareholders in
reinvestment of
dividends 5,491,601 31,479,145
Shares redeemed (36,892,114) (211,492,375)
-----------------------------
Net increase 41,265,985 $ 244,235,647
=============================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 1,195,469 $ 5,952,750
Shares issued to
shareholders in
reinvestment of
dividends 37,614 194,931
Shares redeemed (120,361) (621,579)
-----------------------------
Net increase 1,112,722 $ 5,526,102
=============================
Period ended October 31, 2008 (b):
Shares sold 8,617 $ 50,454
Shares issued to
shareholders in
reinvestment of
dividends 231 1,246
-----------------------------
Net increase 8,848 $ 51,700
=============================
</Table>
(b) Class R2 was seeded April 30, 2008. Investment operations did not commence
until May 1, 2008
NOTE 12--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed
mainstayinvestments.com 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
by New York Life Investments. The settlement relates to the period from March
12, 2002 through June 30, 2004, during which time the SEC alleged that New York
Life Investments failed to provide the Equity Index Fund's board with
information necessary to evaluate the cost of a guarantee provided to
shareholders of the Equity Index Fund, and that prospectus and other disclosures
misrepresented that there was no charge to the Equity Index Fund or its
shareholders for the guarantee. New York Life Investments, without admitting or
denying the allegations, consented to the entry of an administrative cease and
desist order finding violations of Sections 15(c) and 34(b) of the 1940 Act,
Section 206 (2) of the Investment Advisers Act of 1940, as amended, and
requiring a civil penalty of $800,000, disgorgement of $3,950,075 (which
represents a portion of its management fees relating to the Equity Index Fund
for the relevant period) as well as interest of $1,350,709. These amounts,
totaling approximately $6.101 million, are being distributed to shareholders who
held shares of the Equity Index Fund between March 2002 and June 2004, without
any material financial impact to New York Life Investments.
NOTE 13--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
40 MainStay High Yield Corporate Bond Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay High Yield Corporate Bond Fund
("the Fund"), one of the funds constituting The MainStay Funds, as of October
31, 2009, 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, 2009, 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 High Yield Corporate Bond Fund of The MainStay Funds as of October 31,
2009, 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 23, 2009
mainstayinvestments.com 41
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay High Yield Corporate Bond Fund
("Fund") and New York Life Investment Management LLC ("New York Life
Investments"), and the Subadvisory Agreement between New York Life Investments
and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group of Funds, including
the
42 MainStay High Yield Corporate Bond Fund
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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board
mainstayinvestments.com 43
noted, for example, increased costs borne by New York Life Investments and its
affiliates due to new and ongoing regulatory and compliance requirements. The
Board also noted that the Fund benefits from the allocation of certain fixed
costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to MacKay Shields from legally
permitted "soft-dollar" arrangements by which brokers provide research and other
services to MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MacKay Shields on fees charged 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 explanations from New York Life Investments and MacKay
Shields about the different scope of services provided to retail mutual funds as
compared with other investment advisory clients.
44 MainStay High Yield Corporate Bond Fund
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management and subadvisory fees and total ordinary operating expenses
were within a range that is competitive and, within the context of the Board's
overall conclusions regarding the Agreements, support a conclusion that these
fees and expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
mainstayinvestments.com 45
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$1,272,808 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, 2009,
should be multiplied by 88.6% to arrive at the amount eligible for qualified
interest income and 0.4% for the corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND
PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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).
46 MainStay High Yield Corporate Bond Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 47
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
48 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 49
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
50 MainStay High Yield Corporate Bond Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 51
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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017255 (RECYCLE LOGO) MS283-09 MSHY11-12/09
08
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
The MainStay Funds
Annual Report
October 31, 2009
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 26
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 38
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 39
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 43
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 43
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 43
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 44
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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.
A REDEMPTION FEE OF 2% WILL BE APPLIED TO SHARES THAT ARE REDEEMED WITHIN 60
DAYS OF PURCHASE. PERFORMANCE DATA SHOWN DOES NOT REFLECT THE DEDUCTION OF THIS
FEE, WHICH WOULD LOWER PERFORMANCE.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges 14.53% 5.56% 2.90%
Excluding sales charges 21.20 6.76 3.49
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 9450 10000
8438 9710
6887 7290
6974 6327
8340 8037
9600 9551
10887 11279
14056 14383
16348 17966
10987 9590
10/31/09 13316 12247
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges 14.88% 5.66% 2.96%
Excluding sales charges 21.57 6.87 3.54
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 23625 25000
21095 24276
17218 18224
17435 15816
20850 20092
24001 23877
27218 28197
35140 35957
40869 44915
27517 23974
10/31/09 33453 30618
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges 15.31% 5.64% 2.72%
Excluding sales charges 20.31 5.96 2.72
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 10000 10000
8871 9710
7198 7290
7230 6327
8583 8037
9798 9551
11031 11279
14134 14383
16322 17966
10876 9590
10/31/09 13085 12247
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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 CDSC, and have an annual
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--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges 19.32% 5.96% 2.73%
Excluding sales charges 20.32 5.96 2.73
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 10000 10000
8871 9710
7190 7290
7230 6327
8583 8037
9798 9551
11023 11279
14126 14383
16314 17966
10878 9590
10/31/09 13088 12247
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------
22.01% 7.38% 3.90%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 10000 10000
8945 9710
7305 7290
7407 6327
8876 8037
10271 9551
11707 11279
15212 14383
17792 17966
12020 9590
10/31/09 14664 12247
</Table>
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
21.89% 7.21% 3.76%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 10000 10000
8937 9710
7289 7290
7383 6327
8841 8037
10215 9551
11601 11279
15054 14383
17595 17966
11872 9590
10/31/09 14471 12247
</Table>
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. Effective August 1, 2009, the Fund's prior
expense limitation agreement terminated and the Fund now has a voluntary
agreement in place with regard to certain share classes. This voluntary
agreement may be discontinued at any time. Performance figures shown reflect
nonrecurring reimbursements from affiliates for professional fees and losses
attributable to shareholder trading arrangements. If these nonrecurring
reimbursements had not been made the total return (excluding sales charges)
would have been 6.84% for Class A, 5.86% for Class B, 5.93% for Class C,
7.37% for Class I, 7.21% for Class R1 and 6.97% for Class R2 for the five-
year period ended October 31, 2009, and 3.53% for Class A, 2.68% for Class B,
2.71% for Class C, 3.90% for Class I, 3.76% for Class R1 and 3.53% for Class
R2 for the ten-year period then ended. Investor Class and Class R3 shares
were not affected, because the reimbursement occurred prior to the launch of
these share classes.
2. Performance figures for Investor Class shares, first offered to the public 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.
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 International Equity Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
21.53% 7.00% 3.55%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 10000 10000
8916 9710
7260 7290
7332 6327
8757 8037
10107 9551
11473 11279
14861 14383
17312 17966
11662 9590
10/31/09 14174 12247
</Table>
CLASS R3 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
21.31% 6.65% 3.27%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL MSCI EAFE(R)
EQUITY FUND INDEX
---------------------- ------------
10/31/99 10000 10000
8907 9710
7256 7290
7318 6327
8721 8037
9996 9551
11299 11279
14557 14383
16937 17966
11372 9590
10/31/09 13795 12247
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ------------------------------------------------------------------------------
MSCI EAFE(R) Index(5) 27.71% 5.10% 2.05%
Average Lipper international large-cap core fund(6) 23.97 4.46 1.53
</Table>
3. Performance figures for Class I, R1 and R2 shares, each of which was first
offered on January 2, 2004, include the historical performance of Class B
shares through December 31, 2003, adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for Class I,
R1 and R2 shares might have been lower.
4. Performance figures for Class R3 shares which were first offered on April 28,
2006, include the historical performance of Class B shares through April 27,
2006, adjusted for differences certain contractual in expenses and fees.
Unadjusted, the performance shown for Class R3 shares might have been lower.
5. The Morgan Stanley Capital International Europe, Australasia and Far East
("MSCI EAFE(R)") Index is an index of international stocks representing the
developed world outside of North America. Results assume reinvestment of all
income and capital gains. The MSCI EAFE(R) Index is the Fund's broad-based
securities market index for comparison purposes. An investment cannot be made
directly in an index.
6. The average Lipper international large-cap core fund is representative of
funds that, by portfolio practice, invest in a variety of market-
capitalization ranges without concentrating 75% of their equity assets in any
one market-capitalization range over an extended period of time.
International large-cap core funds typically have an average price-to-cash
flow ratio, price-to-book ratio, and three-year sales-per-share growth value
compared to the S&P/Citigroup World ex-U.S. BMI. This benchmark is a product
of Lipper Inc. 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 TWO PRECEDING PAGES 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 INTERNATIONAL EQUITY FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,258.00 $ 9.73 $1,016.60 $ 8.69
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,260.30 $ 8.09 $1,018.00 $ 7.22
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,253.30 $13.97 $1,012.80 $12.48
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,254.70 $13.98 $1,012.80 $12.48
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,262.00 $ 6.44 $1,019.50 $ 5.75
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,261.60 $ 7.01 $1,019.00 $ 6.26
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,259.80 $ 8.60 $1,017.60 $ 7.68
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,258.00 $ 9.79 $1,016.50 $ 8.74
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.71% for Investor Class, 1.42% for Class A, 2.46% for Class B and Class C,
1.13% for Class I, 1.23% for Class R1, 1.51% for Class R2 and 1.72% for Class
R3) multiplied by the average account value over the period, divided by 365
and multiplied by 184 (to reflect the one-half year period). The table above
represents the actual expenses incurred during the one-half year period.
8 MainStay International Equity Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 91.1
Cash and Other Assets, Less Liabilities 4.6
Short-Term Investment 2.2
Warrants 1.8
Futures Contracts 0.3
Written Call Options 0.0
</Table>
See Portfolio of Investments beginning on page 12 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Tesco PLC
2. Nestle S.A. Registered
3. Roche Holding A.G., Genusscheine
4. BP PLC Sponsored ADR (a)
5. NTT DoCoMo, Inc.
6. Enagas
7. Man Group PLC
8. Hannover Rueckversicherung A.G.
9. Novartis A.G. (a)
10. Ryanair Holdings PLC Class A
</Table>
(a) Security trades on more than one exchange.
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGER RUPAL J. BHANSALI OF MACKAY SHIELDS LLC,
THE FUND'S SUBADVISOR.
HOW DID MAINSTAY INTERNATIONAL EQUITY FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay International Equity Fund returned 21.20%
for Investor Class shares, 21.57% for Class A shares, 20.31% for Class B shares
and 20.32% for Class C shares for the 12 months ended October 31, 2009. Over the
same period, the Fund's Class I shares returned 22.01%, Class R1 shares returned
21.89%, Class R2 shares returned 21.53% and Class R3 shares returned 21.31%. All
share classes underperformed the 23.97% return of the average Lipper(1)
international large-cap core fund and the 27.71% return of the MSCI EAFE(R)
Index for the 12 months ended October 31, 2009. The MSCI EAFE(R) Index(2) is the
Fund's broad-based securities-market index. See pages 5 and 6 for Fund returns
with sales charges.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund employs a bottom-up investment approach, selecting stocks on their
individual strengths, rather than focusing on the underlying industry groups of
those stocks or on general economic trends. Country allocations in the Fund are
a result of our bottom-up stock selection process.
Throughout the reporting period, we remained focused on the analysis of
individual business models and sought to invest in quality companies at
reasonable valuations rather than base our decisions on market perceptions.
We attribute the Fund's underperformance of the MSCI EAFE(R) Index to a number
of factors. As the international equity markets rebounded from early March
onward, the strong rally was driven by lower-quality, cyclical-related
businesses. Given our strategy of investing in "quality at the right price," we
emphasized companies with stable revenues, high-quality balance sheets and what
we believed to be reasonable valuations. We are aware that our strategy will
occasionally result in the Fund underperforming the MSCI EAFE(R) Index.
An underweight position in the materials industry group relative to the Index
detracted from the Fund's relative performance. In the telecommunication
services industry group and the pharmaceuticals industry, security selection and
overweight positions relative to the MSCI EAFE(R) Index detracted from the
Fund's performance relative to the Index. On the other hand, an overweight
position and favorable stock selection in the technology hardware & equipment
industry group and an underweight position in automobiles & components helped
the Fund's relative performance during the reporting period. Effective security
selection in the diversified financials industry group also contributed
positively to the Fund's performance relative to the MSCI EAFE(R) Index.
DURING THE REPORTING PERIOD, WHICH INDUSTRY GROUPS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S RELATIVE PERFORMANCE AND WHICH INDUSTRY GROUPS WERE
PARTICULARLY WEAK?
During the reporting period, the industry groups that made the strongest
contributions to the Fund's performance relative to the MSCI EAFE(R) Index were
technology hardware & equipment and health care equipment & services. In both
cases, the benefits came from security selection and overweight positions.
Favorable security selection in diversified financials also helped the Fund's
results relative to the Index.
From an industry group perspective, the most significant detractor from the
Fund's performance relative to the MSCI EAFE(R) Index was telecommunication
services, where the Fund suffered from an overweight position and weak security
selection. Being underweight in materials also detracted from the Fund's
relative performance. Other areas that detracted from performance were the
pharmaceuti-cals industry and the banks industry group. Pharmaceuticals
detracted as investors rotated out of defensive stocks for industry groups that
were more cyclical and growth-oriented, such as banks. Unfortu-nately, the
banking industry group as a whole was a weak performer during the reporting
period.
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. Foreign
securities may be subject to greater risks than U.S. investments, including
currency fluctuations, less-liquid trading markets, greater price volatility,
political and economic instability, less publicly available information, and
changes in tax or currency laws or monetary policy. These risks are likely to be
greater in emerging markets than in developed markets. The Fund may invest in
derivatives, which may increase the volatility of the Fund's net asset value and
may result in a loss to the Fund.
1. See footnote on page 7 for more information on Lipper Inc.
2. See footnote on page 7 for more information on the MSCI EAFE(R) Index.
10 MainStay International Equity Fund
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL FUND HOLDINGS WERE STRONG
CONTRIBUTORS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH HOLDINGS WERE WEAK?
On an absolute basis, the strongest contributor to the Fund's performance was
Man Group, a U.K.-based company that provides alternative investment products to
private and institutional investors. Man Group's shares outperformed the MSCI
EAFE(R) Index, as there were no earnings surprises and the company's dividend
was expected to remain at a relatively high level.
Another strong contributor to the Fund's absolute performance was Germany-based
Hannover Rueckversicherung A.G., which offers life, health, accident, damage,
property and high-risk specialty reinsurance. The shares were strong performers
as the company continued to meet or exceed earnings expectations and maintained
a very attractive dividend yield.
A third strong contributor to the Fund's performance was Swiss eye-care company
Alcon. The company develops, manufactures and markets pharmaceuticals, surgical
equipment and devices as well as contact-lens and other care products that treat
conditions of the eye. Alcon's shares outperformed the MSCI EAFE(R) Index during
the reporting period because Alcon's earnings results reflected the strength of
the company's franchises in ophthalmic pharmaceuticals and surgery.
On an absolute basis, the Fund's weakest performer during the reporting period
was Reed Elsevier, a Netherlands-based publisher and information provider for
the scientific and medical professions. In July 2009, the company announced a
share placement for the purpose of paying down debt. We believed that the
company's debt level was too high and its credit metrics were too stretched, so
we sold the position during the reporting period.
Takeda Pharmaceutical, a Japan-based drug company, also had a negative impact on
the Fund's performance during the reporting period. The shares came under
pressure after the U.S. Food and Drug Administration (FDA) failed to approve a
treatment combining Takeda Pharmaceutical's Actos diabetes pill and an
experimental medicine, alogliptin. The regulators asked for more safety data.
A third detractor was Societe Television Francaise 1, which operates the French
station TF1. In the recent economic downturn, media companies were ex-tremely
hard hit by declining advertising revenues.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund increased its financial exposure by adding UBS, Deutsche Boerse and Man
Group. In our opinion, these are the highest-quality companies in the financials
sector. The decline in the international equity markets during the first months
of the reporting period allowed us to initiate these positions at prices we
found attractive.
In addition to the sales already mentioned, the Fund either sold or trimmed a
number of positions in telecommunication services, pharmaceuticals and utilities
when we felt that valuations had exceeded reasonable levels. We sold the Fund's
position in Terna, the Italian electric transmission company, when valuations
moved ahead of earnings expectations. We also trimmed the Fund's position in
Swiss pharmaceutical company Novartis, as the company's share price outpaced our
expectations for growth potential given the risks inherent in the company's
product pipeline. The Fund trimmed its position in U.K.-based wireless
telecommunication services company Vodafone during the reporting period to
pursue what we believed to be more attractive opportuni-ties in the banking
sector.
HOW WAS THE FUND POSITIONED RELATIVE TO THE MSCI EAFE(R) INDEX AT THE END OF
OCTOBER 2009?
As of October 31, 2009, the Fund held overweight positions relative to the MSCI
EAFE(R) Index in the pharmaceuticals, biotechnology & life sciences, utilities
and media industry groups. As of the same date, the Fund was underweight in
materials, banks and automobiles & components. The Fund held market-weight
positions in the energy industry group and in food, beverages & tobacco.
From a regional perspective, we continued to find fewer compelling investments
in Japan than in Europe and the rest of Asia. As a result, the Fund held an
underweight position relative to the MSCI EAFE(R) Index in Japan at the end of
October 2009.
Industry group and regional weightings result from our rigorous bottom-up
research on individual companies and do not reflect top-down economic, regional
or industry group opinions.
- ----------
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.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 91.1%+
- ---------------------------------------------------------------
AUSTRALIA 0.3%
BHP Billiton, Ltd.,
Sponsored ADR (Metals &
Mining) (a) 28,500 $ 1,869,030
-------------
BELGIUM 3.1%
Belgacom S.A. (Diversified
Telecommunication
Services) 246,900 9,265,440
Mobistar S.A. (Wireless
Telecommunication
Services) 139,063 9,572,606
-------------
18,838,046
-------------
BERMUDA 1.3%
Esprit Holdings, Ltd.
(Specialty Retail) 1,205,100 8,178,919
-------------
CANADA 2.2%
Fairfax Financial Holdings,
Ltd. (Insurance) 18,400 6,513,600
IGM Financial, Inc. (Capital
Markets) 18,800 669,784
Intact Financial Corp.
(Insurance) 47,300 1,438,168
Research In Motion, Ltd.
(Communications Equipment)
(b) 13,900 816,347
Tim Hortons, Inc. (Hotels,
Restaurants & Leisure) 143,100 4,095,751
-------------
13,533,650
-------------
DENMARK 0.4%
Novo-Nordisk A/S Class B
(Pharmaceuticals) 43,600 2,715,705
-------------
FINLAND 2.0%
Nokia OYJ, Sponsored ADR
(Communications Equipment)
(a) 578,200 7,291,102
Sampo OYJ (Insurance) 196,000 4,707,399
-------------
11,998,501
-------------
FRANCE 3.6%
BNP Paribas S.A. (Commercial
Banks) 82,030 6,211,019
Neopost S.A. (Office
Electronics) 65,135 5,714,934
Publicis Groupe (Media) 29,405 1,120,794
Total S.A. (Oil, Gas &
Consumable Fuels) 154,100 9,215,262
-------------
22,262,009
-------------
GERMANY 6.3%
Allianz SE (Insurance) 13,900 1,596,382
Allianz SE, ADR (Insurance)
(a) 384,800 4,367,480
Deutsche Boerse A.G.
(Diversified Financial
Services) 105,400 8,549,773
V Hannover
Rueckversicherung A.G.
(Insurance) (b) 286,886 12,936,086
Infineon Technologies A.G.
(Semiconductors &
Semiconductor Equipment)
(b) 410,000 1,849,350
Puma A.G. Rudolf Dassler
Sport (Textiles, Apparel &
Luxury Goods) 1,900 580,814
Siemens A.G. (Industrial
Conglomerates) 32,600 2,949,074
Siemens A.G., Sponsored ADR
(Industrial Conglomerates)
(a) 50,400 4,537,008
Wincor Nixdorf A.G.
(Computers & Peripherals) 16,300 954,959
-------------
38,320,926
-------------
GREECE 1.7%
Intralot S.A.-Integrated
Lottery Systems & Services
(Hotels, Restaurants &
Leisure) 227,500 1,463,079
OPAP S.A. (Hotels,
Restaurants & Leisure) 338,648 8,671,666
Piraeus Bank S.A.
(Commercial Banks) (b) 21,082 367,650
-------------
10,502,395
-------------
HONG KONG 0.9%
China Mobile, Ltd.,
Sponsored ADR (Wireless
Telecommunication
Services) (a) 102,300 4,780,479
CNOOC, Ltd., ADR (Oil, Gas &
Consumable Fuels) (a) 4,000 595,760
-------------
5,376,239
-------------
IRELAND 0.2%
Allied Irish Banks PLC
(Commercial Banks) (b) 524,900 1,454,174
-------------
ISRAEL 0.2%
Cellcom Israel, Ltd.
(Wireless
Telecommunication
Services) 29,800 896,682
-------------
ITALY 5.9%
Assicurazioni Generali
S.p.A. (Insurance) 171,340 4,326,940
ENI S.p.A. (Oil, Gas &
Consumable Fuels) 304,700 7,582,647
Intesa Sanpaolo S.p.A.
(Commercial Banks) (b) 508,000 2,149,346
MediaSet S.p.A. (Media) 1,156,510 7,535,512
Mediolanum S.p.A.
(Insurance) 336,500 2,141,785
Milano Assicurazioni S.p.A.
(Insurance) 449,700 1,484,090
Snam Rete Gas S.p.A. (Gas
Utilities) 2,236,886 10,863,320
-------------
36,083,640
-------------
JAPAN 16.6%
Astellas Pharma, Inc.
(Pharmaceuticals) 242,400 9,075,021
Canon, Inc. (Office
Electronics) 143,600 5,631,372
Capcom Co., Ltd. (Software) 75,400 1,296,664
Daito Trust Construction
Co., Ltd. (Real Estate
Management & Development) 140,500 5,978,059
FamilyMart Co., Ltd. (Food &
Staples Retailing) 88,400 2,651,558
Japan Tobacco, Inc.
(Tobacco) 2,076 5,920,227
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding short-
term investment. One of the ten largest holdings may be a security traded on
more than one exchange. May be subject to change daily.
12 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
Konica Minolta Holdings,
Inc.
(Office Electronics) 153,500 $ 1,490,407
Kose Corp. (Personal
Products) 69,700 1,547,082
Lawson, Inc. (Food & Staples
Retailing) 40,000 1,799,700
MISUMI Group, Inc. (Trading
Companies & Distributors) 189,600 3,306,915
Nintendo Co., Ltd.
(Software) 32,810 8,448,990
Nintendo Co., Ltd., ADR
(Software) (a) 10,300 323,523
Nissin Foods Holdings Co.,
Ltd.
(Food Products) 250,100 8,918,747
V NTT DoCoMo, Inc.
(Wireless
Telecommunication
Services) 11,504 16,856,942
OBIC Co., Ltd. (IT Services) 28,060 4,800,578
Ono Pharmaceutical Co., Ltd.
(Pharmaceuticals) 25,400 1,218,997
Ryohin Keikaku Co., Ltd.
(Multiline Retail) 56,300 2,558,096
Sankyo Co., Ltd. (Leisure
Equipment & Products) 85,800 4,966,039
Santen Pharmaceutical Co.,
Ltd. (Pharmaceuticals) 54,600 1,892,485
Square Enix Holdings Co.,
Ltd. (Software) 216,100 5,461,617
Suruga Bank, Ltd.
(Commercial Banks) 344,200 3,181,407
Tokio Marine Holdings, Inc.
(Insurance) 176,600 4,679,120
-------------
102,003,546
-------------
MEXICO 0.7%
Grupo Televisa S.A.,
Sponsored ADR (Media) (a) 221,300 4,284,368
-------------
NETHERLANDS 3.4%
Gemalto N.V. (Computers &
Peripherals) (b) 67,200 2,836,801
Koninklijke Ahold N.V. (Food
&
Staples Retailing) 752,100 9,496,590
TNT N.V. (Air Freight &
Logistics) 291,528 7,756,816
Unilever N.V., CVA (Food
Products) (c) 29,400 908,166
-------------
20,998,373
-------------
NORWAY 0.5%
StatoilHydro ASA (Oil, Gas &
Consumable Fuels) 115,500 2,741,307
-------------
SINGAPORE 2.5%
DBS Group Holdings, Ltd.
(Commercial Banks) 560,900 5,226,609
Singapore Post, Ltd.
(Air Freight & Logistics) 1,440,000 970,925
Singapore Technologies
Engineering, Ltd.
(Aerospace & Defense) 1,239,500 2,529,321
SMRT Corp., Ltd. (Road &
Rail) 2,849,800 3,415,978
Venture Corp., Ltd.
(Electronic Equipment &
Instruments) 471,800 3,046,477
-------------
15,189,310
-------------
SPAIN 6.9%
Banco Popular Espanol S.A.
(Commercial Banks) 882,100 7,892,711
V Enagas (Gas Utilities) 808,900 16,689,666
Gestevision Telecinco S.A.
(Media) 536,000 5,561,074
Grifols S.A. (Biotechnology) 318,600 5,159,892
Indra Sistemas S.A. (IT
Services) 285,800 6,733,771
-------------
42,037,114
-------------
SWEDEN 0.4%
Scania AB Class B
(Machinery) 197,100 2,573,437
-------------
SWITZERLAND 12.2%
Actelion, Ltd. Registered
(Biotechnology) (b) 50,000 2,760,990
Credit Suisse Group A.G.,
Sponsored ADR (Capital
Markets) (a) 65,200 3,475,160
Geberit A.G. (Building
Products) 9,732 1,614,569
V Nestle S.A. Registered
(Food Products) 503,100 23,450,865
V Novartis A.G. Registered
(Pharmaceuticals) 118,448 6,205,849
V Novartis A.G., ADR
(Pharmaceuticals) (a) 109,000 5,662,550
V Roche Holding A.G.,
Genusscheine
(Pharmaceuticals) 140,325 22,528,051
Schindler Holding A.G.
(Machinery) 26,900 1,843,328
Swiss Reinsurance Co., Ltd.,
Registered (Insurance) 64,900 2,658,249
Syngenta A.G. Registered
(Chemicals) 5,400 1,283,283
Syngenta A.G., ADR
(Chemicals) (a) 13,600 643,688
UBS A.G. (Capital Markets)
(b) 150,800 2,501,772
-------------
74,628,354
-------------
UNITED KINGDOM 19.5%
Barclays PLC (Commercial
Banks) (b) 1,030,600 5,446,538
V BP PLC, Sponsored ADR
(Oil, Gas & Consumable
Fuels) (a) 350,620 19,852,104
Cobham PLC (Aerospace &
Defense) 1,693,962 6,105,349
De La Rue PLC (Commercial
Services & Supplies) 126,900 1,905,712
GlaxoSmithKline PLC
(Pharmaceuticals) 26,500 543,664
GlaxoSmithKline PLC,
Sponsored ADR
(Pharmaceuticals) (a) 57,400 2,362,584
HSBC Holdings PLC, Sponsored
ADR (Commercial Banks) (a) 30,600 1,694,934
Lloyds TSB Group PLC
(Commercial Banks) (b) 6,800,000 9,712,978
V Man Group PLC (Capital
Markets) 2,938,700 14,951,731
Provident Financial PLC
(Consumer Finance) 104,300 1,594,563
Rolls-Royce Group PLC Class
C (Aerospace & Defense)
(d) 11,459,940 18,809
Royal Dutch Shell PLC Class
A, ADR (Oil, Gas &
Consumable Fuels) (a) 179,100 10,640,331
Scottish & Southern Energy
PLC
(Electric Utilities) 633,500 11,218,701
Shire PLC, ADR
(Pharmaceuticals) (a) 51,000 2,718,300
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
UNITED KINGDOM (CONTINUED)
St. James's Place PLC
(Insurance) 507,000 $ 2,169,319
V Tesco PLC (Food & Staples
Retailing) 3,511,335 23,475,482
Vodafone Group PLC,
Sponsored ADR (Wireless
Telecommunication
Services) (a) 243,424 5,401,579
-------------
119,812,678
-------------
UNITED STATES 0.3%
Philip Morris International,
Inc. (Tobacco) 41,200 1,951,232
-------------
Total Common Stocks
(Cost $536,824,035) 558,249,635
-------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS 1.8%
- ---------------------------------------------------------------
IRELAND 1.8%
V Ryanair Holdings PLC
Class A
Strike Price E 0.000001
Expires 4/3/18 (Airlines)
(b)(e) 2,596,116 11,251,597
-------------
Total Warrants
(Cost $11,253,790) 11,251,597
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 2.2%
- ---------------------------------------------------------------
REPURCHASE AGREEMENT 2.2%
UNITED STATES 2.2%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$13,589,338
(Collateralized by a
United States Treasury
Bill with a rate of 0.066%
and a maturity date of
2/18/10, with a Principal
Amount of $13,865,000 and
a Market Value of
$13,862,227) (Capital
Markets) $13,589,326 13,589,326
-------------
Total Short-Term Investment
(Cost $13,589,326) 13,589,326
-------------
Total Investments,
Before Written Options
(Cost $561,667,151) (h) 95.1% 583,090,558
-------------
<Caption>
NUMBER OF
CONTRACTS VALUE
WRITTEN OPTIONS (0.0%)++
- ---------------------------------------------------------------
GERMANY (0.0%)++
Siemens A.G., Sponsored ADR
Strike Price $105.00
Expires 11/21/09
(Industrial Conglomerates)
(a) (168) $ (3,360)
-------------
NETHERLANDS (0.0%)++
Unilever N.V.
Strike Price $30.00
Expires 11/21/09 (Food
Products) (294) (58,800)
-------------
UNITED KINGDOM (0.0%)++
GlaxoSmithKline PLC
Strike Price $42.50
Expires 11/21/09
(Pharmaceuticals) (366) (19,032)
Vodafone Group PLC
Strike Price $25.00
Expires 11/21/09
(Wireless
Telecommunication
Services) (672) (3,360)
-------------
(22,392)
-------------
Total Written Options
(Proceeds $86,507) (84,552)
-------------
Total Investments,
Net of Written Options
(Cost $561,580,644) 95.1% 583,006,006
Cash and Other Assets,
Less Liabilities 4.9 30,202,165
----- ------------
Net Assets 100.0% $ 613,208,171
===== ============
</Table>
<Table>
<Caption>
CONTRACTS UNREALIZED
LONG DEPRECIATION (F)
FUTURES CONTRACTS (0.3%)
- --------------------------------------------------------
Dow Jones EURO STOXX 50
Index
December 2009 (10 Year)
(g) 698 $(1,331,914)
FTSE 100 Index
December 2009 (10 Year)
(g) 179 (535,280)
Topix Index
December 2009 (10 Year)
(g) 153 (101,725)
-----------
Total Futures Contracts
(Settlement Value
$57,889,393) $(1,968,919)
===========
</Table>
<Table>
+++ On a daily basis New York Life
Investments 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) ADR--American Depositary Receipt.
(b) Non-income producing security.
</Table>
14 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
(c) CVA--Certificaten Van Aandelen.
(d) Fair valued security. The total market
value of this security at October 31,
2009 is $18,809, which represents less
than one-tenth of a percent of the Fund's
net assets.
(e) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(f) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2009.
(g) At October 31, 2009, cash in the amount
of $4,968,638 is segregated as collateral
for futures contracts with the broker.
(h) At October 31, 2009, cost is $567,392,207
for federal purposes and net unrealized
appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 46,930,922
Gross unrealized depreciation (31,232,571)
============
Net unrealized appreciation $ 15,698,351
============
</Table>
The following abbreviation is used in the above portfolio:
<Table>
E --Euro
</Table>
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets and liabilities.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks (a) $558,230,826 $ -- $18,809 $558,249,635
Warrants 11,251,597 -- -- 11,251,597
Short-Term Investment
Repurchase Agreement -- 13,589,326 -- 13,589,326
------------ ----------- ------- ------------
Total Investments in Securities
Other Financial Instruments 569,482,423 13,589,326 18,809 583,090,558
------------ ----------- ------- ------------
Foreign Currency Forward Contracts (b) -- 974,105 -- 974,105
------------ ----------- ------- ------------
Total Other Financial Instruments -- 974,105 -- 974,105
------------ ----------- ------- ------------
Total Investments in Securities and Other
Financial Instruments $569,482,423 $14,563,431 $18,809 $584,064,663
============ =========== ======= ============
</Table>
(a) The level 3 security valued at $18,809 is held in the United Kingdom within
the Common Stocks section of the Portfolio of Investments.
(b) The value listed for these securities represents unrealized appreciation as
shown on Note 5 of the financial statements for foreign currency forward
contracts.
LIABILITY VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Other Financial Instruments
Written Options $ (84,552) $ -- $-- $ (84,552)
Futures Contracts (a) (1,968,919) -- -- (1,968,919)
Foreign Currency Forward Contracts (a) -- (4,863) -- (4,863)
----------- ------- --- -----------
Total Other Financial Instruments $(2,053,471) $(4,863) $-- $(2,058,334)
=========== ======= === ===========
</Table>
(a) The value listed for these securities represents unrealized depreciation as
shown on the Portfolio of Investments or Note 5 of the financial statements
for futures contracts and foreign currency forward contracts, respectively.
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, 2009 (CONTINUED)
The following is a reconciliation of investments in which significant
unobservable inputs (Level 3) were used in determining value:
<Table>
<Caption>
BALANCE CHANGE IN NET NET
AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS
INVESTMENTS OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET NET IN TO OUT OF
IN SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3
Common Stock $126,548 $-- ($11,343) $1,714 $18,762 ($116,872) $-- $--
-------- --- -------- ------ ------- --------- --- ---
Total $126,548 $-- ($11,343) $1,714 $18,762 ($116,872) $-- $--
======== === ======== ====== ======= ========= === ===
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
BALANCE INVESTMENTS
AS OF STILL HELD AT
INVESTMENTS OCTOBER 31, OCTOBER 31,
IN SECURITIES 2009 2009 (A)
Common Stock $18,809 $47
------- ---
Total $18,809 $47
======= ===
</Table>
(a) Included in "Net change in unrealized appreciation (depreciation) on
investments" in the Statement of Operations.
16 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
The table below sets forth the diversification of the International Equity Fund
investments by industry.
INDUSTRY DIVERSIFICATION (UNAUDITED)
<Table>
<Caption>
VALUE PERCENT+
Aerospace & Defense $ 8,653,479 1.4%
Air Freight & Logistics 8,727,741 1.4
Airlines 11,251,597 1.8
Biotechnology 7,920,882 1.3
Building Products 1,614,569 0.3
Capital Markets 35,187,773 5.7
Chemicals 1,926,971 0.3
Commercial Banks 43,337,366 7.1
Commercial Services &
Supplies 1,905,712 0.3
Communications Equipment 8,107,449 1.3
Computers & Peripherals 3,791,760 0.6
Consumer Finance 1,594,563 0.3
Diversified Financial
Services 8,549,773 1.4
Diversified Telecommunication
Services 9,265,440 1.5
Electric Utilities 11,218,701 1.8
Electronic Equipment &
Instruments 3,046,477 0.5
Food & Staples Retailing 37,423,330 6.1
Food Products 33,218,978 5.4
Gas Utilities 27,552,986 4.5
Hotels, Restaurants & Leisure 14,230,496 2.3
Industrial Conglomerates 7,482,722 1.2
Insurance 49,018,618 8.0
IT Services 11,534,349 1.9
Leisure Equipment & Products 4,966,039 0.8
Machinery 4,416,765 0.7
Media 18,501,748 3.0
Metals & Mining 1,869,030 0.3
Multiline Retail 2,558,096 0.4
Office Electronics 12,836,713 2.1
Oil, Gas & Consumable Fuels 50,627,411 8.3
Personal Products 1,547,082 0.3
Pharmaceuticals 54,904,174 9.1
Real Estate Management &
Development 5,978,059 1.0
Road & Rail 3,415,978 0.6
Semiconductors &
Semiconductor Equipment 1,849,350 0.3
Software 15,530,794 2.5
Specialty Retail 8,178,919 1.3
Textiles, Apparel & Luxury
Goods 580,814 0.1
Tobacco 7,871,459 1.3
Trading Companies &
Distributors 3,306,915 0.5
Wireless Telecommunication
Services 37,504,928 6.1
------------ -----
583,006,006 95.1
Cash and Other Assets,
Less Liabilities 30,202,165 4.9
------------ -----
Net Assets $613,208,171 100.0%
============ =====
</Table>
<Table>
+ Percentages indicated are based on Fund
net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $561,667,151) $ 583,090,558
Cash denominated in foreign
currencies
(identified cost $16,123,695) 17,033,947
Foreign cash collateral on deposit
at broker (identified cost
$4,992,399) (See Note 5) 4,968,638
Receivables:
Investment securities sold 10,263,200
Fund shares sold 4,341,332
Dividends and interest 1,784,858
Variation margin on futures
contracts 222,720
Other assets 38,800
Unrealized appreciation on foreign
currency forward contracts 974,105
-------------
Total assets 622,718,158
-------------
LIABILITIES:
Written options, at value
(premiums received $86,507) 84,552
Payables:
Investment securities purchased 6,076,442
Fund shares redeemed 1,203,351
Variation margin on futures
contracts 1,213,525
Manager (See Note 3) 477,449
Transfer agent (See Note 3) 186,204
NYLIFE Distributors (See Note 3) 83,504
Custodian 61,210
Shareholder communication 57,546
Professional fees 53,200
Trustees 1,785
Accrued expenses 6,356
Unrealized depreciation on foreign
currency forward contracts 4,863
-------------
Total liabilities 9,509,987
-------------
Net assets $ 613,208,171
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 502,396
Additional paid-in capital 678,400,246
-------------
678,902,642
Accumulated undistributed net
investment income 15,684,834
Accumulated net realized loss on
investments, written option
transactions and foreign currency
transactions (102,773,610)
Net unrealized appreciation on
investments, futures contracts
and written options 19,456,443
Net unrealized appreciation on
translation of other assets and
liabilities in foreign currencies
and foreign currency forward
contracts 1,937,862
-------------
Net assets $ 613,208,171
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 39,968,591
=============
Shares of beneficial interest
outstanding 3,264,923
=============
Net asset value per share
outstanding $ 12.24
Maximum sales charge (5.50% of
offering price) 0.71
-------------
Maximum offering price per share
outstanding $ 12.95
=============
CLASS A
Net assets applicable to
outstanding shares $ 117,022,947
=============
Shares of beneficial interest
outstanding 9,557,135
=============
Net asset value per share
outstanding $ 12.24
Maximum sales charge (5.50% of
offering price) 0.71
-------------
Maximum offering price per share
outstanding $ 12.95
=============
CLASS B
Net assets applicable to
outstanding shares $ 36,396,912
=============
Shares of beneficial interest
outstanding 3,213,602
=============
Net asset value and offering price
per share outstanding $ 11.33
=============
CLASS C
Net assets applicable to
outstanding shares $ 19,078,689
=============
Shares of beneficial interest
outstanding 1,684,867
=============
Net asset value and offering price
per share outstanding $ 11.32
=============
CLASS I
Net assets applicable to
outstanding shares $ 387,244,770
=============
Shares of beneficial interest
outstanding 31,418,306
=============
Net asset value and offering price
per share outstanding $ 12.33
=============
CLASS R1
Net assets applicable to
outstanding shares $ 5,348,142
=============
Shares of beneficial interest
outstanding 436,642
=============
Net asset value and offering price
per share outstanding $ 12.25
=============
CLASS R2
Net assets applicable to
outstanding shares $ 7,825,876
=============
Shares of beneficial interest
outstanding 637,787
=============
Net asset value and offering price
per share outstanding $ 12.27
=============
CLASS R3
Net assets applicable to
outstanding shares $ 322,244
=============
Shares of beneficial interest
outstanding 26,333
=============
Net asset value and offering price
per share outstanding $ 12.24
=============
</Table>
18 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 19,103,185
Interest 19,875
------------
Total income 19,123,060
------------
EXPENSES:
Manager (See Note 3) 4,601,321
Transfer agent--Investor Class
(See Note 3) 200,323
Transfer agent--Class A (See Note
3) 93,025
Transfer agent--Classes B and C
(See Note 3) 264,451
Transfer agent--Classes I, R1, R2
and R3 (See Note 3) 359,745
Distribution/Service--Investor
Class (See Note 3) 91,286
Distribution/Service--Class A
(See Note 3) 208,749
Service--Class B (See Note 3) 85,670
Service--Class C (See Note 3) 34,864
Distribution/Service--Class R2
(See Note 3) 5,817
Distribution/Service--Class R3
(See Note 3) 544
Distribution--Class B (See Note
3) 257,009
Distribution--Class C (See Note
3) 104,591
Distribution--Class R3 (See Note
3) 544
Custodian 233,590
Shareholder communication 186,053
Professional fees 149,501
Registration 114,587
Trustees 23,344
Shareholder service--Class R1
(See Note 3) 3,650
Shareholder service--Class R2
(See Note 3) 2,327
Shareholder service--Class R3
(See Note 3) 217
Miscellaneous 49,625
------------
Total expenses before waiver 7,070,833
Expense waiver from Manager (See
Note 3) (449,561)
------------
Net expenses 6,621,272
------------
Net investment income 12,501,788
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, WRITTEN OPTIONS AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $(55,875,651)
Written option transactions 52,979
Foreign currency transactions 18,943,769
------------
Net realized loss on investments,
written option transactions and
foreign
currency transactions (36,878,903)
------------
Net change in unrealized
appreciation (depreciation) on:
Investments 136,735,963
Futures contracts (1,968,919)
Written option contracts 1,955
Translation of other assets and
liabilities in foreign
currencies and foreign
currency forward contracts (10,917,482)
------------
Net change in unrealized
depreciation on investments,
futures contracts, written
options and foreign currency
transactions 123,851,517
------------
Net realized and unrealized gain on
investments, futures
transactions, written options and
foreign currency transactions 86,972,614
------------
Net increase in net assets
resulting from operations $ 99,474,402
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$2,183,595.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 12,501,788 $ 24,062,369
Net realized loss on
investments, written
option transactions and
foreign currency
transactions (36,878,903) (42,421,486)
Net change in unrealized
appreciation
(depreciation) on
investments, written
options, futures contracts
and foreign currency
transactions 123,851,517 (254,285,391)
-----------------------------
Net increase (decrease) in
net assets resulting from
operations 99,474,402 (272,644,508)
-----------------------------
Dividends and distributions to
shareholders:
From net investment
income:
Investor Class (2,784,161) --
Class A (5,375,025) (598,461)
Class B (2,657,407) --
Class C (835,870) --
Class I (31,109,639) (5,317,732)
Class R1 (230,732) (32,078)
Class R2 (22,362) (1,893)
Class R3 (2,952) (218)
-----------------------------
(43,018,148) (5,950,382)
-----------------------------
From net realized gain on investments:
Class A -- (16,879,290)
Class B -- (7,486,636)
Class C -- (2,504,890)
Class I -- (57,826,273)
Class R1 -- (383,627)
Class R2 -- (32,779)
Class R3 -- (5,318)
-----------------------------
-- (85,118,813)
-----------------------------
Total dividends and
distributions to
shareholders (43,018,148) (91,069,195)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares $ 212,035,458 $ 123,377,421
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 30,703,329 74,162,347
Cost of shares redeemed
(a) (207,999,568) (236,089,020)
-----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 34,739,219 (38,549,252)
-----------------------------
Net increase (decrease)
in net assets 91,195,473 (402,262,955)
NET ASSETS:
Beginning of year 522,012,698 924,275,653
-----------------------------
End of year $ 613,208,171 $ 522,012,698
=============================
Accumulated undistributed
net investment income at
end of year $ 15,684,834 $ 27,257,425
=============================
</Table>
(a) Cost of shares redeemed net of redemption fee of $48,399 and $24,044 for the
years ended October 31, 2009 and 2008, respectively. (See Note 2(m))
20 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
--------------------------
2009 2008
Net asset value at beginning of period $ 10.96 $ 14.70
------- -------
Net investment income (a) 0.23 0.36
Net realized and unrealized gain
(loss) on investments 1.73 (4.31)
Net realized and unrealized gain
(loss) on foreign currency
transactions 0.18 0.21
------- -------
Total from investment operations 2.14 (3.74)
------- -------
Less dividends and distributions:
From net investment income (0.86) --
From net realized gain on
investments -- --
------- -------
Total dividends and distributions (0.86) --
------- -------
Redemption fee (a) 0.00 ++ 0.00 ++
------- -------
Net asset value at end of period $ 12.24 $ 10.96
======= =======
Total investment return (c) 21.20% (25.44%)(e)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.19% 3.91% ++
Net expenses 1.71% 1.70% ++
Expenses (before
recoupment/waiver/reimbursement) 1.86% 1.73% ++
Portfolio turnover rate 88% 82%
Net assets at end of period (in 000's) $39,969 $35,429
</Table>
<Table>
<Caption>
CLASS B
----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning of
period $ 10.17 $ 16.99 $ 15.78 $ 12.88 $ 11.44
------- ------- ------- ------- -------
Net investment income (a) 0.14 0.28 0.09 0.15 0.05
Net realized and unrealized gain
(loss) on investments 1.61 (5.70) 2.40 3.43 (b) 1.53
Net realized and unrealized gain
(loss) on foreign currency
transactions 0.16 0.28 (0.16) (0.09) (0.14)
------- ------- ------- ------- -------
Total from investment operations 1.91 (5.14) 2.33 3.49 1.44
------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.75) -- -- -- --
From net realized gain on
investments -- (1.68) (1.12) (0.59) --
------- ------- ------- ------- -------
Total dividends and distributions (0.75) (1.68) (1.12) (0.59) --
------- ------- ------- ------- -------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------- ------- ------- ------- -------
Net asset value at end of period $ 11.33 $ 10.17 $ 16.99 $ 15.78 $ 12.88
======= ======= ======= ======= =======
Total investment return (c) 20.31% (33.36%) 15.48% 28.13%(b)(d) 12.59%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.41% 2.10% 0.52% 1.11% 0.40%
Net expenses 2.46% 2.40% 2.35% 2.37% 2.49%
Expenses (before
recoupment/waiver/reimbursement) 2.62% 2.42% 2.30% 2.41%(d) 2.51%
Portfolio turnover rate 88% 82% 49% 50% 51%
Net assets at end of period (in
000's) $36,397 $37,098 $76,081 $67,150 $88,410
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.02 per
share on net realized gains on investments and the effect on total investment
return was less than 0.01%, respectively.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) Total return is not annualized.
</Table>
22 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 10.97 $ 18.09 $ 16.69 $ 13.53 $ 11.95
-------- ------- -------- -------- -------
0.26 0.41 0.22 0.24 0.15
1.73 (6.10) 2.54 3.65 (b) 1.59
0.18 0.30 (0.17) (0.10) (0.14)
-------- ------- -------- -------- -------
2.17 (5.39) 2.59 3.79 1.60
-------- ------- -------- -------- -------
(0.90) (0.05) (0.07) (0.04) (0.02)
-- (1.68) (1.12) (0.59) --
-------- ------- -------- -------- -------
(0.90) (1.73) (1.19) (0.63) (0.02)
-------- ------- -------- -------- -------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- ------- -------- -------- -------
$ 12.24 $ 10.97 $ 18.09 $ 16.69 $ 13.53
======== ======= ======== ======== =======
21.57% (32.67%) 16.30% 29.11%(b)(d) 13.40%
2.40% 2.79% 1.25% 1.65% 1.15%
1.39% 1.47% 1.58% 1.62% 1.74%
1.42% 1.47% 1.55% 1.67%(d) 1.76%
88% 82% 49% 50% 51%
$117,023 $63,470 $186,738 $145,964 $87,204
<Caption>
CLASS C
------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 10.17 $ 16.98 $ 15.77 $ 12.87 $ 11.44
-------- ------- -------- -------- -------
0.13 0.29 0.09 0.13 0.05
1.61 (5.69) 2.40 3.45 (b) 1.52
0.16 0.27 (0.16) (0.09) (0.14)
-------- ------- -------- -------- -------
1.90 (5.13) 2.33 3.49 1.43
-------- ------- -------- -------- -------
(0.75) -- -- -- --
-- (1.68) (1.12) (0.59) --
-------- ------- -------- -------- -------
(0.75) (1.68) (1.12) (0.59) --
-------- ------- -------- -------- -------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- ------- -------- -------- -------
$ 11.32 $ 10.17 $ 16.98 $ 15.77 $ 12.87
======== ======= ======== ======== =======
20.32% (33.32%) 15.49% 28.15%(b)(d) 12.50%
1.34% 2.12% 0.53% 0.91% 0.40%
2.46% 2.39% 2.33% 2.37% 2.49%
2.60% 2.41% 2.30% 2.42%(d) 2.51%
88% 82% 49% 50% 51%
$ 19,079 $10,976 $ 25,677 $ 17,026 $11,600
</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 I
----------------------------------------------------------------------------------
Year ended October 31,
----------------------------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning of period $ 11.05 $ 18.23 $ 16.79 $ 13.60 $ 12.02
-------- -------- -------- -------- --------
Net investment income (a) 0.29 0.50 0.31 0.33 0.23
Net realized and unrealized gain (loss) on
investments 1.75 (6.16) 2.56 3.66 (b) 1.59
Net realized and unrealized gain (loss) on
foreign currency transactions 0.18 0.30 (0.16) (0.10) (0.14)
-------- -------- -------- -------- --------
Total from investment operations 2.22 (5.36) 2.71 3.89 1.68
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.94) (0.14) (0.15) (0.11) (0.10)
From net realized gain on investments -- (1.68) (1.12) (0.59) --
-------- -------- -------- -------- --------
Total dividends and distributions (0.94) (1.82) (1.27) (0.70) (0.10)
-------- -------- -------- -------- --------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- -------- -------- --------
Net asset value at end of period $ 12.33 $ 11.05 $ 18.23 $ 16.79 $ 13.60
======== ======== ======== ======== ========
Total investment return (c) 22.01% (32.44%) 16.96% 29.94%(b)(d) 13.98%
Ratios (to average net assets)/Supplemental
Data:
Net investment income 2.70% 3.48% 1.80% 2.22% 1.72%
Net expenses 1.08% 1.03% 1.03% 1.01% 1.17%
Expenses (before
recoupment/waiver/reimbursement) 1.17% 1.05% 1.02% 1.08%(d) 1.19%
Portfolio turnover rate 88% 82% 49% 50% 51%
Net assets at end of period (in 000's) $387,245 $371,975 $631,206 $520,233 $135,643
</Table>
<Table>
<Caption>
Class R2
-------------------------------------------------------------------------
Year ended October 31,
-------------------------------------------------------------------------
2009 2008 2007 2006
Net asset value at beginning of period $10.99 $ 18.14 $16.72 $13.55
------ ------- ------ ------
Net investment income (a) 0.16 0.46 0.24 0.31
Net realized and unrealized gain (loss) on
investments 1.82 (6.14) 2.57 3.62 (b)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.19 0.30 (0.16) (0.10)
------ ------- ------ ------
Total from investment operations 2.17 (5.38) 2.65 3.83
------ ------- ------ ------
Less dividends and distributions:
From net investment income (0.89) (0.09) (0.11) (0.07)
From net realized gain on investments -- (1.68) (1.12) (0.59)
------ ------- ------ ------
Total dividends and distributions (0.89) (1.77) (1.23) (0.66)
------ ------- ------ ------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------ ------- ------ ------
Net asset value at end of period $12.27 $ 10.99 $18.14 $16.72
====== ======= ====== ======
Total investment return (c) 21.53% (32.63%) 16.49% 29.53%(b)(d)
Ratios (to average net assets)/Supplemental
Data:
Net investment income 1.39% 3.24% 1.38% 2.07%
Net expenses 1.50% 1.38% 1.38% 1.37%
Expenses (before
recoupment/waiver/reimbursement) 1.54% 1.40% 1.37% 1.42%(d)
Portfolio turnover rate 88% 82% 49% 50%
Net assets at end of period (in 000's) $7,826 $ 274 $ 358 $ 289
<Caption>
Class
R2
------
Year
ended
Octo-
ber
31,
------
2005
Net asset value at beginning of period $11.99
------
Net investment income (a) 0.19
Net realized and unrealized gain (loss) on
investments 1.57
Net realized and unrealized gain (loss) on
foreign currency transactions (0.14)
------
Total from investment operations 1.62
------
Less dividends and distributions:
From net investment income (0.06)
From net realized gain on investments --
------
Total dividends and distributions (0.06)
------
Redemption fee (a) 0.00 ++
------
Net asset value at end of period $13.55
======
Total investment return (c) 13.52%
Ratios (to average net assets)/Supplemental
Data:
Net investment income 1.37%
Net expenses 1.52%
Expenses (before
recoupment/waiver/reimbursement) 1.54%
Portfolio turnover rate 51%
Net assets at end of period (in 000's) $ 416
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.02 per
share on net realized gains on investments and the effect on total investment
return was less than 0.01%, respectively.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) Total return is not annualized.
</Table>
24 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
$10.98 $ 18.13 $16.71 $13.54 $12.00
------ ------- ------ ------ ------
0.28 0.49 0.29 0.32 0.22
1.74 (6.13) 2.55 3.64 (b) 1.54
0.18 0.30 (0.16) (0.10) (0.14)
------ ------- ------ ------ ------
2.20 (5.34) 2.68 3.86 1.62
------ ------- ------ ------ ------
(0.93) (0.13) (0.14) (0.10) (0.08)
-- (1.68) (1.12) (0.59) --
------ ------- ------ ------ ------
(0.93) (1.81) (1.26) (0.69) (0.08)
------ ------- ------ ------ ------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------ ------- ------ ------ ------
$12.25 $ 10.98 $18.13 $16.71 $13.54
====== ======= ====== ====== ======
21.89% (32.53%) 16.88% 29.76%(b)(d) 13.57%
2.58% 3.40% 1.68% 2.19% 1.62%
1.19% 1.13% 1.13% 1.12% 1.27%
1.27% 1.15% 1.12% 1.17%(d) 1.29%
88% 82% 49% 50% 51%
$5,348 $ 2,755 $4,158 $3,893 $3,325
</Table>
<Table>
<Caption>
CLASS R3
-------------------------------------------------------------------------
APRIL 28,
2006
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31
-------------------------------------------------------------------------
2009 2008 2007 2006
$10.95 $ 18.10 $16.70 $15.26
------ ------- ------ ------
0.26 0.42 0.13 0.13
1.72 (6.13) 2.64 1.35 (b)
0.17 0.30 (0.17) (0.04)
------ ------- ------ ------
2.15 (5.41) 2.60 1.44
------ ------- ------ ------
(0.86) (0.06) (0.08) --
-- (1.68) (1.12) --
------ ------- ------ ------
(0.86) (1.74) (1.20) --
------ ------- ------ ------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------ ------- ------ ------
$12.24 $ 10.95 $18.10 $16.70
====== ======= ====== ======
21.31% (32.86%) 16.35% 9.44%(e)
2.45% 2.93% 0.76% 1.60%++
1.69% 1.63% 1.63% 1.59%++
1.77% 1.65% 1.62% 1.70%(d)++
88% 82% 49% 50%
$ 322 $ 37 $ 57 $ 11
</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:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay International Equity Fund (the "Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on September
13, 1994. Class C shares commenced operations on September 1, 1998. Class I
shares, Class R1 shares and Class R2 shares commenced operations on January 2,
2004. Class R3 shares commenced operations on April 28, 2006. Investor Class
shares commenced operations on February 28, 2008. Investor Class and Class A
shares are offered at net asset value ("NAV") 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 at NAV 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 1.00% 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 offered at NAV and
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 a shareholder
service fee 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 R1, Class R2 or Class R3 shares.
The Fund's investment objective is to provide long-term growth of capital
commensurate with an acceptable level of risk by investing in a portfolio
consisting primarily of non-U.S. equity securities. Current income is a
secondary objective.
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. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in other mutual funds are
valued at their NAVs as of the close of the New York Stock Exchange on the
valuation date. Foreign currency forward contracts are valued at their fair
market values determined on the basis of the mean between the last current bid
and ask prices based on dealer or exchange quotations.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund held
securities with a value of $18,809 that were valued in such manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is
26 MainStay International Equity Fund
calculated. These events may include, but are not limited to, situations
relating to a single issuer in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3(A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures. At October 31, 2009, foreign securities
held by the Fund were not fair valued.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2009, maximized the use of observable inputs and minimized the
use of unobservable inputs. The Fund may have utilized some of the following
fair value techniques: multi-dimensional relational pricing models, option
adjusted spread pricing and estimating the price that would have prevailed in a
liquid market for an international equity security given information available
at the time of evaluation, when there are significant events after the close of
local foreign markets. For the year ended October 31, 2009, there have been no
changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 securities
purchased, other than short-term investments, 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
investments are accreted and amortized, respectively, on the straight-line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares 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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. These securities are
subject to equity price risk in the normal course of investing in these
transactions. Premiums received are recorded as assets, and the market value of
the written options are recorded as liabilities. The liabilities are
subsequently adjusted and unrealized appreciation or depreciation is recorded to
reflect the current value of the options written. Premiums received from writing
options that expire are treated as realized gains. Premiums received from
writing options that are exercised or are cancelled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, in exchange for the premium, the Fund foregoes the opportunity for
capital appreciation above the exercise price should the price of the underlying
security or foreign currency increase. The Fund, in exchange for the premium,
accepts the risk of a decline in the market value of the underlying security or
foreign currency below the exercise price. A call option may be covered by the
call writer's owning the underlying security throughout the option period. A
call option may also be covered by the call writer's maintaining liquid assets
valued at greater than the exercise price of the call written. When writing a
covered call option, the Fund, in return for the premium on the option, gives up
the opportunity to profit from a price increase in the underlying securities
above the exercise price. However, as long as the obligation as the writer
continues, the Fund has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur risk
exposure equal to the difference between the exercise price of the option and
the sum of the market value of the underlying security plus the premium received
from the sale of the option. The Fund writes covered call options to try to
realize greater return on the sale of a stock. The Fund writes put options to
help protect against unanticipated adverse developments.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing. The Fund may purchase put options on its securities or foreign
currencies to protect against a decline in the value
28 MainStay International Equity Fund
of the security or foreign currency or to close out covered written put
positions. The Fund may also purchase options to seek to enhance returns. Risks
may arise from an imperfect correlation between the change in market value of
the securities or foreign currencies held by the Fund and the prices of options
relating to the securities or foreign currencies purchased or sold by the Fund
and from the possible lack of a liquid secondary market for an option. The
maximum risk exposure for any purchased option is limited to the premium
initially paid for the option. (See Note 5.)
(I) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a financial
instrument (i.e., foreign currency, interest rate, security, or securities
index.) The Fund is subject to equity price risk and interest rate risk in the
normal course of investing in these transactions. 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 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 have minimal counterparty risk as they are
conducted through regulated exchanges that guarantee the futures against default
by the counterparty. The Fund invests in futures contracts to help manage the
duration and yield curve of the portfolio while minimizing the exposure to wider
bid/ask spreads in traditional bonds. The Fund's investment in futures contracts
and other derivatives may increase the volatility of the Fund's NAV and may
result in a loss to the Fund.
(J) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign
currency forward contracts, which are agreements to buy or sell currencies of
different countries on a specified future date at a specified rate. The Fund is
subject to foreign currency exchange rate risk in the normal course of investing
in these transactions. During the period the forward contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. Cash movement occurs on
settlement date. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract. The Fund
enters into foreign currency forward contracts to reduce currency risk versus
the benchmark or for trade settlement.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. While a
Fund may enter into forward contracts to reduce currency exchange risks, changes
in currency exchange rates may result in poorer overall performance for the Fund
than if it had not engaged in such transactions. Exchange rate movements can be
large, depending on the currency, and can last for extended periods of time,
affecting the value of the Fund's assets. Moreover, there may be an imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to the risk of currency exchange loss. The unrealized
appreciation on forward contracts reflects the Fund's exposure at valuation date
to credit loss in the event of a counterparty's failure to perform its
obligations. (See Note 5.)
(K) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing such foreign currency denominated
assets and liabilities, other than investments at valuation date exchange rates,
are reflected in unrealized foreign exchange gains or losses.
(L) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate. The Fund had no securities on loan
as of October 31, 2009.
(M) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase for any class. The redemption fee is designed to offset brokerage
commissions and other costs associated with short-term trading and is not
assessed on shares acquired through the reinvestment of dividends or
distributions paid by the Fund. The redemption fees are included in the
Statement of Changes in Net Assets' shares redeemed amount and retained by the
Fund.
(N) CONCENTRATION OF RISK. The Fund invests in foreign securities, which carry
certain risks that are in addition to the usual risks inherent in domestic
instruments. These risks include those resulting from currency fluctuations,
future adverse political and economic developments and possible imposition of
currency exchange blockages or other foreign governmental laws or restrictions.
These risks are likely to be greater in emerging markets than in developed
markets. The ability of issuers of securities held by the Fund to meet their
obligations may be affected by economic and political developments in a specific
country, industry or region.
(O) 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.
(P) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
FAIR VALUE OF DERIVATIVES AS OF OCTOBER 31, 2009
ASSET DERIVATIVES
<Table>
<Caption>
STATEMENT OF FOREIGN
ASSETS EXCHANGE EQUITY
AND LIABILITIES CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Investment in
securities, at
Warrants value $ -- $11,251,597 $11,251,597
Unrealized
appreciation on
foreign
currency
forward
Forward Contracts contracts 974,105 -- 974,105
-------------------------------------
Total Fair Value $974,105 $11,251,597 $12,225,702
=====================================
</Table>
30 MainStay International Equity Fund
LIABILITY DERIVATIVES
<Table>
<Caption>
STATEMENT OF FOREIGN
ASSETS EXCHANGE EQUITY
AND LIABILITIES CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Written options,
Written Options at value $ -- $ (84,552) $ (84,552)
Net
Assets -- Unreal-
ized appreciation
on investments,
futures contracts
and written
Futures options -- (1,968,919) (1,968,919)
Unrealized
depreciation on
Forward foreign currency
Contracts forward contracts (4,863) -- (4,863)
-------------------------------------
Total Value $(4,863) $(2,053,471) $(2,058,334)
=====================================
</Table>
(a) Includes cumulative appreciation (depreciation) of futures contracts is
reported in Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets & Liabilities.
The effect of derivative instruments on the Statement of Operations for the year
ended October 31, 2009.
REALIZED GAIN (LOSS)
<Table>
<Caption>
FOREIGN
STATEMENT OF EXCHANGE EQUITY
OPERATIONS CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Net realized
gain (loss) on
Purchased security
Options transactions $ -- $ (445,309) $ (445,309)
Net realized
gain (loss) on
security
Rights transactions -- (706,652) (706,652)
Net realized
gain (loss) on
security
Warrants transactions -- (315,259) (315,259)
Net realized
gain (loss) on
Written written option
Options transactions -- 52,979 52,979
Net realized
gain (loss) on
foreign
currency
Forward Contracts transactions 2,692,936 -- 2,692,936
-------------------------------------
Total Realized Gain (Loss) $2,692,936 $(1,414,241) $1,278,695
=====================================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
FOREIGN
STATEMENT EXCHANGE EQUITY
OF OPERATIONS CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Net change
in unrealized
appreciation
(depreciation)
Warrants on investments $ -- $ 1,046,759 $ 1,046,759
Net change in
unrealized
appreciation
(depreciation)
Futures on futures
Contracts contracts -- (1,968,919) (1,968,919)
Net change in
unrealized
appreciation
(depreciation)
Written on written
Options option contracts -- 1,955 1,955
Net change in
unrealized
appreciation
(depreciation)
on translation
of other assets
and liabilities
in foreign
currencies and
foreign currency
Forward forward
Contracts contracts (12,471,327) -- (12,471,327)
-----------------------------------------
Total Change in
Appreciation
(Depreciation) $(12,471,327) $ (920,205) $(13,391,532)
=========================================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
FOREIGN
EXCHANGE EQUITY
CONTRACTS CONTRACTS
RISK RISK TOTAL
Purchased Options (2) -- 1,016 1,016
Rights (2) -- 614,479 614,479
Warrants (2) -- 1,222,485 1,222,485
Futures Contracts (2) -- 1,030 1,030
Written Options (2) -- (3,283) (3,283)
Forward Contracts Long (3) $82,704,286 -- $ 82,704,286
Forward Contracts Short (3) $(64,586,250) -- $(64,586,250)
</Table>
(1) Amount disclosed represents the weighted average held during the twelve-
month period.
(2) Amount(s) represent(s) number of contracts or number of shares/units.
(3) Amount(s) represent(s) notional amount.
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and
an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to
the Fund and is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between New York Life Investments and the Subadvisor,
New York Life Investments pays for the services of the Subadvisor.
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:
0.90% on assets up to $500 million and 0.85% on assets in excess of $500
million, plus a fee for fund accounting services previously provided by New York
Life Investments under a separate fund accounting agreement.
Effective August 1, 2009, New York Life Investments agreed to voluntarily waive
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,
1.85%; Class B, 2.60%; and Class C, 2.60%. These voluntary waivers or
reimbursements may be discontinued at any time.
Prior to August 1, 2009, New York Life Investments had entered into a written
expense limitation agreement under which it 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 did not exceed the
following percentages of average daily net assets: Investor Class, 1.70%; Class
A, 1.37%; Class B, 2.45%; Class C, 2.45%; Class I, 1.03%; Class R1, 1.13%; Class
R2, 1.38% and Class R3, 1.63%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $4,601,321 and waived its fees in the amount of
$449,561.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares, at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV of the Class B and Class C shares of the Fund. Pursuant
to the Class R3 Plan, the Distributor receives a monthly distribution and
shareholder service fee from the Class R3 shares at an annual rate of 0.50% of
the average daily net assets of the Class R3 shares, which is an expense of the
Class R3 shares 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.
32 MainStay International Equity Fund
(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
$15,842 and $21,107, respectively, for the year ended October 31, 2009. 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 $74,
$3,212, $49,173 and $7,347, respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $917,544.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 228 0.0%++
- --------------------------------------------------
Class C 146 0.0++
- --------------------------------------------------
Class I 74,152,573 19.1
- --------------------------------------------------
Class R1 1,491 0.0++
- --------------------------------------------------
Class R2 1,475 0.0++
- --------------------------------------------------
Class R3 10,370 3.2
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $22,439.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$16,652,678 $(97,048,554) $-- $14,701,405 $(65,694,471)
- ---------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation
(depreciation) is primarily due to wash sale deferrals, straddle loss deferrals
and mark to market on foreign currency forward contracts.
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, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$18,943,769 $(18,490,238) $(453,531)
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gains
and losses.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $97,048,554 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $43,558
2017 53,491
- ------------------------------------
Total $97,049
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distribution paid from:
Ordinary Income $43,018,148 $29,895,926
Long-Term Capital Gains -- 61,173,269
- -----------------------------------------------------
Total $43,018,148 $91,069,195
- -----------------------------------------------------
</Table>
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS, FOREIGN CURRENCY TRANSACTIONS AND
WRITTEN OPTIONS:
As of October 31, 2009, the Fund held the following foreign currency forward
contracts:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
COUNTERPARTY SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale
Contracts:
- ----------------------------------------------------------------------------------------------------------
Canadian vs. Euro,
expiring 11/19/09 JPMorgan Chase Bank CAD 2,040,000 EUR 1,302,474 USD 31,388
- ----------------------------------------------------------------------------------------------------------
Canadian vs. Pound Sterling,
expiring 1/19/10 HSBC BankUSA CAD 4,740,000 GBP 2,889,011 358,808
- ----------------------------------------------------------------------------------------------------------
Euro vs. Australian Dollar,
expiring 1/12/10 HSBC BankUSA EUR 1,859,195 AUD 3,165,000 93,901
- ----------------------------------------------------------------------------------------------------------
Euro vs. Japanese Yen,
expiring 12/15/09 HSBC BankUSA EUR 6,605,000 JPY 889,875,137 169,019
- ----------------------------------------------------------------------------------------------------------
Japanese Yen vs. Australian
Dollar, expiring 12/16/09 HSBC BankUSA JPY832,570,000 AUD 10,314,807 (4,863)
- ----------------------------------------------------------------------------------------------------------
Japanese Yen vs. Norwegian
Krone, expiring 11/25/09 HSBC BankUSA JPY204,606,900 NOK 13,158,000 22,824
- ----------------------------------------------------------------------------------------------------------
Pound Sterling vs. Swedish
Krona, expiring 11/17/09 HSBC BankUSA GBP 1,725,000 SEK 20,527,043 63,566
- ----------------------------------------------------------------------------------------------------------
Swiss Franc vs. Japanese
Yen, expiring 12/14/09 HSBC BankUSA CHF 31,067,610 JPY 2,747,200,000 234,599
- ----------------------------------------------------------------------------------------------------------
Net unrealized appreciation
on foreign currency
forward contracts USD 969,242
- ----------------------------------------------------------------------------------------------------------
As of October 31, 2009, the Fund held the following foreign currencies:
<Caption>
CURRENCY COST VALUE
Australian Dollar AUD 7,961,940 USD 6,246,142 USD 7,166,939
- ----------------------------------------------------------------------------------------------------------
Canadian Dollar CAD 28,802 27,355 26,618
- ----------------------------------------------------------------------------------------------------------
Danish Krone DKK 2,359,822 472,543 466,622
- ----------------------------------------------------------------------------------------------------------
Euro EUR 2,966,565 4,415,488 4,365,748 (a)
- ----------------------------------------------------------------------------------------------------------
Japanese Yen JPY 195,453,834 2,135,175 2,171,347 (a)
- ----------------------------------------------------------------------------------------------------------
Mexican Peso MXN 50,762 3,795 3,845
- ----------------------------------------------------------------------------------------------------------
Norwegian Krone NOK 70,118 12,454 12,246
- ----------------------------------------------------------------------------------------------------------
Pound Sterling GBP 1,169,455 1,918,840 1,919,366 (a)
- ----------------------------------------------------------------------------------------------------------
Singapore Dollar SGD 578,406 413,598 412,690
- ----------------------------------------------------------------------------------------------------------
Swedish Krona SEK 5,733,270 792,558 808,385
- ----------------------------------------------------------------------------------------------------------
Swiss Franc CHF 4,769,182 4,678,146 4,648,779
- ----------------------------------------------------------------------------------------------------------
Total USD 21,116,094 USD 22,002,585
- ----------------------------------------------------------------------------------------------------------
</Table>
(a) A portion of this amount is segregated as collateral for futures contracts.
34 MainStay International Equity Fund
During the year ended October 31, 2009, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at
October 31, 2008 -- $ --
- ----------------------------------------------------
Options--Written 6,382 553,067
- ----------------------------------------------------
Options--Expired (4,882) (466,560)
- ----------------------------------------------------
Options--Canceled in closing
transactions -- --
- ----------------------------------------------------
Options Outstanding at
October 31, 2009 1,500 $ 86,507
- ----------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street is the custodian of the cash and the securities of the Fund.
Custodial fees are charged to the Fund based on the market value of securities
in the Fund and the number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and up front payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $427,767 and $420,292, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 295,274 $ 3,133,222
Shares issued to
shareholders in
reinvestment of dividends 274,197 2,763,906
Shares redeemed (677,337) (7,030,762)
---------------------------
Net decrease in shares
outstanding before
conversion (107,866) (1,133,634)
Shares converted into
Investor Class (See Note
1) 395,555 3,930,155
Shares converted from
Investor Class (See Note
1) (254,427) (3,007,535)
---------------------------
Net increase (decrease) 33,262 $ (211,014)
===========================
Period ended October 31, 2008 (a):
Shares sold 912,966 $ 13,363,940
Shares redeemed (538,793) (7,293,093)
---------------------------
Net increase in shares
outstanding before
conversion 374,173 6,070,847
Shares converted into
Investor Class (See Note
1) 3,101,147 44,596,624
Shares converted from
Investor Class (See Note
1) (243,659) (3,193,356)
---------------------------
Net increase 3,231,661 $ 47,474,115
===========================
(a) Investor Class shares were first offered on February
28, 2008.
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 5,778,794 $ 61,127,837
Shares issued to
shareholders in
reinvestment of dividends 472,195 4,745,571
Shares redeemed (2,669,609) (27,735,286)
---------------------------
Net increase in shares
outstanding before
conversion 3,581,380 38,138,122
Shares converted into Class
A (See Note 1) 384,373 4,403,119
Shares converted from Class
A (See Note 1) (192,063) (1,824,267)
---------------------------
Net increase 3,773,690 $ 40,716,974
===========================
Year ended October 31, 2008:
Shares sold 1,097,446 $ 15,769,585
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,019,884 16,233,458
Shares redeemed (4,266,847) (61,427,956)
---------------------------
Net decrease in shares
outstanding before
conversion (2,149,517) (29,424,913)
Shares converted into Class
A (See Note 1) 545,536 7,557,221
Shares converted from Class
A (See Note 1) (2,932,777) (42,271,956)
---------------------------
Net decrease (4,536,758) $ (64,139,648)
===========================
</Table>
mainstayinvestments.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 464,319 $ 4,633,379
Shares issued to
shareholders in
reinvestment of dividends 265,133 2,489,639
Shares redeemed (803,787) (7,681,906)
---------------------------
Net decrease in shares
outstanding before
conversion (74,335) (558,888)
Shares converted from Class
B (See Note 1) (359,682) (3,501,472)
---------------------------
Net decrease (434,017) $ (4,060,360)
===========================
Year ended October 31, 2008:
Shares sold 545,410 $ 7,446,033
Shares issued to
shareholders in
reinvestment of
distributions 470,567 6,983,163
Shares redeemed (1,338,746) (17,624,078)
---------------------------
Net decrease in shares
outstanding before
conversion (322,769) (3,194,882)
Shares converted from Class
B (See Note 1) (506,987) (6,688,533)
---------------------------
Net decrease (829,756) $ (9,883,415)
===========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 1,013,936 $ 10,052,536
Shares issued to
shareholders in
reinvestment of dividends 72,908 683,874
Shares redeemed (481,736) (4,586,684)
---------------------------
Net increase 605,108 $ 6,149,726
===========================
Year ended October 31, 2008:
Shares sold 185,495 $ 2,529,522
Shares issued to
shareholders in
reinvestment of
distributions 133,359 1,977,716
Shares redeemed (751,031) (9,864,002)
---------------------------
Net decrease (432,177) $ (5,356,764)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 11,205,468 $ 122,915,797
Shares issued to
shareholders in
reinvestment of dividends 1,958,800 19,764,293
Shares redeemed (15,405,836) (159,726,727)
---------------------------
Net decrease (2,241,568) $ (17,046,637)
===========================
Year ended October 31, 2008:
Shares sold 5,903,055 $ 83,879,213
Shares issued to
shareholders in
reinvestment of dividends
and distributions 3,021,225 48,512,097
Shares redeemed (9,888,291) (139,440,210)
---------------------------
Net decrease (964,011) $ (7,048,900)
===========================
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 198,843 $ 2,160,188
Shares issued to
shareholders in
reinvestment of dividends 22,981 230,732
Shares redeemed (36,009) (388,500)
---------------------------
Net increase 185,815 $ 2,002,420
===========================
Year ended October 31, 2008:
Shares sold 20,736 $ 268,492
Shares issued to
shareholders in
reinvestment of dividends
and distributions 26,051 415,705
Shares redeemed (25,311) (356,580)
---------------------------
Net increase 21,476 $ 327,617
===========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 672,602 $ 7,620,471
Shares issued to
shareholders in
reinvestment of dividends 2,218 22,362
Shares redeemed (61,929) (677,769)
---------------------------
Net increase 612,891 $ 6,965,064
===========================
Year ended October 31, 2008:
Shares sold 8,027 $ 114,012
Shares issued to
shareholders in
reinvestment of dividends
and distributions 2,172 34,672
Shares redeemed (5,051) (75,353)
---------------------------
Net increase 5,148 $ 73,331
===========================
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 38,045 $ 392,028
Shares issued to
shareholders in
reinvestment of dividends 293 2,952
Shares redeemed (15,357) (171,934)
---------------------------
Net increase 22,981 $ 223,046
===========================
Year ended October 31, 2008:
Shares sold 465 $ 6,624
Shares issued to
shareholders in
reinvestment of dividends
and distributions 348 5,536
Shares redeemed (607) (7,748)
---------------------------
Net increase 206 $ 4,412
===========================
</Table>
36 MainStay International Equity Fund
NOTE 10--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 11--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay International Equity Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2009, 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, 2009, 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 International Equity Fund of The MainStay Funds as of October 31, 2009,
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 23, 2009
38 MainStay International Equity Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay International Equity Fund ("Fund")
and New York Life Investment Management LLC ("New York Life Investments"), and
the Subadvisory Agreement between New York Life Investments and MacKay Shields
LLC ("MacKay Shields") on behalf of the Fund.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's
mainstayinvestments.com 39
officers. The Board also considered the benefits to shareholders of being part
of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order
40 MainStay International Equity Fund
for New York Life Investments to continue to provide high-quality ongoing
services to the Fund. The Board noted, for example, increased costs borne by New
York Life Investments and its affiliates due to new and ongoing regulatory and
compliance requirements. The Board also noted that the Fund benefits from the
allocation of certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to MacKay Shields from legally
permitted "soft-dollar" arrangements by which brokers provide research and other
services to MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and MacKay Shields on fees charged 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 explanations from New York Life Investments and MacKay
Shields about the different scope of
mainstayinvestments.com 41
services provided to retail mutual funds as compared with other investment
advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to
eliminate the expense limitation arrangements on the Fund's share classes. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
eliminate the expense limitations on the Fund's share classes. The Board
acknowledged that New York Life Investments may determine voluntarily to waive
expenses of Fund share classes without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
42 MainStay International Equity Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$19,717,713 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, 2009,
should be multiplied by 1.00% to arrive at the amount eligible for the corporate
dividends received deduction.
In accordance with federal tax law, the Fund elects to provide each shareholder
with their portion of the Fund's foreign taxes paid and the income sourced from
foreign countries. Accordingly, the Fund hereby makes the following designations
regarding its fiscal year ended October 31, 2009:
- -- the total amount of taxes paid to foreign countries was $2,183,595
- -- the total amount of income sourced from foreign countries was $20,665,350
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND
PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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 43
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Chief Executive Officer,
Director since 2008 (20 NYLIFE Distributors LLC and
portfolios). Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
44 MainStay International Equity Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 45
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
46 MainStay International Equity Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 47
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
48 MainStay International Equity Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO17129 (RECYCLE LOGO) MS283-09 MSIE11-12/09
10
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 31
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 36
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 36
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 37
NOTICE TO FORMER SHAREHOLDERS OF
MAINSTAY MID CAP GROWTH FUND
ON NOVEMBER 12, 2009, MAINSTAY MID CAP GROWTH FUND REORGANIZED WITH AND INTO
MAINSTAY LARGE CAP GROWTH FUND. AN ANNUAL REPORT FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2009, FOR MAINSTAY MID CAP GROWTH FUND WILL BE AVAILABLE TO FORMER
SHAREHOLDERS BY DECEMBER 31, 2009, WITHOUT CHARGE, ON THE MAINSTAY FUNDS
WEBSITE, MAINSTAYINVESTMENTS.COM, OR UPON REQUEST BY CALLING 800-MAINSTAY (624-
6782).
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 11.19% 2.37% 0.14%
Excluding sales charges 17.66 3.54 0.71
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 9450 10000 10000
11420 10933 10609
7771 6566 7967
6415 5278 6764
7936 6429 8170
8522 6646 8940
9732 7232 9720
10709 8016 11308
13515 9557 12954
8619 6026 8278
10/31/09 10141 7080 9090
</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 11.63% 2.41% 0.16%
Excluding sales charges 18.12 3.58 0.73
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 23625 25000 25000
28549 27333 26523
19428 16415 19918
16037 13195 16909
19840 16073 20426
21306 16616 22350
24330 18081 24299
26773 20041 28270
33787 23893 32386
21501 15064 20696
10/31/09 25397 17701 22725
</Table>
CLASS B SHARES(4)--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 11.85% 2.39% -0.05%
Excluding sales charges 16.85 2.75 -0.05
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 10000 10000 10000
11994 10933 10609
8101 6566 7967
6637 5278 6764
8149 6429 8170
8686 6646 8940
9851 7232 9720
10751 8016 11308
13489 9557 12954
8515 6026 8278
10/31/09 9949 7080 9090
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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 CDSC and have an annual 12b-1 fee of 0.25%.
Class R1 and Class R2 shares are only available through corporate-sponsored
retirement programs, which include certain minimum program requirements.
Class R3 shares are sold with no initial sales charge or CDSC, have an annual
12b-1 fee of 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. Effective August 1, 2009, the Fund's prior contractual expense
limitation agreement terminated and the Fund now has voluntary agreements in
place. Certain of these voluntary waivers or reimbursements will remain in
effect until at least November 12, 2010 and others may be discontinued at any
time.
THE FOOTNOTES ON THE FOLLOWING 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 15.85% 2.75% -0.05%
Excluding sales charges 16.85 2.75 -0.05
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 10000 10000 10000
11994 10933 10609
8101 6566 7967
6637 5278 6764
8149 6429 8170
8686 6646 8940
9851 7232 9720
10751 8016 11308
13471 9557 12954
8515 6026 8278
10/31/09 9949 7080 9090
</Table>
CLASS I SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
18.37% 4.08% 1.10%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 10000 10000 10000
12115 10933 10609
8265 6566 7967
6839 5278 6764
8482 6429 8170
9132 6646 8940
10478 7232 9720
11585 8016 11308
14732 9557 12954
9422 6026 8278
10/31/09 11153 7080 9090
</Table>
CLASS R1 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
18.28% 3.92% 0.97%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 10000 10000 10000
12103 10933 10609
8248 6566 7967
6819 5278 6764
8448 6429 8170
9086 6646 8940
10383 7232 9720
11484 8016 11308
14574 9557 12954
9312 6026 8278
10/31/09 11014 7080 9090
</Table>
2. Performance figures for Investor Class shares, first offered to the public 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 shares include the historical performance of
the FMI Winslow Growth Fund (a predecessor to the Fund) through March 31,
2005, adjusted to reflect the current maximum sales charge applicable to
Class A shares. Unadjusted, the performance shown for Class A shares might
have been lower.
4. Performance figures for Class B, Class C, Class I, Class R1 and Class R2
shares, each of which was first offered to the public on April 1, 2005,
include the historical performance of Class A shares through March 31, 2005,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class B, C, I, R1 and R2 shares might
have been lower.
5. Performance figures for Class R3 shares which were first offered to the
public on April 28, 2006, include the historical performance of Class A
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.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE DISCLOSURE AND FOOTNOTES ON THE
FOLLOWING PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE
CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Large Cap Growth Fund
CLASS R2 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
18.01% 3.68% 0.73%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 10000 10000 10000
12072 10933 10609
8207 6566 7967
6768 5278 6764
8364 6429 8170
8973 6646 8940
10224 7232 9720
11271 8016 11308
14282 9557 12954
9110 6026 8278
10/31/09 10750 7080 9090
</Table>
CLASS R3 SHARES(5)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
17.70% 3.39% 0.46%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE
CAP GROWTH RUSSELL 1000(R) S&P 500(R)
FUND GROWTH INDEX INDEX
-------------- --------------- ----------
10/31/99 10000 10000 10000
12042 10933 10609
8166 6566 7967
6717 5278 6764
8281 6429 8170
8862 6646 8940
10084 7232 9720
11058 8016 11308
13980 9557 12954
8896 6026 8278
10/31/09 10470 7080 9090
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell 1000(R) Growth Index(6) 17.51% 1.27% -3.39%
S&P 500(R) Index(7) 9.80 0.33 -0.95
Average Lipper large-cap growth fund(8) 14.74 0.70 -2.13
</Table>
6. The Russell 1000(R) Growth Index measures the performance of those Russell
1000(R) companies with higher price-to-book ratios and higher forecasted
growth values. The Russell 1000(R) Index measures the performance of the
1,000 largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000(R)
Index. The Russell 3000(R) Index measures the performance of the 3,000
largest U.S. companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market. Total returns assume
reinvestment of all dividends and capital gains. The Russell 1000(R) Growth
Index is the Fund's broad-based securities market index for comparison
purposes. An investment cannot be made directly in an index.
7. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
Index is widely regarded as the standard for measuring large-cap U.S. stock-
market performance. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly in an index.
8. The average Lipper large-cap growth fund is representative of funds that, by
portfolio practice, invest at least 75% of their equity assets in companies
with market capitalization (on a three-year weighted basis) above Lipper's
U.S. Diversified Equity large-cap floor. Large-cap growth funds typically
have an above-average price-to-earning ratio, price-to-book ratio, and three-
year sales-per-share growth value, compared to the S&P 500(R) Index. This
benchmark is a product of Lipper Inc. 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.
On April 1, 2005, FMI Winslow Growth Fund was reorganized as MainStay Large Cap
Growth Fund Class A shares. Performance for MainStay Large Cap Growth Fund Class
A shares, first offered April 1, 2005, includes the historical performance of
the FMI Winslow Growth Fund from inception (July 1, 1995) through March 31, 2005
adjusted to reflect the applicable sales charge and fees and expenses.
Performance for Class B, C, and I shares, first offered April 1, 2005, and
Investor Class shares, first offered February 28, 2008, includes the historical
performance of Class A shares from inception (July 1, 1995) through March 31,
2005 for Class B, C and I shares and through February 27, 2008 for Investor
Class shares, adjusted to reflect the sales change (or CDSC) and fees and
expenses of such shares. Performance for Class R1, R2 and R3 shares, first
offered April 1, 2005, April 1, 2005, and April 28, 2006, respectively, includes
the historical performance of Class A shares from inception (July 1, 1995)
through March 31, 2005 for Class R1 and R2 shares, and through April 27, 2006
for Class R3 shares, adjusted to reflect the applicable fees and expenses of
such shares. Prior to the reorganization (July 1, 1995, through March 31, 2005),
the Fund operated as the FMI Winslow Growth Fund, had no sales charge, and its
total net expenses were capped at 1.30%. Fund performance for all share classes
prior to April 1, 2005, has not been adjusted to reflect the current expenses of
the Fund or any applicable waivers. If the above adjustments had not been made,
or if Fund performance for all share classes prior to April 1, 2005, had been
adjusted to reflect the current expense caps, the performance numbers shown
would have been different.
THE FOOTNOTES ON THE PRECEDING TWO PAGES 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 LARGE CAP GROWTH FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,159.30 $ 7.67 $1,018.10 $ 7.17
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,159.00 $ 6.69 $1,019.00 $ 6.26
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,153.30 $11.72 $1,014.30 $10.97
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,155.80 $11.68 $1,014.40 $10.92
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,161.90 $ 4.52 $1,021.00 $ 4.23
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,160.80 $ 5.56 $1,020.10 $ 5.19
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,160.40 $ 7.02 $1,018.70 $ 6.56
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,157.20 $ 8.32 $1,017.50 $ 7.78
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.41% for Investor Class, 1.23% for Class A, 2.16% for Class B, 2.15% Class
C, 0.83% for Class I, 1.02% 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
365 and multiplied by 184 (to reflect the one-half year period). The table
above represents the actual expenses incurred during the one-half year
period.
8 MainStay Large Cap Growth Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
IT Services 10.2%
Computers & Peripherals 8.4
Communications Equipment 7.6
Oil, Gas & Consumable Fuels 7.1
Internet Software & Services 6.3
Capital Markets 5.9
Software 4.6
Internet & Catalog Retail 3.9
Health Care Providers & Services 3.8
Diversified Financial Services 3.7
Food & Staples Retailing 2.9
Health Care Equipment & Supplies 2.7
Biotechnology 2.5
Multiline Retail 2.5
Road & Rail 2.5
Machinery 2.4
Pharmaceuticals 2.4
Semiconductors & Semiconductor
Equipment 2.4
Aerospace & Defense 2.3
Chemicals 2.1
Specialty Retail 1.9
Energy Equipment & Services 1.6
Metals & Mining 1.0
Trading Companies & Distributors 1.0
Wireless Telecommunication Services 1.0
Air Freight & Logistics 0.9
Hotels, Restaurants & Leisure 0.9
Electrical Equipment 0.8
Construction & Engineering 0.7
Short-Term Investment 3.9
Other Assets, Less Liabilities 0.1
-----
100.0%
=====
</Table>
See Portfolio of Investments beginning on page 12 for specific holdings within
these categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Apple, Inc.
2. Google, Inc. Class A
3. Medco Health Solutions, Inc.
4. Hewlett-Packard Co.
5. Cognizant Technology Solutions Corp.
Class A
6. Visa, Inc. Class A
7. QUALCOMM, Inc.
8. Cisco Systems, Inc.
9. JPMorgan Chase & Co.
10. Southwestern Energy Co.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS CLARK J. WINSLOW, JUSTIN H. KELLY, CFA,
AND R. BART WEAR, CFA, OF WINSLOW CAPITAL MANAGEMENT, LLC, THE FUND'S
SUBADVISOR.
HOW DID MAINSTAY LARGE CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Large Cap Growth Fund returned 17.66% for
Investor Class shares, 18.12% for Class A shares, and 16.85% for Class B and
Class C shares for the 12 months ended October 31, 2009. Over the same period,
the Fund returned 18.37% for Class I shares, 18.28% for Class R1 shares, 18.01%
for Class R2 shares and 17.70% for Class R3 shares. All share classes
outperformed the 14.74% return of the average Lipper(1) large-cap growth fund.
Investor Class, Class A, Class I, Class R1, Class R2 and Class R3 shares
outperformed--and Class B and Class C shares underperformed--the 17.51% return
of the Russell 1000(R) Growth Index for the 12 months ended October 31, 2009.
The Russell 1000(R) Growth Index(2) 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 RELATIVE PERFORMANCE DURING THE
REPORTING PERIOD?
Both stock selection and sector allocation benefited the Fund's performance in
relation to the Russell
1000(R) Growth Index during the reporting period. Stock selection and overweight
positions in infor-
mation technology and financials were especially helpful.
We had believed for some time that the economy would show positive growth during
the second half of 2009. We also knew that stocks historically move before
economic changes are visible. On this basis, we examined what we perceived to be
individual stock opportunities and repositioned the Fund early in the second
half of the reporting period. We moved the Fund's information technology and
energy allo-
cations from underweight to overweight relative to the Russell 1000(R) Growth
Index. We repositioned the Fund's financial holdings in anticipation of improved
capital-market conditions and declining risk. We reduced the Fund's overweight
allocation to health care relative to the Russell 1000(R) Growth Index. The
timing and implementation of this repositioning strategy contributed positively
to the Fund's annual results.
WHICH SECTORS WERE THE FUND'S STRONGEST CONTRIB-UTORS DURING THE REPORTING
PERIOD AND WHICH SECTORS WERE THE WEAKEST?
The sectors that made the strongest contributions to the Fund's performance
relative to the Russell 1000(R) Growth Index were information technology, finan-
cials and consumer discretionary. The weakest-contributing sectors to the Fund's
relative perfor-mance were materials, telecommunication services and energy.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE
FUND'S ABSOLUTE RETURN AND WHICH STOCKS WERE PARTICULARLY WEAK?
The three stocks that made the strongest contribution to the Fund's absolute
performance were all in the information technology sector. They were global
online travel company Priceline.com, computer and digital device manufacturer
Apple and business software and services company Cognizant Technol-ogy
Solutions.
Stocks that detracted the most from the Fund's absolute performance included
agricultural products manufacturer Monsanto, telecommunication services company
NII Holdings and diversified consumer products manufacturer Procter & Gamble.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund established a position in Baidu, the dominant Internet search engine in
China. The position was sold in October 2009. We also purchased shares of Suncor
Energy, one of the few energy companies with secular production growth, to take
advantage of the company's large reserves in the Canadian tar sands.
We sold the Fund's positions in educational pro-gram providers Apollo Group and
ITT Educational Services. Each of these companies beat consensus earnings
estimates but faced heightened concern
- ----------
Investments in common stocks and other equity securities are 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 growth stocks is that investors expect growth companies to
increase their earnings at a rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly even if earnings show an absolute
increase. Growth company stocks also typically lack the dividend yield that can
cushion stock prices in market downturns. Foreign securities may be subject to
greater risks than U.S. investments, including currency fluctuations, less-
liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy.
1. See footnote on page 7 for more information on Lipper Inc.
2. See footnote on page 7 for more information on the Russell 1000(R) Growth
Index.
10 MainStay Large Cap Growth Fund
about the potential for regulatory changes in the for-profit education industry.
With higher-margin branded products losing market share to lower-cost store
brands, we eliminated the Fund's position in multinational manufacturer Procter
& Gamble after the company lowered its earnings outlook for 2010.
WERE THERE ANY CHANGES IN THE FUND'S WEIGHTINGS DURING THE REPORTING PERIOD?
During the reporting period, we shifted the Fund's positions in energy and
information technology from substantially underweight to significantly
overweight relative to the Russell 1000(R) Growth Index. We also shifted the
Fund's allocation to the health care sector from a significantly overweight
position to a materially underweight exposure relative to the Index. We also
substantially reduced the Fund's weighting in consumer staples relative to the
benchmark.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
The Fund's sector weightings are principally driven by our bottom-up stock
selection process. As of October 31, 2009, the Fund held its largest overweight
positions relative to the Russell 1000(R) Growth Index in the information
technology, energy and financials sectors. On the same date, the Fund held its
most significant underweight positions relative to the benchmark in consumer
staples and health care.
- ----------
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any 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, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 96.0%+
- -----------------------------------------------------------------
AEROSPACE & DEFENSE 2.3%
United Technologies Corp. 1,336,100 $ 82,103,345
--------------
AIR FREIGHT & LOGISTICS 0.9%
C.H. Robinson Worldwide,
Inc. 565,300 31,153,683
--------------
BIOTECHNOLOGY 2.5%
Celgene Corp. (a) 668,100 34,106,505
Gilead Sciences, Inc. (a) 1,281,300 54,519,315
--------------
88,625,820
--------------
CAPITAL MARKETS 5.9%
BlackRock, Inc. 295,500 63,972,795
Charles Schwab Corp. (The) 3,314,600 57,475,164
Goldman Sachs Group, Inc.
(The) 436,800 74,330,256
Invesco, Ltd. 848,200 17,939,430
--------------
213,717,645
--------------
CHEMICALS 2.1%
Ecolab, Inc. 770,800 33,884,368
Monsanto Co. 623,100 41,859,858
--------------
75,744,226
--------------
COMMUNICATIONS EQUIPMENT 7.6%
V Cisco Systems, Inc. (a) 4,369,900 99,852,215
Juniper Networks, Inc. (a) 2,163,600 55,193,436
V QUALCOMM, Inc. 2,826,400 117,041,224
--------------
272,086,875
--------------
COMPUTERS & PERIPHERALS 8.4%
V Apple, Inc. (a) 764,400 144,089,400
V Hewlett-Packard Co. 2,595,200 123,168,192
International Business
Machines Corp. 282,600 34,084,386
--------------
301,341,978
--------------
CONSTRUCTION & ENGINEERING 0.7%
Aecom Technology Corp. (a) 1,053,500 26,590,340
--------------
DIVERSIFIED FINANCIAL SERVICES 3.7%
IntercontinentalExchange,
Inc. (a) 334,000 33,463,460
V JPMorgan Chase & Co. 2,363,900 98,740,103
--------------
132,203,563
--------------
ELECTRICAL EQUIPMENT 0.8%
First Solar, Inc. (a) 244,100 29,763,113
--------------
ENERGY EQUIPMENT & SERVICES 1.6%
FMC Technologies, Inc. (a) 603,600 31,749,360
Weatherford International,
Ltd. (a) 1,469,900 25,767,347
--------------
57,516,707
--------------
FOOD & STAPLES RETAILING 2.9%
Costco Wholesale Corp. 513,900 29,215,215
CVS Caremark Corp. 2,132,700 75,284,310
--------------
104,499,525
--------------
HEALTH CARE EQUIPMENT & SUPPLIES 2.7%
Baxter International, Inc. 1,156,300 62,509,578
Mindray Medical
International, Ltd., ADR
(b) 1,156,290 35,532,792
--------------
98,042,370
--------------
HEALTH CARE PROVIDERS & SERVICES 3.8%
V Medco Health Solutions,
Inc. (a) 2,466,700 138,431,204
--------------
HOTELS, RESTAURANTS & LEISURE 0.9%
Carnival Corp. 1,138,282 33,146,772
--------------
INTERNET & CATALOG RETAIL 3.9%
Amazon.com, Inc. (a) 433,800 51,539,778
Priceline.com, Inc. (a) 565,300 89,198,687
--------------
140,738,465
--------------
INTERNET SOFTWARE & SERVICES 6.3%
eBay, Inc. (a) 1,200,600 26,737,362
Equinix, Inc. (a) 654,400 55,833,408
V Google, Inc. Class A (a) 267,270 143,288,792
--------------
225,859,562
--------------
IT SERVICES 10.2%
Accenture PLC Class A 1,156,300 42,875,604
V Cognizant Technology
Solutions Corp. Class A
(a) 3,186,200 123,146,630
Mastercard, Inc. Class A 359,700 78,781,494
V Visa, Inc. Class A 1,593,100 120,693,256
--------------
365,496,984
--------------
MACHINERY 2.4%
Danaher Corp. 1,259,100 85,908,393
--------------
METALS & MINING 1.0%
Freeport-McMoRan Copper
& Gold, Inc. (a) 488,300 35,821,688
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding short-
term investment. May be subject to change daily.
12 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MULTILINE RETAIL 2.5%
Kohl's Corp. (a) 899,300 $ 51,457,946
Target Corp. 770,800 37,329,844
--------------
88,787,790
--------------
OIL, GAS & CONSUMABLE FUELS 7.1%
Peabody Energy Corp. 642,400 25,432,616
PetroHawk Energy Corp. (a) 1,002,100 23,569,392
Petroleo Brasileiro S.A.,
ADR (b) 901,800 41,681,196
V Southwestern Energy Co.
(a) 2,185,900 95,261,522
Suncor Energy, Inc. 2,057,500 67,938,650
--------------
253,883,376
--------------
PHARMACEUTICALS 2.4%
Teva Pharmaceutical
Industries, Ltd.,
Sponsored ADR (b) 1,695,900 85,609,032
--------------
ROAD & RAIL 2.5%
Union Pacific Corp. 1,633,100 90,049,134
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.4%
Lam Research Corp. (a) 734,700 24,774,084
Linear Technology Corp. 1,104,900 28,594,812
Marvell Technology Group,
Ltd. (a) 2,466,700 33,843,124
--------------
87,212,020
--------------
SOFTWARE 4.6%
Adobe Systems, Inc. (a) 1,156,300 38,088,522
Microsoft Corp. 2,209,800 61,277,754
Oracle Corp. 3,109,100 65,602,010
--------------
164,968,286
--------------
SPECIALTY RETAIL 1.9%
Best Buy Co., Inc. 850,000 32,453,000
O'Reilly Automotive, Inc.
(a) 925,000 34,484,000
--------------
66,937,000
--------------
TRADING COMPANIES & DISTRIBUTORS 1.0%
Fastenal Co. 1,002,100 34,572,450
--------------
WIRELESS TELECOMMUNICATION SERVICES 1.0%
American Tower Corp. Class
A (a) 976,400 35,951,048
--------------
Total Common Stocks
(Cost $3,055,148,749) 3,446,762,394
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 3.9%
- -----------------------------------------------------------------
REPURCHASE AGREEMENT 3.9%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$140,501,632
(Collateralized by a
United States Treasury
Bill with a rate of
0.066% and a maturity
date of 12/24/09, with a
Principal Amount of
$143,330,000 and a Market
Value of $143,315,667) $140,501,515 $ 140,501,515
--------------
Total Short-Term Investment
(Cost $140,501,515) 140,501,515
--------------
Total Investments
(Cost $3,195,650,264) (c) 99.9% 3,587,263,909
Other Assets,
Less Liabilities 0.1 3,874,480
===== ------------
Net Assets 100.0% $3,591,138,389
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) At October 31, 2009, cost is
$3,242,138,156 for federal income tax
purposes and net unrealized appreciation
is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 391,130,411
Gross unrealized depreciation (46,004,658)
-------------
Net unrealized appreciation $ 345,125,753
============
</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, 2009 (CONTINUED)
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $3,446,762,394 $ -- $ -- $3,446,762,394
Short-Term Investment
Repurchase Agreement -- 140,501,515 -- 140,501,515
-------------- --------------------------- --------------- --------------
Total Investments in Securities $3,446,762,394 $140,501,515 $-- $3,587,263,909
============== =========================== =============== ==============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with
significant unobservable inputs (Level 3).
14 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $3,195,650,264) $3,587,263,909
Receivables:
Investment securities sold 67,018,764
Fund shares sold 14,753,746
Dividends and interest 1,699,742
Other assets 119,058
--------------
Total assets 3,670,855,219
--------------
LIABILITIES:
Payables:
Investment securities purchased 71,770,546
Fund shares redeemed 4,155,544
Manager (See Note 3) 1,860,724
Transfer agent (See Note 3) 1,069,301
NYLIFE Distributors (See Note 3) 583,436
Professional fees 133,308
Shareholder communication 100,199
Custodian 13,734
Trustees 9,550
Accrued expenses 20,488
--------------
Total liabilities 79,716,830
--------------
Net assets $3,591,138,389
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 6,435,082
Additional paid-in capital 3,569,846,173
--------------
3,576,281,255
Accumulated net realized loss on
investments and foreign currency
transactions (376,756,511)
Net unrealized appreciation on
investments 391,613,645
--------------
Net assets $3,591,138,389
==============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 59,498,618
==============
Shares of beneficial interest
outstanding 10,767,802
==============
Net asset value per share
outstanding $ 5.53
Maximum sales charge (5.50% of
offering price) 0.32
--------------
Maximum offering price per share
outstanding $ 5.85
==============
CLASS A
Net assets applicable to
outstanding shares $1,662,622,496
==============
Shares of beneficial interest
outstanding 299,969,214
==============
Net asset value per share
outstanding $ 5.54
Maximum sales charge (5.50% of
offering price) 0.32
--------------
Maximum offering price per share
outstanding $ 5.86
==============
CLASS B
Net assets applicable to
outstanding shares $ 63,327,301
==============
Shares of beneficial interest
outstanding 11,863,067
==============
Net asset value and offering price
per share outstanding $ 5.34
==============
CLASS C
Net assets applicable to
outstanding shares $ 174,954,585
==============
Shares of beneficial interest
outstanding 32,797,195
==============
Net asset value and offering price
per share outstanding $ 5.33
==============
CLASS I
Net assets applicable to
outstanding shares $1,341,714,873
==============
Shares of beneficial interest
outstanding 236,499,157
==============
Net asset value and offering price
per share outstanding $ 5.67
==============
CLASS R1
Net assets applicable to
outstanding shares $ 161,642,368
==============
Shares of beneficial interest
outstanding 28,712,090
==============
Net asset value and offering price
per share outstanding $ 5.63
==============
CLASS R2
Net assets applicable to
outstanding shares $ 113,942,489
==============
Shares of beneficial interest
outstanding 20,465,043
==============
Net asset value and offering price
per share outstanding $ 5.57
==============
CLASS R3
Net assets applicable to
outstanding shares $ 13,435,659
==============
Shares of beneficial interest
outstanding 2,434,586
==============
Net asset value and offering price
per share outstanding $ 5.52
==============
</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
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 18,574,623
Interest 19,365
-------------
Total income 18,593,988
-------------
EXPENSES:
Manager (See Note 3) 16,658,076
Transfer agent--Investor Class
(See Note 3) 210,921
Transfer agent--Class A (See Note
3) 1,919,855
Transfer agent--Classes B and C
(See Note 3) 736,739
Transfer agent--Classes I, R1, R2
and R3
(See Note 3) 2,281,521
Distribution/Service--Investor
Class
(See Note 3) 127,086
Distribution/Service--Class A
(See Note 3) 2,366,921
Service--Class B (See Note 3) 148,025
Service--Class C (See Note 3) 299,097
Distribution/Service--Class R2
(See Note 3) 137,770
Distribution/Service--Class R3
(See Note 3) 19,089
Distribution--Class B (See Note
3) 444,075
Distribution--Class C (See Note
3) 897,290
Distribution--Class R3 (See Note
3) 19,089
Shareholder communication 625,907
Professional fees 450,042
Registration 251,415
Shareholder service--Class R1
(See Note 3) 102,062
Shareholder service--Class R2
(See Note 3) 55,108
Shareholder service--Class R3
(See Note 3) 7,635
Trustees 110,379
Custodian 48,456
Miscellaneous 116,769
-------------
Total expenses before waiver 28,033,327
Expense waiver from Manager (See
Note 3) (2,109,637)
-------------
Net expenses 25,923,690
-------------
Net investment loss (7,329,702)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized loss on:
Security transactions $(221,407,318)
Foreign currency transactions (11,675)
-------------
Net realized loss on investments
and foreign currency transactions (221,418,993)
-------------
Net change in unrealized
depreciation on investments 719,911,021
-------------
Net realized and unrealized gain on
investments and foreign currency
transactions 498,492,028
-------------
Net increase in net assets
resulting from operations $ 491,162,326
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$196,205.
16 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (7,329,702) $ (6,030,201)
Net realized loss on
investments and foreign
currency transactions (221,418,993) (146,550,866)
Net change in unrealized
appreciation
(depreciation) on
investments 719,911,021 (579,518,985)
-------------------------------
Net increase (decrease)
in net assets resulting
from operations 491,162,326 (732,100,052)
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares 2,328,749,338 1,621,723,549
Cost of shares redeemed (793,865,436) (476,246,239)
-------------------------------
Increase in net assets
derived from capital
share transactions 1,534,883,902 1,145,477,310
-------------------------------
Net increase in net
assets 2,026,046,228 413,377,258
NET ASSETS:
Beginning of year 1,565,092,161 1,151,714,903
-------------------------------
End of year $3,591,138,389 $1,565,092,161
===============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
-----------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
-----------------------------
2009 2008
Net asset value at
beginning of period $ 4.70 $ 6.63
------- -------
Net investment loss (a) (0.03) (0.03)
Net realized and
unrealized gain (loss)
on investments 0.86 (1.90)
------- -------
Total from investment
operations 0.83 (1.93)
------- -------
Less distributions:
From net realized gain
on investments -- --
------- -------
Net asset value at end of
period $ 5.53 $ 4.70
======= =======
Total investment return
(b) 17.66% (29.11%)(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.62%) (0.73%)++
Net expenses 1.45% 1.38% ++
Expenses (before
waiver/reimbursement) 1.45% 1.39% ++
Portfolio turnover rate 62% 115%
Net assets at end of
period (in 000's) $59,499 $46,762
</Table>
<Table>
<Caption>
CLASS B
---------------------------------------------------------------------
JULY 1, APRIL 1,
2005*** 2005**
THROUGH THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, JUNE 30,
---------------------------------------------------------------------
2009 2008 2007 2006 2005 2005
Net asset value at
beginning of period $ 4.57 $ 7.24 $ 5.77 $ 5.29 $ 5.06 $ 4.83
------- ------- -------- -------- -------- --------
Net investment loss (a) (0.06) (0.09) (0.08) (0.07) (0.03) (0.00)++
Net realized and
unrealized gain (loss)
on investments 0.83 (2.58) 1.55 0.55 0.26 0.23
------- ------- -------- -------- -------- --------
Total from investment
operations 0.77 (2.67) 1.47 0.48 0.23 0.23
------- ------- -------- -------- -------- --------
Less distributions:
From net realized gain
on investments -- -- -- (0.00)++ -- --
------- ------- -------- -------- -------- --------
Net asset value at end of
period $ 5.34 $ 4.57 $ 7.24 $ 5.77 $ 5.29 $ 5.06
======= ======= ======== ======== ======== ========
Total investment return
(b) 16.85% (36.88%) 25.48% 9.13% 4.55% (c) 4.76% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.35%) (1.34%) (1.34%) (1.29%) (1.52%)++ (1.41%)++
Net expenses 2.20% 2.10% 2.11% 2.15% 2.15% ++ 2.15% ++
Expenses (before
waiver/reimbursement) 2.21% 2.12% 2.18% 2.38% 2.52% ++ 4.24% ++
Portfolio turnover rate 62% 115% 74% 92% 29% 27%
Net assets at end of
period (in 000's) $63,327 $65,996 $132,402 $133,330 $169,703 $168,063
</Table>
<Table>
** Commencement of operations.
*** The Fund changed its fiscal year end from June 30 to October 31.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment 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) The investment returns may reflect adjustments to conform to generally
accepted accounting principals.
</Table>
18 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
- ---------------------------------------------------------------------------------
JULY 1,
2005***
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, JUNE 30,
- ---------------------------------------------------------------------------------
2009 2008 2007 2006 2005 2005
$ 4.70 $ 7.37 $ 5.84 $ 5.31 $ 5.06 $ 4.69
---------- -------- -------- -------- ------- -------
(0.02) (0.03) (0.04) (0.03) (0.01) (0.03)
0.86 (2.64) 1.57 0.56 0.26 0.40
---------- -------- -------- -------- ------- -------
0.84 (d) (2.67) 1.53 0.53 0.25 0.37
---------- -------- -------- -------- ------- -------
-- -- -- -- (0.00)++ --
---------- -------- -------- -------- ------- -------
$ 5.54 $ 4.70 $ 7.37 $ 5.84 $ 5.31 $ 5.06
========== ======== ======== ======== ======= =======
17.87% (d) (36.36%) 26.20% 10.04% 4.94% (c) 7.89%
(0.43%) (0.52%) (0.61%) (0.53%) (0.77%)++ (0.29%)
1.21% 1.23% 1.36% 1.40% 1.40% ++ 1.35%
1.24% 1.26% 1.43% 1.63% 1.77% ++ 3.01%
62% 115% 74% 92% 29% 27%
$1,662,622 $495,184 $374,978 $200,500 $71,859 $67,000
</Table>
<Table>
<Caption>
CLASS C
- --------------------------------------------------------------------------
JULY 1, APRIL 1,
2005*** 2005**
THROUGH THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, JUNE 30,
- --------------------------------------------------------------------------
2009 2008 2007 2006 2005 2005
$ 4.57 $ 7.23 $ 5.77 $ 5.29 $ 5.05 $ 4.83
-------- ------- ------- ------- ------ ------
(0.07) (0.09) (0.09) (0.07) (0.03) (0.01)
0.83 (2.57) 1.55 0.55 0.27 0.23
-------- ------- ------- ------- ------ ------
0.76 (2.66) 1.46 0.48 0.24 0.22
-------- ------- ------- ------- ------ ------
-- -- -- (0.00)++ -- --
-------- ------- ------- ------- ------ ------
$ 5.33 $ 4.57 $ 7.23 $ 5.77 $ 5.29 $ 5.05
======== ======= ======= ======= ====== ======
16.63% (d)(36.79%) 25.30% 9.13% 4.75% (c) 4.55% (c)
(1.38%) (1.41%) (1.37%) (1.29%) (1.52%)++ (1.41%)++
2.19% 2.11% 2.11% 2.15% 2.15% ++ 2.15% ++
2.20% 2.12% 2.18% 2.38% 2.52% ++ 4.24% ++
62% 115% 74% 92% 29% 27%
$174,955 $93,249 $58,119 $18,171 $8,024 $7,190
</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>
Class I
-------------------------------------------------------------------------
July 1, April 1,
2005** 2005**
through through
Year ended October 31, October 31, June 30,
-------------------------------------------------------------------------
2009 2008 2007 2006 2005 2005
Net asset value at
beginning of period $ 4.79 $ 7.49 $ 5.89 $ 5.33 $ 5.07 $ 4.83
---------- -------- -------- -------- ------- -------
Net investment income
(loss) (a) 0.00++ (0.01) (0.00)++ 0.01 0.00++ (0.01)
Net realized and unrealized
gain (loss) on
investments 0.88 (2.69) 1.60 0.55 0.26 0.25
---------- -------- -------- -------- ------- -------
Total from investment
operations 0.88 (2.70) 1.60 0.56 0.26 0.24
---------- -------- -------- -------- ------- -------
Less distributions:
From net realized gain on
investments -- -- -- (0.00)++ -- --
---------- -------- -------- -------- ------- -------
Net asset value at end of
period $ 5.67 $ 4.79 $ 7.49 $ 5.89 $ 5.33 $ 5.07
========== ======== ======== ======== ======= =======
Total investment return (b) 18.37% (36.05%) 27.16% 10.56% 5.13%(c) 4.97% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.00%(e) (0.08%) (0.01%) 0.11% 0.06%++ (0.28%)++
Net expenses 0.82% 0.79% 0.76% 0.75% 0.60%++ 1.02% ++
Expenses (before
waiver/reimbursement) 0.99% 0.94% 0.91% 0.98% 0.97%++ 3.11% ++
Portfolio turnover rate 62% 115% 74% 92% 29% 27%
Net assets at end of period
(in 000's) $1,341,715 $761,458 $524,485 $259,588 $93,694 $14,349
</Table>
<Table>
<Caption>
Class R2
------------------------------------------------------------------
July 1, April 1,
2005*** 2005**
through through
Year ended October 31, October 31, June 30,
------------------------------------------------------------------
2009 2008 2007 2006 2005 2005
Net asset value at
beginning of period $ 4.72 $ 7.40 $ 5.84 $ 5.30 $ 5.05 $ 4.83
-------- ------- ------ ------ ------ ------
Net investment loss (a) (0.02) (0.03) (0.02) (0.01) (0.01) (0.03)
Net realized and unrealized
gain (loss) on
investments 0.87 (2.65) 1.58 0.55 0.26 0.25
-------- ------- ------ ------ ------ ------
Total from investment
operations 0.85 (2.68) 1.56 0.54 0.25 0.22
-------- ------- ------ ------ ------ ------
Less distributions:
From net realized gain on
investments -- -- -- (0.00)++ -- --
-------- ------- ------ ------ ------ ------
Net asset value at end of
period $ 5.57 $ 4.72 $ 7.40 $ 5.84 $ 5.30 $ 5.05
======== ======= ====== ====== ====== ======
Total investment return (b) 18.01% (36.22%) 26.71% 10.25% 4.95% (c) 4.55% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.45%) (0.46%) (0.37%) (0.24%) (0.51%)++ (0.63%)++
Net expenses 1.24% 1.14% 1.11% 1.10% 0.95% ++ 1.37% ++
Expenses (before
waiver/reimbursement) 1.35% 1.29% 1.27% 1.33% 1.32% ++ 3.46% ++
Portfolio turnover rate 62% 115% 74% 92% 29% 27%
Net assets at end of period
(in 000's) $113,942 $35,410 $4,154 $ 9 $ 2 $ 2
</Table>
<Table>
* Commencement of operations.
*** The Fund changed its fiscal year end from June 30 to October 31.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment 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.
(e) Less than one-hundredth of a percent.
</Table>
20 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
------------------------------------------------------------------------------------------
JULY 1, APRIL 1,
2005*** 2005**
THROUGH THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, JUNE 30,
------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005 2005
$ 4.76 $ 7.45 $ 5.87 $ 5.31 $5.06 $ 4.83
-------- ------- ------- ------ ----- ------
(0.01) (0.01) (0.01) 0.00 ++ 0.00 ++ (0.03)
0.88 (2.68) 1.59 0.56 0.25 0.26
-------- ------- ------- ------ ----- ------
0.87 (2.69) 1.58 0.56 0.25 0.23
-------- ------- ------- ------ ----- ------
-- -- -- (0.00)++ -- --
-------- ------- ------- ------ ----- ------
$ 5.63 $ 4.76 $ 7.45 $ 5.87 $5.31 $ 5.06
======== ======= ======= ====== ===== ======
18.28% (36.11%) 26.92% 10.60% 4.94%(c) 4.76% (c)
(0.19%) (0.16%) (0.19%) 0.03% 0.10%++ (0.38%)++
0.98% 0.88% 0.85% 0.85% 0.70%++ 1.12% ++
1.09% 1.03% 1.01% 1.08% 1.07%++ 3.21% ++
62% 115% 74% 92% 29% 27%
$161,642 $62,344 $57,460 $3,163 $ 2 $ 2
</Table>
<Table>
<Caption>
Class R3
-----------------------------------------------------------
April 28,
2006**
through
Year ended October 31, October 31,
-----------------------------------------------------------
2009 2008 2007 2006
$ 4.69 $ 7.37 $ 5.83 $ 5.74
------- ------- ------ ------
(0.03) (0.05) (0.04) (0.01)
0.86 (2.63) 1.58 0.10
------- ------- ------ ------
0.83 (2.68) 1.54 0.09
------- ------- ------ ------
-- -- -- --
------- ------- ------ ------
$ 5.52 $ 4.69 $ 7.37 $ 5.83
======= ======= ====== ======
17.70% (36.36%) 26.42% 1.57% (c)
(0.70%) (0.77%) (0.66%) (0.47%)++
1.49% 1.40% 1.35% 1.37% ++
1.59% 1.56% 1.51% 1.63% ++
62% 115% 74% 92%
$13,436 $ 4,689 $ 117 $ 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
21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Large Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class A shares, Class B
shares, Class C shares, Class I shares, Class R1 shares and Class R2 shares
commenced operations on March 31, 2005. Class R3 shares commenced operations on
April 28, 2006. Investor Class shares commenced operations on February 28, 2008.
Investor Class and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00%
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 offered at NAV and 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 a shareholder service fee 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 R1, Class R2 or Class R3 shares.
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. Investments
in other mutual funds are valued at their NAVs as of the close of the New York
Stock Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the
22 MainStay Large Cap Growth Fund
risk inherent in a particular valuation technique used to measure fair value
using a pricing model and/or the risk inherent in the inputs for the valuation
technique. Inputs may be observable or unobservable. Observable inputs are
inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of the reporting entity. Unobservable inputs are inputs that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the information
available in the circumstances. The inputs or methodology used for valuing
securities may not be an indication of the risks associated with investing in
those securities. The three-tier hierarchy of inputs is summarized in the three
broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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
investments 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 NAV
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
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate. The Fund had no portfolio
securities on loan as of October 31, 2000.
(I) 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 AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. Winslow Capital Management, Inc. (the "Subadvisor"), a registered
investment adviser, is responsible for the day-to-day portfolio management of
the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between New York Life Investments and the Subadvisor,
New York Life Investments pays for the services of the Subadvisor. Effective on
or about December 26, 2008, Nuveen Investments, Inc. acquired the Subadvisor.
This resulted in a change of control of the Subadvisor and an automatic
termination of the previous subadvisory agreement with Winslow under the
Investment Company Act of 1940, as amended. At a meeting held on December 11-12,
2008, the Fund's Board of Trustees approved the continued retention of the
Subadvisor as the Fund's subadvisor and approved a new subadvisory agreement.
The Fund has obtained an exemptive order from the Securities and Exchange
Commission allowing New York Life Investments to retain unaffiliated
subadvisors, such as the Subadvisor, for the Fund without shareholder approval.
24 MainStay Large Cap Growth Fund
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:
0.80% on assets up to $250 million, 0.75% on assets from $250 million up to $500
million, 0.725% on assets from $500 million up to $750 million, 0.70% on assets
from $750 million up to $2 billion, 0.65% on assets from $2 billion up to $3
billion and 0.60% on assets in excess of $3 billion, plus a fee for fund
accounting services previously provided by New York Life Investments under a
separate fund accounting agreement.
Effective August 1, 2008, the Manager has also contractually agreed to waive a
portion of its management fee so that the management fee does not exceed 0.75%
to $500 million, 0.725% on assets from $500 million up to $750 million, 0.70% on
assets from $750 million up to $2 billion, 0.65% on assets from $2 billion up to
$3 billion and 0.60% on assets in excess of $3 billion.
Effective November 13, 2009, New York Life Investments agreed to voluntarily
waive or reimburse the expenses of the appropriate class of the MainStay Large
Cap Growth 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) does not exceed the following percentages of average net
assets: Investor Class, 1.47%; Class A, 1.24%; Class B, 2.22%; Class C 2.22%;
Class R1, 1.09%; Class R2, 1.34%; Class R3, 1.59%. This voluntary waiver or
reimbursement will be in effect until November 12, 2010 unless extended by New
York Life Investments and approved by the Fund's Board of Directors.
Effective August 1, 2009, New York Life Investments agreed to voluntarily waive
or reimburse the expenses of the Class I shares of the Fund so that the total
ordinary operating expenses of Class I shares (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) does not
exceed 0.85%. This voluntary waiver or reimbursement may be discontinued at any
time without notice.
Prior to August 1, 2009, New York Life Investments had a written expense
limitation agreement under which it 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 did not exceed the
following percentages of average daily net assets: Investor Class, 1.50%; Class
A, 1.18%; Class B, 2.25%; Class C, 2.25%; Class I, 0.80%; Class R1, 0.90%; Class
R2, 1.15% and Class R3, 1.40%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $16,658,076 and waived its fees in the amount of
$2,109,637.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares, at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV of the Class B and Class C shares of the Fund. Pursuant
to the Class R3 Plan, the Distributor receives a monthly distribution and
shareholder service fee from the Class R3 shares at an annual rate of 0.50% of
the average daily net assets of the Class R3 shares, which is an expense of the
Class R3 shares 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
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
$22,178 and $108,111, respectively, for the year ended October 31, 2009. 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
$39, $654, $95,206 and $60,945, respectively, for the year ended October 31,
2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $5,149,036.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 211 0.0%++
- ------------------------------------------------
Class B 2,212 0.0 ++
- ------------------------------------------------
Class C 2,323 0.0 ++
- ------------------------------------------------
Class I 2,349 0.0 ++
- ------------------------------------------------
Class R1 2,332 0.0 ++
- ------------------------------------------------
Class R2 2,308 0.0 ++
- ------------------------------------------------
Class R3 9,617 0.1
- ------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $107,153.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(330,268,619) $-- $345,125,753 $14,857,134
- ------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment loss, accumulated net realized loss on
investments and additional paid-in capital arising from permanent differences;
net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$7,329,702 $125,404,133 $(132,733,835)
- --------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gains
and losses, capital loss carryforwards expiring and prior year adjustments.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $330,268,619 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2010 $ 5,418
2013 1,157
2016 126,102
2017 197,592
- ------------------------------------
Total $330,269
- ------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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.
26 MainStay Large Cap Growth Fund
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $2,829,190 and $1,399,246, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 1,185,220 $ 5,644,897
Shares redeemed (1,705,493) (7,937,171)
----------------------------
Net decrease in shares
outstanding before
conversion (520,273) (2,292,274)
Shares converted into
Investor Class (See Note
1) 1,857,003 8,371,723
Shares converted from
Investor Class (See Note
1) (527,203) (2,871,796)
----------------------------
Net increase 809,527 $ 3,207,653
============================
Period ended October 31,
2008 (a):
Shares sold 3,002,468 $ 20,261,840
Shares redeemed (1,348,994) (8,401,600)
----------------------------
Net increase in shares
outstanding before
conversion 1,653,474 11,860,240
Shares converted into
Investor Class (See Note
1) 8,967,275 57,338,024
Shares converted from
Investor Class (See Note
1) (662,474) (4,077,142)
----------------------------
Net increase 9,958,275 $ 65,121,122
============================
(a) Investor Class shares were first offered on February
28, 2008.
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 275,635,598 $1,335,246,033
Shares redeemed (81,829,122) (394,226,769)
----------------------------
Net increase in shares
outstanding before
conversion 193,806,476 941,019,264
Shares converted into
Class A (See Note 1) 1,232,481 6,168,378
Shares converted from
Class A (See Note 1) (511,877) (2,276,447)
----------------------------
Net increase 194,527,080 $ 944,911,195
============================
Year ended October 31,
2008:
Shares sold 85,405,037 $ 531,611,091
Shares redeemed (25,924,299) (155,561,459)
----------------------------
Net increase in shares
outstanding before
conversion 59,480,738 376,049,632
Shares converted into
Class A (See Note 1) 2,654,030 17,614,744
Shares converted from
Class A (See Note 1) (7,543,627) (47,971,883)
----------------------------
Net increase 54,591,141 $ 345,692,493
============================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 2,203,717 $ 10,281,855
Shares redeemed (2,666,211) (11,904,756)
----------------------------
Net decrease in shares
outstanding before
conversion (462,494) (1,622,901)
Shares converted from
Class B (See Note 1) (2,114,416) (9,391,858)
----------------------------
Net decrease (2,576,910) $ (11,014,759)
============================
Year ended October 31,
2008:
Shares sold 3,326,519 $ 21,444,506
Shares redeemed (3,683,623) (22,965,912)
----------------------------
Net decrease in shares
outstanding before
conversion (357,104) (1,521,406)
Shares converted from
Class B (See Note 1) (3,492,442) (22,903,743)
----------------------------
Net decrease (3,849,546) $ (24,425,149)
============================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 18,526,032 $ 87,677,031
Shares redeemed (6,146,430) (27,887,032)
----------------------------
Net increase 12,379,602 $ 59,789,999
============================
Year ended October 31,
2008:
Shares sold 14,881,921 $ 94,422,906
Shares redeemed (2,498,353) (14,634,277)
----------------------------
Net increase 12,383,568 $ 79,788,629
============================
</Table>
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 139,522,030 $ 689,831,159
Shares redeemed (62,000,780) (302,994,049)
----------------------------
Net increase 77,521,250 $ 386,837,110
============================
Year ended October 31,
2008:
Shares sold 126,761,613 $ 835,684,808
Shares redeemed (37,786,596) (246,885,115)
----------------------------
Net increase 88,975,017 $ 588,799,693
============================
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 20,960,751 $ 102,212,398
Shares redeemed (5,343,626) (25,555,494)
----------------------------
Net increase 15,617,125 $ 76,656,904
============================
Year ended October 31,
2008:
Shares sold 8,358,789 $ 56,203,766
Shares redeemed (2,977,005) (19,379,358)
----------------------------
Net increase 5,381,784 $ 36,824,408
============================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 16,720,843 $ 86,609,987
Shares redeemed (3,758,852) (19,248,645)
----------------------------
Net increase 12,961,991 $ 67,361,342
============================
Year ended October 31,
2008:
Shares sold 8,173,216 $ 55,268,071
Shares redeemed (1,231,106) (7,803,703)
----------------------------
Net increase 6,942,110 $ 47,464,368
============================
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 2,248,906 $ 11,245,978
Shares redeemed (814,674) (4,111,520)
----------------------------
Net increase 1,434,232 $ 7,134,458
============================
Year ended October 31,
2008:
Shares sold 1,082,715 $ 6,826,561
Shares redeemed (98,234) (614,815)
----------------------------
Net increase 984,481 $ 6,211,746
============================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009 through December 23, 2009, the
date the financial statements were issued, have been evaluated by the Fund's
management for possible adjustment and/or disclosure. No subsequent events
requiring financial statement adjustment or disclosure have been identified,
except for the following:
FUND ACQUISITION:
At a meeting held on June 23, 2009, the Board of Trustees approved a plan of
reorganization where the Fund would acquire the assets, including the
investments, and assume the identified liabilities of MainStay Mid Cap Growth
Fund, a series of The MainStay Funds. Shareholders of the MainStay Mid Cap
Growth Fund approved this reorganization on November 5, 2009, which was then
completed on November 12, 2009. The aggregate net assets of the Fund immediately
before the acquisition were $3,824,302,830 and the combined net assets after the
acquisition were $3,984,094,585.
28 MainStay Large Cap Growth Fund
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
MainStay Mid Cap Growth Fund
- -------------------------------------------------------
Investor Class 2,057,499 $19,791,497
- -------------------------------------------------------
Class A 4,876,777 47,121,371
- -------------------------------------------------------
Class B 2,883,066 25,819,585
- -------------------------------------------------------
Class C 2,037,533 18,242,438
- -------------------------------------------------------
Class I 4,841,458 47,583,301
- -------------------------------------------------------
Class R2 9,945 95,806
- -------------------------------------------------------
Class R3 118,906 1,137,757
- -------------------------------------------------------
</Table>
In exchange for the MainStay Mid Cap Growth Fund shares and net assets, the Fund
issued 3,386,751 Investor Class Shares; 8,038,446 Class A shares; 4,574,534
Class B shares; 3,234,360 Class C shares; 7,929,625 Class I shares; 16,271 Class
R2 shares and 194,952 Class R3 shares.
MainStay Mid Cap Growth Fund's net assets at the acquisition date were as
follows, which include the following amounts of capital stock, unrealized
appreciation, and accumulated net realized loss and undistributed net investment
loss:
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED
TOTAL NET CAPITAL UNREALIZED NET REALIZED NET INVESTMENT
ASSETS STOCK APPRECIATION LOSS LOSS
MainStay
Mid Cap
Growth Fund $159,791,755 $184,410,583 $5,535,410 $(30,146,396) $(7,842)
- ---------------------------------------------------------------------------------------
</Table>
In December 2007, the Financial Accounting Standards Board issued Accounting
Standards Codification (ASC) 805 (formerly FAS 141R Business Combinations),
which requires the following disclosures by the acquirer, among other things,
when a transaction or other event meets the definition of a business
combination:
- - The identification of the acquiree
- - Recognizing and measuring identifiable assets acquired and liabilities
assumed, at the acquisition date, generally at their fair values
- - Disclosure, by the acquirer, of information that enables users of its
financial statements to evaluate the nature and financial effect of a business
combination that occurs during the current reporting period
ASC 805 requires prospective application to business combinations for which the
acquisition date occurs in an annual reporting period beginning on or after
December 15, 2008.
In accordance with ASC 805, for financial reporting purposes, assets received
and shares issued by the Fund were recorded at fair value; however, the cost
basis of the investments received from MainStay Mid Cap Growth Fund was carried
forward to align ongoing reporting of the Fund's realized and unrealized gains
and losses with amounts distributable to shareholders for tax purposes.
ASC 805 will require disclosure in the semi-annual report as of April 30, 2010,
and in the annual report as of October 31, 2010, of the Fund's pro-forma results
of operations, including net investment income, net gain (loss) on investments
and net increase (decrease) in net assets resulting from operations, assuming
the acquisition had been completed on November 1, 2009, the beginning of the
annual reporting period of the Fund, through the end of the applicable reporting
period.
ASC 805 also requires the Fund to report, if practicable, the amounts of revenue
and earnings of the acquiree since the acquisition date included in the combined
entity's income statement for the reporting period. Because the combined
investment portfolios have been managed as a single integrated portfolio since
the acquisition was completed, it is not practicable to separate the amounts of
revenue and earnings of the MainStay Mid Cap Growth Fund that will be included
in the Fund's Statement of Operations since November 12, 2009.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Large Cap Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2009, 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 or periods
presented. 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, 2009, by correspondence with the custodian
and brokers. As to securities purchased or sold but not yet received or
delivered, we performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Large Cap Growth Fund of The MainStay Funds as of October 31, 2009, and
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 or periods presented, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2009
30 MainStay Large Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Large Cap Growth Fund ("Fund") and
New York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and Winslow Capital
Management Inc. ("Winslow") on behalf of the Fund.
In addition, on June 23, 2009, the Board approved New York Life Investments'
proposal to reorganize the MainStay Mid Cap Growth Fund with and into the Fund.
In determining to approve this reorganization, the Board took several factors
into account, including the fact that the reorganization would be part of a
larger initiative of New York Life Investments designed to reposition,
rationalize and streamline the MainStay Group of Funds to reduce duplication
among funds, strengthen the fund lineup overall, and offer funds with asset
levels to potentially benefit shareholders with economies of scale.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates and Winslow as subadviser to the Fund, and responses to several
comprehensive lists of questions encompassing a variety of topics prepared on
behalf of the Board by independent legal counsel to the Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales and
marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and Winslow;
(ii) the investment performance of the Fund, New York Life Investments and
Winslow; (iii) the costs of the services to be provided, and profits to be
realized, by New York Life Investments and its affiliates and by Winslow as
subadviser to the Fund, from their 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 and subadvisory fee levels and overall total ordinary
operating expenses, particularly as compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND WINSLOW
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York
mainstayinvestments.com 31
Life Investments' reputation and financial condition. The Board considered New
York Life Investments' performance in fulfilling its responsibilities for
overseeing the Fund's legal and compliance environment, for overseeing Winslow's
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
Winslow proposed to provide to the Fund. The Board evaluated Winslow's
experience in serving as subadviser to the Fund and managing other portfolios.
It examined Winslow's track record and experience in providing investment
advisory services, the experience of investment advisory, senior management and
administrative personnel at Winslow, and Winslow's overall legal and compliance
environment. The Board also reviewed Winslow's willingness to invest in
personnel designed to benefit the Fund. In this regard, the Board considered the
experience of the Fund's portfolio managers, the number of accounts managed by
the portfolio managers and the method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and Winslow'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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND WINSLOW
The Board considered the costs of the services provided by New York Life
Investments and Winslow under the Agreements, and the profits expected to be
realized by New York Life Investments, its affiliates and Winslow due to their
relationships with the Fund.
In evaluating the costs and profits of New York Life Investments and its
affiliates and Winslow due to their relationships with the Fund, the Board
considered, among other things, each party's investments in personnel, systems,
equipment and other resources necessary to manage the Fund, and the fact that
New York Life Investments is responsible for paying the subadvisory fees for the
Fund. The Board acknowledged that New York Life Investments and Winslow must be
in a position to pay and retain
32 MainStay Large Cap Growth Fund
experienced professional personnel to provide services to the Fund, and that New
York Life Investments' ability to maintain a strong financial position is
important in order for New York Life Investments to continue to provide high-
quality ongoing services to the Fund. The Board noted, for example, increased
costs borne by New York Life Investments and its affiliates due to new and
ongoing regulatory and compliance requirements. The Board also noted that the
Fund benefits from the allocation of certain fixed costs across the MainStay
Group of Funds.
The Board also reviewed information from New York Life Investments, its
affiliates and Winslow regarding their estimated profitability due to their
overall relationships with the Fund. For New York Life Investments, the Board
considered information illustrating the revenues and expenses allocated to the
Fund. With respect to Winslow, the Board considered representations from Winslow
and New York Life Investments that the subadvisory fee paid by New York Life
Investments to Winslow was the result of arm's-length negotiations. Because
Winslow is not affiliated with New York Life Investments, and Winslow's fees are
paid directly by New York Life Investments, the Board focused primarily on the
profitability of the relationship among New York Life Investments, its
affiliates and the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to Winslow from legally permitted
"soft-dollar" arrangements by which brokers provide research and other services
to Winslow in exchange for commissions paid by the Fund with respect to trades
on the Fund's portfolio securities. With respect to Winslow, the Board requested
and received information from Winslow and New York Life Investments concerning
other business relationships between Winslow and its affiliates, on the one
hand, and New York Life Investments and its affiliates, on the other. The Board
requested and received assurances that these other business relationships did
not impact New York Life Investments' recommendation for Winslow to serve as
subadviser.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates and
Winslow due to their relationships with the Fund are fair and reasonable. With
respect to Winslow, the Board concluded that any profits realized by Winslow due
to its relationship with the Fund are the result of arm's-length negotiations
between New York Life Investments and Winslow, and are based on subadvisory fees
paid to Winslow by New York Life Investments, not the Fund.
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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and Winslow may realize a larger profit margin as the Fund's assets
grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
mainstayinvestments.com 33
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses of the
Fund. The Board primarily considered the reasonableness of the overall
management fees paid by the Fund to New York Life Investments, since the fees to
be paid to Winslow are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and Winslow on fees charged 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 explanations from New York Life Investments and Winslow about
the different scope of services provided to retail mutual funds as compared with
other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to
eliminate the expense limitation arrangements on the Fund's share classes. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
eliminate the expense limitations on the Fund's share
34 MainStay Large Cap Growth Fund
classes. The Board acknowledged that New York Life Investments may determine
voluntarily to waive expenses of Fund share classes without the right to recoup
such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
mainstayinvestments.com 35
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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).
36 MainStay Large Cap Growth Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Chief Executive Officer,
Director since 2008 (20 NYLIFE Distributors LLC and
portfolios). Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Large Cap Growth Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
40 MainStay Large Cap Growth Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 41
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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017115 (RECYCLE LOGO) MS283-09 MSLG11-12/09
31
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MAP FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MAP FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 13
- ---------------------------------------------
FINANCIAL STATEMENTS 19
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 26
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 36
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 37
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 41
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 41
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 41
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 42
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 7.57% 1.00% 4.68%
Excluding sales charges 13.83 2.15 5.28
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000(R) S&P 500(R)
FUND INDEX INDEX
------------ --------------- ----------
10/31/99 9450 10000 10000
11267 10963 10609
11009 8204 7967
9582 7026 6764
12421 8691 8170
14210 9517 8940
16130 10526 9720
18840 12249 11308
21969 14030 12954
13884 8894 8278
10/31/09 15803 9858 9090
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 7.84% 1.05% 4.71%
Excluding sales charges 14.12 2.20 5.30
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000(R) S&P 500(R)
FUND INDEX INDEX
------------ --------------- ----------
10/31/99 23625 25000 25000
28167 27408 26523
27523 20510 19918
23956 17566 16909
31052 21727 20426
35526 23793 22350
40325 26316 24299
47100 30623 28270
54922 35074 32386
34709 22235 20696
10/31/09 39609 24645 22725
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 7.97% 1.07% 4.48%
Excluding sales charges 12.97 1.36 4.48
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000(R) S&P 500(R)
FUND INDEX INDEX
------------ --------------- ----------
10/31/99 10000 10000 10000
11841 10963 10609
11477 8204 7967
9911 7026 6764
12758 8691 8170
14490 9517 8940
16322 10526 9720
18924 12249 11308
21900 14030 12954
13725 8894 8278
10/31/09 15506 9858 9090
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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
sub-ject 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 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
THE FOOTNOTES ON THE FOLLOWING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
1mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 11.96% 1.37% 4.49%
Excluding sales charges 12.96 1.37 4.49
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000(R) S&P 500
FUND INDEX INDEX
------------ --------------- -------
10/31/99 10000 10000 10000
11841 10963 10609
11477 8204 7967
9911 7026 6764
12758 8691 8170
14490 9517 8940
16322 10526 9720
18924 12249 11308
21900 14030 12954
13732 8894 8278
10/31/09 15512 9858 9090
</Table>
CLASS I SHARES--MAXIMUM 4.75% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------
14.38% 2.53% 5.62%
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000(R) S&P 500
FUND INDEX INDEX
------------ --------------- -------
10/31/99 9525 10000 10000
11955 10963 10609
11710 8204 7967
10216 7026 6764
13276 8691 8170
15245 9517 8940
17373 10526 9720
20362 12249 11308
23823 14030 12954
15105 8894 8278
10/31/09 17277 9858 9090
</Table>
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------
14.20% 2.42% 5.50%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MainStay Map Russell 3000(R) S&P 500
Fund Index Index
- ------------ ------------ --------------- -------
10/31/99 10000 10000 10000
11941 10963 10609
11682 8204 7967
10184 7026 6764
13219 8691 8170
15152 9517 8940
17249 10526 9720
20196 12249 11308
23607 14030 12954
14951 8894 8278
10/31/09 17074 9858 9090
</Table>
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. Certain
fee waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board. The Manager 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 existing limitations and the recoupment is made within, the term of
the agreement. Any recoupment amount is generally applied within a fiscal
year. This agreement expires on July 31, 2010. In addition to any contractual
fee waivers, the Manager has agreed to voluntarily reimburse certain expenses
of Class A, I, R1, R2 and R3 shares. This voluntary waiver may be
discontinued at any time.
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 R1 and R2 shares, each of which was first
offered to the public on January 2, 2004, include the historical performance
of Class A shares through January 1, 2004, adjusted for differences in
certain contractual expenses and fees. Unadjusted, the performance shown for
Class R1 and R2 shares might have been lower.
4. Performance figures for Class R3 shares, which were first offered to the
public on April 28, 2006, include the historical
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 MAP Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
13.96% 2.19% 5.25%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000(R) S&P 500(R)
FUND INDEX INDEX
------------ --------------- ----------
10/31/99 10000 10000 10000
11911 10963 10609
11625 8204 7967
10107 7026 6764
13088 8691 8170
14969 9517 8940
16997 10526 9720
19852 12249 11308
23149 14030 12954
14635 8894 8278
10/31/09 16679 9858 9090
</Table>
CLASS R3 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
13.65% 1.88% 4.95%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000(R) S&P 500(R)
FUND INDEX INDEX
------------ --------------- ----------
10/31/99 10000 10000 10000
11881 10963 10609
11569 8204 7967
10034 7026 6764
12961 8691 8170
14776 9517 8940
16714 10526 9720
19453 12249 11308
22637 14030 12954
14269 8894 8278
10/31/09 16216 9858 9090
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell 3000(R) Index(5) 10.83% 0.71% -0.14%
S&P 500(R) Index(6) 9.80 0.33 -0.95
Average Lipper large-cap core fund(7) 10.85 0.51 -0.36
</Table>
performance of Class A 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.
5. The Russell 3000(R) Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market. Total returns assume
reinvestment of all dividends and capital gains. An investment cannot be made
directly in an index. The Russell 3000(R) Index is the Fund's broad-based
securities market index for comparison purposes. An investment cannot be made
directly in an index.
6. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
Index is widely regarded as the standard for measuring large-cap U.S. stock
market performance. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly in an index.
7. The average Lipper large-cap core fund is representative of funds that, by
portfolio practice, invest at least 75% of their equity assets in companies
with market capitalization (on a three-year weighted basis) above Lipper's
U.S. Diversified Equity large-cap floor. Large-cap core funds have more
latitude in the companies in which they invest. These funds typically have an
average price-to-earning ratio, price-to-book ratio, and three-year sales-
per-share growth value, compared to the S&P 500(R) Index. This benchmark is a
product of Lipper Inc. 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 TWO PRECEDING PAGES 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 MAP FUND (UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,216.50 $ 7.99 $1,018.00 $ 7.27
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,217.60 $ 6.76 $1,019.10 $ 6.16
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,211.50 $12.15 $1,014.20 $11.07
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,211.90 $12.15 $1,014.20 $11.07
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,219.20 $ 5.48 $1,020.30 $ 4.99
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,218.80 $ 6.04 $1,019.80 $ 5.50
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,217.40 $ 7.43 $1,018.50 $ 6.77
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,215.20 $ 8.82 $1,017.20 $ 8.03
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.43% for Investor Class, 1.21% for Class A, 2.18% for Class B and Class C,
0.98% for Class I, 1.08% for Class R1, 1.33% for Class R2 and 1.58% for Class
R3) multiplied by the average account value over the period, divided by 365
and multiplied by 184 (to reflect the one-half year period). The table above
represents the actual expenses incurred during the one-half year period.
8 MainStay MAP Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Oil, Gas & Consumable Fuels 8.2%
Pharmaceuticals 7.7
Commercial Banks 7.1
Insurance 5.2
Computers & Peripherals 4.1
Aerospace & Defense 3.5
Beverages 3.2
Health Care Equipment & Supplies 3.2
Semiconductors & Semiconductor
Equipment 3.2
Machinery 3.0
Specialty Retail 3.0
Industrial Conglomerates 2.8
Food & Staples Retailing 2.7
Capital Markets 2.6
Media 2.6
Consumer Finance 2.4
Energy Equipment & Services 2.4
Diversified Financial Services 2.3
Road & Rail 1.9
Chemicals 1.8
Electric Utilities 1.8
Internet Software & Services 1.8
Metals & Mining 1.7
Software 1.7
Wireless Telecommunication Services 1.6
Electronic Equipment & Instruments 1.3
Automobiles 1.2
Health Care Providers & Services 1.0
Hotels, Restaurants & Leisure 1.0
Auto Components 0.9
Multi-Utilities 0.9
Biotechnology 0.8
Diversified Telecommunication
Services 0.7
Real Estate Investment Trusts 0.7
Trading Companies & Distributors 0.7
Household Products 0.6
Real Estate Management &
Development 0.6
Commercial Services & Supplies 0.5
Construction & Engineering 0.5
Independent Power Producers &
Energy Traders 0.5
Internet & Catalog Retail 0.5
Air Freight & Logistics 0.4
Multiline Retail 0.4
Diversified Consumer Services 0.3
Food Products 0.3
Airlines 0.2
Electrical Equipment 0.2
Gas Utilities 0.2
IT Services 0.2
Paper & Forest Products 0.2
Building Products 0.1
Communications Equipment 0.1
Marine 0.1
Office Electronics 0.0++
Professional Services 0.0++
Thrifts & Mortgage Finance 0.0++
Short-Term Investment 3.2
Cash and Other Assets, Less
Liabilities 0.2
-----
100.0%
=====
</Table>
See Portfolio of Investments beginning on page 13 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Wells Fargo & Co.
2. PepsiCo, Inc.
3. Schering-Plough Corp.
4. Apple, Inc.
5. U.S. Bancorp
6. Pfizer, Inc.
7. Caterpillar, Inc.
8. CVS Caremark Corp.
9. CSX Corp.
10. Marathon Oil Corp.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS MICHAEL J. MULLARKEY, ROGER LOB AND
CHRISTOPHER MULLARKEY OF FUND CO-SUBADVISOR MARKSTON INTERNATIONAL LLC AND BY
PORTFOLIO MANAGERS JERROLD K. SENSER, CFA, AND THOMAS R. WENZEL, CFA, OF FUND
CO-SUBADVISOR INSTITUTIONAL CAPITAL LLC (ICAP).
HOW DID MAINSTAY MAP FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING
THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay MAP Fund returned 13.83% for Investor
Class shares, 14.12% for Class A shares, 12.97% for Class B shares and 12.96%
for Class C shares for the 12 months ended Octo-ber 31, 2009. Over the same
period, the Fund's Class I shares returned 14.38%, Class R1 shares returned
14.20%, Class R2 shares returned 13.96% and Class R3 shares returned 13.65%. All
share classes outperformed the 10.85% return of the average Lipper(1) large-cap
core fund and the 10.83% return of the Russell 3000(R) Index(2) for the 12
months ended October 31, 2009. The Russell 3000(R) Index is the Fund's broad-
based securities-market index. See pages 5 and 6 for Fund returns with sales
charges.
WHAT KEY FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
Markston International:
During the reporting period, our portion of the Fund outperformed the Russell
3000(R) Index by investing excess cash in the financials sector near the
market's low point in March. Our portion of the Fund also benefited from our
investment in the information technology sector, specifically computer and
elect-ronic device manufacturer Apple, software company Adobe Systems and
Internet software & services company eBay. Consumer staples holdings in our
portion of the Fund also performed well.
ICAP:
Our portion of the Fund that invests in U.S. stocks outperformed the S&P 500(R)
Index(3) during the reporting period largely because of favorable stock
selection in the health care, energy and consumer
staples sectors. Our performance in these domestic equity sectors more than
offset weaker stock selec- tion in the financials, consumer discretionary and
materials sectors.
In the portion of the Fund that invests in global stocks, all sectors
contributed positively to the Fund's absolute performance during the reporting
period. Positions in the energy, industrials and information technology sectors
were the largest contributors to the Fund's absolute performance.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO
PERFOR-MANCE IN YOUR PORTION OF THE FUND AND WHICH SECTORS WERE THE GREATEST
DETRACTORS?
Markston International:
In our portion of the Fund, the strongest sectors relative to the Russell
3000(R) Index were financials, consumer discretionary and information
technology. The weakest-performing sectors on a relative basis were health care,
industrials and materials.
ICAP:
Relative to the S&P 500(R) Index, health care was
the strongest-contributing sector in our domestic equity portion of the Fund,
followed by energy and industrials. Financials, information technology and
consumer discretionary were the worst-performing domestic equity sectors in our
portion of the Fund relative to the S&P 500(R) Index.
In the global equity portion of the Fund, telecom-munication services, energy
and industrials were the best-performing sectors on an absolute basis. The
worst-performing sectors on an absolute basis were financials, materials and
consumer discretionary.
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. The principal risk of investing in value stocks is that they
may never reach what the subadvisor believes is their full value or they may
even go down in value. Issuers of convertible securities may not be as
financially strong as issuers of securities with higher credit ratings and may
be more vulnerable to changes in the economy. If an issuer stops making interest
and/or principal payments on its convertible securities, these securities may
become worthless and the Fund could lose its entire investment. Investments in
foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets. The Fund
may experience a portfolio turnover of more than 100% and may generate taxable
short-term capital gains.
1. See footnote on page 7 for more information on Lipper Inc.
2. See footnote on page 7 for more information on the Russell 3000(R) Index.
3. See footnote on page 7 for more information on the S&P 500(R) Index. The S&P
500(R) Index is a secondary benchmark of the Fund.
10 MainStay MAP Fund
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG CONTRIBUTORS TO ABSOLUTE
PERFORMANCE IN YOUR PORTION OF THE FUND AND WHICH STOCKS DETRACTED?
Markston International:
Strong contributors in our portion of the Fund included computer and electronic
device manufac- turer Apple, Internet auction company eBay and capital markets
company Ameriprise Financial. The success of the iPhone helped expand Apple's
fran-chise. EBay benefited from a restructuring under
new management. Ameriprise Financial has a
strong financial-services franchise.
Stocks that detracted from performance included defense contractor Raytheon and
oil, gas & consum- able fuels companies Apache and Devon Energy. The uncertainty
surrounding future defense spending under the Obama administration contributed
to Raytheon's decline. Apache and Devon fell because the price of oil was down
from its peak in 2008.
ICAP:
During the reporting period, the strongest contrib-utors to absolute performance
in our domestic and global equity portions of the Fund were health care
companies Schering-Plough and Wyeth. Shares of both rose on merger news during
the reporting period. Wyeth was acquired by Pfizer during the period and is no
longer held in the Fund.
In our domestic equity portion, energy company Occidental Petroleum was also a
strong contributor to absolute performance. In our global equity portion,
banking company Banco Santander was a strong absolute performer. We felt that
the company was positioned to gain market share and outgrow its peers because of
management's ability to generate strong risk-adjusted returns.
The holdings that detracted the most from absolute performance in our domestic
and global equity portions of the Fund were bank holding companies Capital One
Financial and Bank of America. We eliminated both positions from our portion of
the Fund during the reporting period, but we later repurchased Capital One
Financial when our view of the stock improved. During the reporting period, we
also eliminated our position in diversified media giant News Corp., which
suffered from soft advertising sales in a weak economic environment and
detracted from performance.
DID YOU MAKE ANY SIGNIFICANT PURCHASES OR SALES IN YOUR PORTION OF THE FUND
DURING THE REPORTING PERIOD?
Markston International:
During the reporting period, we initiated positions in health care equipment &
supplies company Baxter International and independent oil and natural gas
company EOG Resources. We purchased Baxter International because insiders were
accumulating shares and we thought that concerns about a national health care
plan had driven the health care sector to attractive values. We purchased EOG
Resources after seeing reports that the firm expected to significantly increase
its future oil production. We pared our positions in Raytheon and Devon Energy
after seeing significant insider selling. The sale reflected our desire to
manage risk in our portion of Fund.
ICAP:
In a period characterized by financial deleveraging and relatively weak economic
activity, we believed that strong companies would become stronger. In our
opinion, companies with strong balance sheets, good market positions and solid
operating characteristics would have the greatest potential to increase their
market share.
In our domestic and global equity portions of the Fund, we initiated a position
in Intel, one of the world's largest semiconductor manufacturers. We expected
the company to benefit from its substantial investments in research and
development. We also added Caterpillar, the world's largest manufacturer of
construction and mining equipment to our domestic and global equity portions of
the Fund. We felt that Caterpillar's exposure to construction, mining, petroleum
and other cyclical sectors had placed the company in a strong position should
the economy improve. We also believed that Caterpillar was beginning to expand
its margins.
We eliminated Bank of America from our domestic equity and global equity
portions of the Fund, when the company's credit losses exceeded our expect-
ations. In our global equity portion, we sold the Fund's position in wireless
telecommunication services provider NTT DoCoMo after the stock reached our price
target. We also sold the Fund's position in U.K. brewer SABMiller when we saw
limited upside potential in the stock and felt that other investment candidates
were more attractive.
mainstayinvestments.com 11
HOW DID THE SECTOR WEIGHTINGS IN YOUR PORTION OF THE FUND CHANGE DURING THE
REPORTING PERIOD?
Markston International:
In our portion of the Fund, we added to our financials and consumer staples
allocations during the reporting period. Over the same period, we lowered our
portion of the Fund's industrials exposure. Although we reduced our portion of
the Fund's exposure to cash during the first half of the reporting period, near
the end of the reporting period, our portion of the Fund received a large cash
infusion, which increased its exposure to cash.
ICAP:
The most significant increase in our domestic equity sector weightings was in
industrials, where we shifted from an underweight to an overweight position
relative to the S&P 500((R) )Index. We decreased relative weightings most
significantly in information technol- ogy and consumer staples, further
underweighting the Index. We also lowered our portion of the Fund's exposure
from an overweight position to a slight underweight in consumer discretionary.
In the global stock portion of the Fund, we increased sector allocations most
significantly in financials, industrials and information technology. We
decreased the global sector allocations in our portion of the Fund most
significantly in consumer staples, health care and telecommunication services.
HOW WAS YOUR PORTION OF THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
Markston International:
As of October 31, 2009, our portion of the Fund was overweight in financials and
slightly overweight in energy. The overweight in financials helped per-formance,
while the modest overweight in energy marginally detracted from results. As of
the same date, our portion of the Fund was underweight relative to the Russell
3000(R) Index in consumer staples and health care. The underweight in con-sumer
staples hurt relative performance, because the sector outperformed the
benchmark. Neverthe- less, our holdings outperformed the return of the consumer
staples sector in the benchmark. The underweight in the health care sector
helped performance as the sector had negative returns.
ICAP:
As of October 31, 2009, the largest overweight sector positions relative to the
S&P 500(R) Index in our domestic equity portion of the Fund were in financials,
health care and industrials. The most significant underweight positions were in
information technology, consumer staples and utilities. This positioning
reflected our view on the prospects for economic recovery and on the relative
attractiveness of individual holdings in those sectors.
In our global equity portion of the Fund, allocations to financials, industrials
and information technology were increased, while allocations to consumer
staples, health care and telecommunication services were decreased.
- ----------
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.
12 MainStay MAP Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 96.2%+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE 3.5%
Boeing Co. (The) 204,400 $ 9,770,320
GenCorp, Inc. (a) 141,000 1,049,040
GeoEye, Inc. (a) 2,900 73,573
Honeywell International, Inc. 560,050 20,100,194
Lockheed Martin Corp. 91,400 6,287,406
Northrop Grumman Corp. 95,328 4,778,793
Orbital Sciences Corp. (a) 151,700 1,953,896
Raytheon Co. 65,500 2,965,840
--------------
46,979,062
--------------
AIR FREIGHT & LOGISTICS 0.4%
TNT N.V. 210,380 5,597,675
--------------
AIRLINES 0.2%
Southwest Airlines Co. 372,800 3,131,520
--------------
AUTO COMPONENTS 0.9%
Goodyear Tire & Rubber Co. (The) (a) 103,250 1,329,860
Johnson Controls, Inc. 445,150 10,647,988
--------------
11,977,848
--------------
AUTOMOBILES 1.2%
Daimler A.G 158,400 7,711,262
Toyota Motor Corp., Sponsored ADR (b) 107,500 8,480,675
--------------
16,191,937
--------------
BEVERAGES 3.2%
Coca-Cola Co. (The) 184,200 9,819,702
V PepsiCo, Inc. 477,041 28,884,833
Pernod-Ricard S.A. 58,150 4,859,889
--------------
43,564,424
--------------
BIOTECHNOLOGY 0.8%
Alkermes, Inc. (a) 98,480 784,886
Celgene Corp. (a) 95,892 4,895,286
Genzyme Corp. (a) 86,821 4,393,143
Gilead Sciences, Inc. (a) 21,000 893,550
--------------
10,966,865
--------------
BUILDING PRODUCTS 0.1%
JS Group Corp. 69,500 1,151,192
--------------
CAPITAL MARKETS 2.6%
Ameriprise Financial, Inc. 191,166 6,627,725
Bank of New York Mellon Corp. (The) 34,175 911,106
Credit Suisse Group A.G.,
Sponsored ADR (b) 49,200 2,622,360
Goldman Sachs Group, Inc. (The) 41,699 7,095,919
Jefferies Group, Inc. (a) 305,351 7,969,661
Knight Capital Group, Inc. Class A (a) 10,253 172,763
Legg Mason, Inc. 24,010 698,931
State Street Corp. 120,698 5,066,902
UBS A.G. (a) 229,000 3,861,682
Virtus Investment Partners, Inc. (a) 3,159 46,311
--------------
35,073,360
--------------
CHEMICALS 1.8%
CF Industries Holdings, Inc. 18,100 1,506,825
E.I. du Pont de Nemours & Co. 358,600 11,410,652
Monsanto Co. 73,014 4,905,081
Mosaic Co. (The) 27,940 1,305,636
Yara International A.S.A. 155,400 5,172,853
--------------
24,301,047
--------------
COMMERCIAL BANKS 7.1%
Banco Santander S.A. 385,825 6,242,958
BB&T Corp. 515,400 12,323,214
Popular, Inc. 453,171 978,849
Societe Generale 109,572 7,317,603
Standard Chartered PLC 263,750 6,495,357
Sumitomo Mitsui Financial Group, Inc. 166,500 5,845,026
V U.S. Bancorp 1,171,900 27,211,518
V Wells Fargo & Co. 1,059,674 29,162,228
--------------
95,576,753
--------------
COMMERCIAL SERVICES & SUPPLIES 0.5%
Covanta Holding Corp. (a) 262,553 4,510,661
Waste Management, Inc. 51,400 1,535,832
--------------
6,046,493
--------------
COMMUNICATIONS EQUIPMENT 0.1%
Cisco Systems, Inc. (a) 35,400 808,890
Finisar Corp. (a) 32,936 245,373
Motorola, Inc. 10,100 86,557
Nokia OYJ, Sponsored ADR (b) 53,500 674,635
--------------
1,815,455
--------------
COMPUTERS & PERIPHERALS 4.1%
V Apple, Inc. (a) 152,085 28,668,023
Dell, Inc. (a) 266,900 3,867,381
Hewlett-Packard Co. 348,900 16,558,794
SanDisk Corp. (a) 214,742 4,397,916
Sun Microsystems, Inc. (a) 228,952 1,872,827
--------------
55,364,941
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding
short-term investment. 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
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
CONSTRUCTION & ENGINEERING 0.5%
China Communications Construction Co.,
Ltd. Class H 611,300 $ 675,962
China Railway Construction Corp., Ltd. 1,383,700 1,860,359
Jacobs Engineering Group, Inc. (a) 96,150 4,066,184
--------------
6,602,505
--------------
CONSUMER FINANCE 2.3%
American Express Co. 386,800 13,476,112
Capital One Financial Corp. 357,850 13,097,310
Discover Financial Services 327,830 4,635,516
--------------
31,208,938
--------------
DIVERSIFIED CONSUMER SERVICES 0.3%
Coinstar, Inc. (a) 131,920 4,187,141
--------------
DIVERSIFIED FINANCIAL SERVICES 2.3%
Bank of America Corp. 112,664 1,642,641
Citigroup, Inc. 255,100 1,043,359
CME Group, Inc. 17,800 5,386,458
JPMorgan Chase & Co. 485,400 20,275,158
Leucadia National Corp. (a) 82,360 1,850,629
--------------
30,198,245
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.7%
AT&T, Inc. 333,600 8,563,512
Verizon Communications, Inc. 25,200 745,668
--------------
9,309,180
--------------
ELECTRIC UTILITIES 1.8%
American Electric Power Co., Inc. 32,765 990,158
Duke Energy Corp. 1,041,400 16,474,948
Energias de Portugal S.A. 1,249,300 5,528,470
Westar Energy, Inc. 56,100 1,074,315
--------------
24,067,891
--------------
ELECTRICAL EQUIPMENT 0.2%
Rockwell Automation, Inc. 70,350 2,880,833
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 1.3%
Anixter International, Inc. (a) 15,300 640,305
Corning, Inc. 122,300 1,786,803
HOYA Corp. 305,000 6,878,298
Murata Manufacturing Co., Ltd. 72,600 3,629,395
Sanmina-SCI Corp. (a) 67,206 431,462
Tyco Electronics, Ltd. 210,939 4,482,454
--------------
17,848,717
--------------
ENERGY EQUIPMENT & SERVICES 2.4%
BJ Services Co. 117,704 2,259,917
Exterran Holdings, Inc. (a) 35,400 723,222
Halliburton Co. 653,640 19,092,824
Hercules Offshore, Inc. (a) 191,062 980,148
Key Energy Services, Inc. (a) 297,205 2,172,569
Newpark Resources, Inc. (a) 41,620 125,276
Parker Drilling Co. (a) 75,200 391,040
Saipem S.p.A. 106,800 3,165,450
Schlumberger, Ltd. 37,200 2,313,840
Tidewater, Inc. 13,500 562,545
Weatherford International, Ltd. (a) 9,850 172,671
--------------
31,959,502
--------------
FOOD & STAPLES RETAILING 2.7%
V CVS Caremark Corp. 638,126 22,525,848
Wal-Mart Stores, Inc. 178,420 8,863,906
Walgreen Co. 137,750 5,211,082
--------------
36,600,836
--------------
FOOD PRODUCTS 0.3%
Archer-Daniels-Midland Co. 42,263 1,272,962
Bunge, Ltd. 50,790 2,898,077
Kraft Foods, Inc. Class A 16,500 454,080
--------------
4,625,119
--------------
GAS UTILITIES 0.2%
National Fuel Gas Co. 34,300 1,555,162
Nicor, Inc. 34,250 1,269,990
--------------
2,825,152
--------------
HEALTH CARE EQUIPMENT & SUPPLIES 3.2%
ArthroCare Corp. (a) 10,110 192,090
Baxter International, Inc. 68,850 3,722,031
Boston Scientific Corp. (a) 172,650 1,401,918
CareFusion Corp. (a) 31,085 695,371
Covidien PLC 498,369 20,991,302
Gen-Probe, Inc. (a) 28,468 1,187,685
Hospira, Inc. (a) 103,650 4,626,936
Medtronic, Inc. 285,768 10,201,918
--------------
43,019,251
--------------
HEALTH CARE PROVIDERS & SERVICES 1.0%
Aetna, Inc. 371,270 9,664,158
Cardinal Health, Inc. 61,370 1,739,226
Humana, Inc. (a) 55,530 2,086,817
SunLink Health Systems, Inc. (a) 50,068 117,660
Universal Health Services, Inc. Class B 2,900 161,385
--------------
13,769,246
--------------
HOTELS, RESTAURANTS & LEISURE 1.0%
InterContinental Hotels Group PLC, ADR (b) 363,183 4,616,056
Marriott International, Inc. Class A 28,563 715,789
</Table>
14 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
McDonald's Corp. 127,180 $ 7,454,020
Starwood Hotels & Resorts
Worldwide, Inc. 38,400 1,115,904
--------------
13,901,769
--------------
HOUSEHOLD PRODUCTS 0.6%
Colgate-Palmolive Co. 29,800 2,343,174
Procter & Gamble Co. (The) 97,800 5,672,400
--------------
8,015,574
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.5%
AES Corp. (The) (a) 429,000 5,607,030
Dynegy, Inc. Class A (a) 355,100 710,200
Mirant Corp. (a) 32,400 452,952
--------------
6,770,182
--------------
INDUSTRIAL CONGLOMERATES 2.8%
3M Co. 42,490 3,125,989
General Electric Co. 596,250 8,502,525
Hutchison Whampoa, Ltd. 847,300 6,051,206
Siemens A.G 64,850 5,866,485
Sime Darby Berhad 953,300 2,483,469
Textron, Inc. 298,100 5,300,218
Tyco International, Ltd. 174,189 5,844,041
--------------
37,173,933
--------------
INSURANCE 5.2%
ACE, Ltd. (a) 260,700 13,389,552
Allstate Corp. (The) 196,800 5,819,376
Aon Corp. 378,940 14,592,979
Chubb Corp. (The) 50,600 2,455,112
HCC Insurance Holdings, Inc. 65,800 1,736,462
Marsh & McLennan Cos., Inc. 108,755 2,551,392
MetLife, Inc. 179,561 6,110,461
Muenchener Rueckversicherungs-Gesellschaft
A.G. Registered 35,950 5,694,786
Phoenix Cos., Inc. (The) (a) 105,800 336,444
Principal Financial Group, Inc. 36,850 922,724
Reinsurance Group of America, Inc. 35,592 1,640,791
Travelers Cos., Inc. (The) 160,506 7,991,594
W.R. Berkley Corp. 288,900 7,141,608
--------------
70,383,281
--------------
INTERNET & CATALOG RETAIL 0.5%
Liberty Media Corp. Interactive Class A
(a) 528,890 5,997,613
--------------
INTERNET SOFTWARE & SERVICES 1.8%
eBay, Inc. (a) 449,675 10,014,262
Internet Capital Group, Inc. (a) 33,850 246,090
Valueclick, Inc. (a) 163,874 1,612,520
VeriSign, Inc. (a) 532,898 12,155,403
--------------
24,028,275
--------------
IT SERVICES 0.2%
Computer Sciences Corp. (a) 48,900 2,479,719
--------------
MACHINERY 3.0%
V Caterpillar, Inc. 445,150 24,509,959
Cummins, Inc. 199,550 8,592,623
KOMATSU, Ltd. 120,350 2,430,665
Vallourec S.A. 26,212 4,154,518
--------------
39,687,765
--------------
MARINE 0.1%
American Commercial Lines, Inc. (a) 47,836 1,026,082
--------------
MEDIA 2.6%
Ascent Media Corp. Class A (a) 1,729 40,095
British Sky Broadcasting Group PLC 439,900 3,848,183
Cablevision Systems Corp. Class A 160,500 3,685,080
Comcast Corp. Class A 122,000 1,769,000
Lamar Advertising Co. Class A (a) 1,500 36,450
Liberty Media Corp. Capital Class A (a) 117,135 2,423,523
Liberty Media Corp. Entertainment Class A
(a) 20,697 637,881
Marvel Entertainment, Inc. (a) 27,970 1,397,661
Primedia, Inc. 9,629 24,169
Sky Deutschland A.G. (a) 295,600 1,235,457
Time Warner Cable, Inc. 14,445 569,711
Time Warner, Inc. 56,666 1,706,780
Viacom, Inc. Class B (a) 648,100 17,881,079
Walt Disney Co. (The) 9,000 246,330
--------------
35,501,399
--------------
METALS & MINING 1.7%
Anglo American PLC (a) 98,900 3,595,378
Newmont Mining Corp. 403,300 17,527,418
United States Steel Corp. 51,950 1,791,755
--------------
22,914,551
--------------
MULTI-UTILITIES 0.9%
Black Hills Corp. 4,550 110,884
Dominion Resources, Inc. 28,800 981,792
DTE Energy Corp. 27,400 1,013,252
GDF Suez S.A. 149,896 6,288,048
Suez Environnement S.A. 152,750 3,402,267
--------------
11,796,243
--------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MULTILINE RETAIL 0.4%
Kohl's Corp. (a) 77,000 $ 4,405,940
Target Corp. 22,700 1,099,361
--------------
5,505,301
--------------
OFFICE ELECTRONICS 0.0%++
Xerox Corp. 58,100 436,912
--------------
OIL, GAS & CONSUMABLE FUELS 8.1%
Anadarko Petroleum Corp. 164,000 9,992,520
Apache Corp. 20,500 1,929,460
BP PLC, Sponsored ADR (b) 299,750 16,971,845
Chesapeake Energy Corp. 95,000 2,327,500
Chevron Corp. 64,474 4,934,840
ConocoPhillips 75,578 3,792,504
Devon Energy Corp. 180,171 11,658,865
EOG Resources, Inc. 81,700 6,671,622
ExxonMobil Corp. 57,600 4,128,192
Hess Corp. 49,150 2,690,471
V Marathon Oil Corp. 667,250 21,331,982
Occidental Petroleum Corp. 130,820 9,926,622
Plains Exploration & Production Co. (a) 3,557 94,261
Spectra Energy Corp. 530,400 10,141,248
Williams Cos., Inc. 142,300 2,682,355
--------------
109,274,287
--------------
PAPER & FOREST PRODUCTS 0.2%
MeadWestvaco Corp. 80,405 1,835,646
Weyerhaeuser Co. 25,254 917,731
--------------
2,753,377
--------------
PHARMACEUTICALS 7.7%
Abbott Laboratories 159,177 8,049,581
Bayer A.G. 96,700 6,721,237
Merck & Co., Inc. 69,600 2,152,728
Mylan, Inc. (a) 29,000 470,960
V Pfizer, Inc. 1,567,253 26,690,318
Roche Holding A.G., Sponsored ADR (b) 112,900 4,504,710
Sanofi-Aventis 112,350 8,224,837
Sanofi-Aventis, Sponsored ADR (b) 308,500 11,389,820
V Schering-Plough Corp. 1,019,000 28,735,800
Teva Pharmaceutical Industries, Ltd.,
Sponsored ADR (b) 125,998 6,360,379
--------------
103,300,370
--------------
PROFESSIONAL SERVICES 0.0%++
On Assignment, Inc. (a) 15,800 95,432
--------------
REAL ESTATE INVESTMENT TRUSTS 0.7%
HCP, Inc. 116,496 3,447,117
UDR, Inc. 369,175 5,308,736
--------------
8,755,853
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.6%
Mitsubishi Estate Co., Ltd. 333,900 5,207,972
St. Joe Co. (The) (a) 113,450 2,715,993
--------------
7,923,965
--------------
ROAD & RAIL 1.9%
Celadon Group, Inc. (a) 119,074 1,162,162
V CSX Corp. 516,950 21,804,951
Kansas City Southern (a) 15,600 377,988
Union Pacific Corp. 38,500 2,122,890
--------------
25,467,991
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.2%
Cirrus Logic, Inc. (a) 139,191 673,684
Intel Corp. 1,100,020 21,021,382
NVIDIA Corp. (a) 20,106 240,468
Texas Instruments, Inc. 869,350 20,386,258
--------------
42,321,792
--------------
SOFTWARE 1.7%
Adobe Systems, Inc. (a) 56,100 1,847,934
Blackboard, Inc. (a) 42,339 1,501,764
Compuware Corp. (a) 37,472 264,552
Electronic Arts, Inc. (a) 34,500 629,280
i2 Technologies, Inc. (a) 123,652 1,946,283
LiveWire Mobile, Inc. (a) 157,228 45,596
Microsoft Corp. 570,433 15,818,107
Oracle Corp. 28,800 607,680
Plato Learning, Inc. (a) 25,000 110,500
S1 Corp. (a) 88,068 528,408
TIBCO Software, Inc. (a) 10,200 89,250
--------------
23,389,354
--------------
SPECIALTY RETAIL 2.8%
Home Depot, Inc. (The) 461,203 11,571,583
Lowe's Cos., Inc. 1,006,200 19,691,334
PEP Boys-Manny, Moe & Jack 234,255 2,054,416
Yamada Denki Co., Ltd. 74,600 4,632,717
--------------
37,950,050
--------------
THRIFTS & MORTGAGE FINANCE 0.0%++
New York Community Bancorp, Inc. 43,800 472,602
--------------
TRADING COMPANIES & DISTRIBUTORS 0.7%
Mitsubishi Corp. 404,000 8,873,055
--------------
</Table>
16 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES 1.6%
Sprint Nextel Corp. (a) 117,841 $ 348,809
Vodafone Group PLC, Sponsored ADR (b) 928,350 20,600,087
--------------
20,948,896
--------------
Total Common Stocks
(Cost $1,291,627,870) 1,293,986,751
--------------
CONVERTIBLE PREFERRED STOCK 0.0%++
- ------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE 0.0%++
Six Flags, Inc.
7.25% 102,600 66,690
--------------
Total Convertible Preferred Stock
(Cost $2,279,666) 66,690
--------------
<Caption>
PRINCIPAL
AMOUNT
LONG-TERM BONDS 0.4%
CONVERTIBLE BONDS 0.2%
- ------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES 0.0%++
Covanta Holding Corp.
1.00%, due 2/1/27 $ 150,000 136,313
--------------
CONSUMER FINANCE 0.1%
Americredit Corp.
0.75%, due 9/15/11 1,750,000 1,581,562
--------------
OIL, GAS & CONSUMABLE FUELS 0.1%
Bill Barrett Corp.
5.00%, due 3/15/28 989,300 960,858
--------------
Total Convertible Bonds
(Cost $2,275,825) 2,678,733
--------------
CORPORATE BOND 0.2%
- ------------------------------------------------------------------------------
SPECIALTY RETAIL 0.2%
PEP Boys-Manny Moe & Jack
7.50%, due 12/15/14 2,800,000 2,590,000
--------------
Total Corporate Bond
(Cost $2,006,614) 2,590,000
--------------
Total Long-Term Bonds
(Cost $4,282,439) 5,268,733
--------------
SHORT-TERM INVESTMENT 3.2%
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENT 3.2%
State Street Bank and Trust Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity $42,970,132
(Collateralized by United States
Treasury Bill with rate of 0.066% and
0.105% and maturity date of 2/18/10 and
3/18/10, with a Principal Amount of
$43,850,000 and a Market Value of
$43,839,665) 42,970,096 42,970,096
--------------
Total Short-Term Investment
(Cost $42,970,096) 42,970,096
--------------
Total Investments
(Cost $1,341,160,071) (c) 99.8% 1,342,292,270
Cash and Other Assets,
Less Liabilities 0.2 2,887,406
----- ------------
Net Assets 100.0% $1,345,179,676
===== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) At October 31, 2009, cost is
$1,364,324,619 for federal income tax
purposes and net unrealized depreciation
is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 159,551,359
Gross unrealized depreciation (181,583,708)
-------------
Net unrealized depreciation $ (22,032,349)
=============
</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, 2009 (CONTINUED)
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $1,293,986,751 $ -- $ -- $1,293,986,751
Convertible Preferred Stock 66,690 -- -- 66,690
Long-Term Bonds
Convertible Bonds -- 2,678,733 -- 2,678,733
Corporate Bond -- 2,590,000 -- 2,590,000
-------------- ---------------- -------- --------------
Total Long-Term Bonds -- 5,268,733 -- 5,268,733
-------------- ---------------- -------- --------------
Short-Term Investment
Repurchase Agreement -- 42,970,096 -- 42,970,096
-------------- ---------------- -------- --------------
Total Investments in Securities $1,294,053,441 $48,238,829 $-- $1,342,292,270
============== ================ ======== ==============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with significant
unobservable inputs (Level 3).
Following is a reconciliation of investments in which significant unobservable
inputs (Level 3) were used in determining value:
<Table>
<Caption>
BALANCE CHANGE IN NET NET
AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS
INVESTMENTS OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET NET IN TO OUT OF
IN SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3
Corporate Bond
Marine $ 37,419 $-- $-- $-- $-- $ (37,419) $-- $--
Warrants
Marine 320,932 -- -- -- -- (320,932) -- --
-------- --- --- --- --- --------- --- ---
Total $358,351 $-- $-- $-- $-- $(358,351) $-- $--
======== === === === === ========= === ===
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
BALANCE INVESTMENTS
AS OF STILL HELD AT
INVESTMENTS OCTOBER 31, OCTOBER 31,
IN SECURITIES 2009 2009
Corporate Bond
Marine $-- $--
Warrants
Marine -- --
--- ---
Total $-- $--
=== ===
</Table>
18 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $1,341,160,071) $1,342,292,270
Receivables:
Investment securities sold 7,095,980
Dividends and interest 1,668,808
Fund shares sold 901,481
Other assets 55,494
--------------
Total assets 1,352,014,033
--------------
LIABILITIES:
Payables:
Fund shares redeemed 2,847,165
Investment securities purchased 1,946,553
Manager (See Note 3) 809,041
Transfer agent (See Note 3) 544,464
NYLIFE Distributors (See Note 3) 392,890
Shareholder communication 123,778
Professional fees 109,578
Custodian 39,854
Trustees 4,040
Accrued expenses 16,994
--------------
Total liabilities 6,834,357
--------------
Net assets $1,345,179,676
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number
of shares authorized $ 528,723
Additional paid-in capital 1,636,865,220
--------------
1,637,393,943
Accumulated net realized loss on
investments and foreign currency
transactions (293,345,595)
Net unrealized appreciation on
investments 1,132,199
Net unrealized depreciation on
translation of other assets and
liabilities in foreign
currencies (871)
--------------
Net assets $1,345,179,676
==============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 99,663,457
==============
Shares of beneficial interest
outstanding 3,876,306
==============
Net asset value per share
outstanding $ 25.71
Maximum sales charge (5.50% of
offering price) 1.50
--------------
Maximum offering price per share
outstanding $ 27.21
==============
CLASS A
Net assets applicable to
outstanding shares $ 324,421,321
==============
Shares of beneficial interest
outstanding 12,631,328
==============
Net asset value per share
outstanding $ 25.68
Maximum sales charge (5.50% of
offering price) 1.49
--------------
Maximum offering price per share
outstanding $ 27.17
==============
CLASS B
Net assets applicable to
outstanding shares $ 169,605,790
==============
Shares of beneficial interest
outstanding 7,053,761
==============
Net asset value and offering price
per share outstanding $ 24.04
==============
CLASS C
Net assets applicable to
outstanding shares $ 167,652,457
==============
Shares of beneficial interest
outstanding 6,970,943
==============
Net asset value and offering price
per share outstanding $ 24.05
==============
CLASS I
Net assets applicable to
outstanding shares $ 567,720,338
==============
Shares of beneficial interest
outstanding 21,714,185
==============
Net asset value and offering price
per share outstanding $ 26.15
==============
CLASS R1
Net assets applicable to
outstanding shares $ 626,357
==============
Shares of beneficial interest
outstanding 24,235
==============
Net asset value and offering price
per share outstanding $ 25.84
==============
CLASS R2
Net assets applicable to
outstanding shares $ 14,005,513
==============
Shares of beneficial interest
outstanding 543,781
==============
Net asset value and offering price
per share outstanding $ 25.76
==============
CLASS R3
Net assets applicable to
outstanding shares $ 1,484,443
==============
Shares of beneficial interest
outstanding 57,756
==============
Net asset value and offering price
per share outstanding $ 25.70
==============
</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, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 26,645,127
Interest 359,028
-------------
Total income 27,004,155
-------------
EXPENSES:
Manager (See Note 3) 8,350,429
Transfer agent--Investor Class
(See Note 3) 303,470
Transfer agent--Class A (See Note
3) 488,711
Transfer agent--Classes B and C
(See Note 3) 1,263,556
Transfer agent--Classes I, R1, R2
and R3
(See Note 3) 861,655
Distribution--Class B (See Note
3) 1,190,942
Distribution--Class C (See Note
3) 1,132,846
Distribution--Class R3 (See Note
3) 2,235
Distribution/Service--Investor
Class
(See Note 3) 188,007
Distribution/Service--Class A
(See Note 3) 647,012
Service--Class B (See Note 3) 396,981
Service--Class C (See Note 3) 377,615
Distribution/Service--Class R2
(See Note 3) 25,358
Distribution/Service--Class R3
(See Note 3) 2,235
Shareholder communication 349,002
Professional fees 240,123
Registration 162,224
Custodian 110,382
Trustees 51,385
Shareholder service--Class R1
(See Note 3) 3,454
Shareholder service--Class R2
(See Note 3) 10,143
Shareholder service--Class R3
(See Note 3) 894
Miscellaneous 79,892
-------------
Total expenses before waiver 16,238,551
Expense waiver from Manager
(See Note 3) (738,258)
-------------
Net expenses 15,500,293
-------------
Net investment income 11,503,862
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized loss on:
Security transactions $(150,447,894)
Foreign currency transactions (45,670)
-------------
Net realized loss on investments
and foreign currency transactions (150,493,564)
-------------
Net change in unrealized
depreciation on:
Investments 284,266,269
Translation of other assets and
liabilities in foreign
currencies 45,913
-------------
Net change in unrealized
depreciation on investments and
foreign currency transactions 284,312,182
-------------
Net realized and unrealized gain on
investments and foreign currency
transactions 133,818,618
-------------
Net increase in net assets
resulting from operations $ 145,322,480
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$686,517.
20 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 11,503,862 $ 11,686,631
Net realized loss on
investments and foreign
currency transactions (150,493,564) (121,849,084)
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currency transactions 284,312,182 (582,729,897)
-------------------------------
Net increase (decrease)
in net assets resulting
from operations 145,322,480 (692,892,350)
-------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (1,466,474) --
Class A (6,536,408) (3,806,297)
Class B (621,662) --
Class C (598,336) --
Class I (12,231,419) (4,002,781)
Class R1 (21,358) (99,389)
Class R2 (182,158) (49,463)
Class R3 (11,256) (1,139)
-------------------------------
(21,669,071) (7,959,069)
-------------------------------
From net realized gain on investments:
Class A -- (70,672,548)
Class B -- (43,873,928)
Class C -- (38,749,093)
Class I -- (48,317,817)
Class R1 -- (1,357,529)
Class R2 -- (943,174)
Class R3 -- (28,767)
-------------------------------
-- (203,942,856)
-------------------------------
Total dividends and
distributions to
shareholders (21,669,071) (211,901,925)
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares 251,418,088 521,256,181
Net asset value of shares
issued in connection with
the acquisition of
MainStay Mid Cap Core
Fund 87,462,037 --
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 19,947,441 187,112,652
Cost of shares redeemed (301,744,976) (455,569,781)
-------------------------------
Increase in net assets
derived from capital
share transactions 57,082,590 252,799,052
-------------------------------
Net increase (decrease)
in net assets 180,735,999 (651,995,223)
NET ASSETS:
Beginning of year 1,164,443,677 1,816,438,900
-------------------------------
End of year $1,345,179,676 $1,164,443,677
===============================
Accumulated undistributed
net investment income at
end of year $ -- $ 10,781,818
===============================
</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
--------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
--------------------------
2009 2008
Net asset value at
beginning of period $ 23.04 $ 32.90
------- -------
Net investment income
(a) 0.22 0.17
Net realized and
unrealized gain (loss)
on investments 2.90 (10.02)
Net realized and
unrealized gain (loss)
on
foreign currency
transactions 0.00 ++ (0.01)
------- -------
Total from investment
operations 3.12 (9.86)
------- -------
Less dividends and
distributions:
From net investment
income (0.45) --
From net realized gain
on investments -- --
------- -------
Total dividends and
distributions (0.45) --
------- -------
Net asset value at end
of period $ 25.71 $ 23.04
======= =======
Total investment return
(c) 13.83% (29.97%)(d)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 0.98% 0.81% ++
Net expenses 1.44% 1.35% ++
Expenses (before
waiver/reimburse-
ment) 1.50% 1.35% ++
Portfolio turnover rate 60% 96%
Net assets at end of
period (in 000's) $99,663 $72,709
</Table>
<Table>
<Caption>
CLASS B
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 21.36 $ 38.79 $ 36.49 $ 33.50 $ 30.96
-------- -------- -------- -------- --------
Net investment income
(loss) (a) 0.06 0.04 0.02 (0.15) (0.15)(b)
Net realized and
unrealized gain (loss)
on investments 2.70 (12.91) 5.34 5.27 4.00
Net realized and
unrealized gain (loss)
on
foreign currency
transactions 0.00 ++ (0.01) -- -- --
-------- -------- -------- -------- --------
Total from investment
operations 2.76 (12.88) 5.36 5.12 3.85
-------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.08) -- -- -- --
From net realized gain
on investments -- (4.55) (3.06) (2.13) (1.31)
-------- -------- -------- -------- --------
Total dividends and
distributions (0.08) (4.55) (3.06) (2.13) (1.31)
-------- -------- -------- -------- --------
Net asset value at end
of period $ 24.04 $ 21.36 $ 38.79 $ 36.49 $ 33.50
======== ======== ======== ======== ========
Total investment return
(c) 12.97% (37.33%) 15.73% 15.94% 12.64%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.31% 0.13% 0.06% (0.45%) (0.46%)(b)
Net expenses 2.19% 2.07% 2.02% 2.10% 2.10%
Expenses (before
waiver/reimburse-
ment) 2.26% 2.07% 2.02% 2.08% 2.12%
Portfolio turnover rate 60% 96% 76% 100% 56%
Net assets at end of
period (in 000's) $169,606 $189,015 $378,342 $354,543 $387,772
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income (loss) and the ratio of net investment income (loss)
includes $0.04 per share and 0.11%, respectively as a result of a special one
time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Total return is not annualized.
</Table>
22 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
$ 23.04 $ 41.39 $ 38.55 $ 35.03 $ 32.08
-------- -------- -------- -------- --------
0.28 0.31 0.31 0.11 0.10 (b)
2.90 (13.88) 5.68 5.54 4.16
0.00 ++ (0.01) -- -- --
-------- -------- -------- -------- --------
3.18 (13.58) 5.99 5.65 4.26
-------- -------- -------- -------- --------
(0.54) (0.22) (0.09) -- --
-- (4.55) (3.06) (2.13) (1.31)
-------- -------- -------- -------- --------
(0.54) (4.77) (3.15) (2.13) (1.31)
-------- -------- -------- -------- --------
$ 25.68 $ 23.04 $ 41.39 $ 38.55 $ 35.03
======== ======== ======== ======== ========
14.12% (36.80%) 16.61% 16.80% 13.51%
1.25% 0.96% 0.79% 0.28% 0.29%(b)
1.20% 1.23% 1.27% 1.35% 1.35%
1.29% 1.25% 1.27% 1.33% 1.37%
60% 96% 76% 100% 56%
$324,421 $291,812 $647,374 $524,523 $358,214
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
$ 21.37 $ 38.79 $ 36.49 $ 33.50 $ 30.96
-------- -------- -------- -------- --------
0.06 0.04 0.01 (0.16) (0.15)(b)
2.70 (12.90) 5.35 5.28 4.00
0.00 ++ (0.01) -- -- --
-------- -------- -------- -------- --------
2.76 (12.87) 5.36 5.12 3.85
-------- -------- -------- -------- --------
(0.08) -- -- -- --
-- (4.55) (3.06) (2.13) (1.31)
-------- -------- -------- -------- --------
(0.08) (4.55) (3.06) (2.13) (1.31)
-------- -------- -------- -------- --------
$ 24.05 $ 21.37 $ 38.79 $ 36.49 $ 33.50
======== ======== ======== ======== ========
12.96% (37.30%) 15.73% 15.94% 12.64%
0.29% 0.13% 0.04% (0.46%) (0.46%)(b)
2.19% 2.07% 2.02% 2.10% 2.10%
2.25% 2.07% 2.02% 2.08% 2.12%
60% 96% 76% 100% 56%
$167,652 $178,672 $331,430 $245,458 $181,398
</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 I
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning of
period $ 23.51 $ 42.13 $ 39.15 $ 35.50 $ 32.37
-------- -------- -------- -------- --------
Net investment income (a) 0.33 0.39 0.45 0.23 0.24 (b)
Net realized and unrealized gain
(loss) on
investments 2.95 (14.12) 5.78 5.62 4.20
Net realized and unrealized gain
(loss) on
foreign currency transactions 0.00 ++ (0.00)++ -- -- --
-------- -------- -------- -------- --------
Total from investment operations 3.28 (13.73) 6.23 5.85 4.44
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.64) (0.34) (0.19) (0.07) --
From net realized gain on
investments -- (4.55) (3.06) (2.13) (1.31)
-------- -------- -------- -------- --------
Total dividends and distributions (0.64) (4.89) (3.25) (2.20) (1.31)
-------- -------- -------- -------- --------
Net asset value at end of period $ 26.15 $ 23.51 $ 42.13 $ 39.15 $ 35.50
======== ======== ======== ======== ========
Total investment return (c) 14.38% (36.59%) 16.99% 17.21% 13.96%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.45% 1.22% 1.15% 0.61% 0.69%(b)
Net expenses 0.98% 0.96% 0.92% 1.03% 0.95%
Expenses (before
waiver/reimbursement) 1.04% 0.96% 0.92% 1.01% 0.97%
Portfolio turnover rate 60% 96% 76% 100% 56%
Net assets at end of period (in
000's) $567,720 $425,266 $438,054 $358,423 $320,099
</Table>
<Table>
<Caption>
CLASS R2
----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning of
period $ 23.06 $ 41.40 $38.54 $35.03 $32.07
------- ------- ------ ------ ------
Net investment income (loss) (a) 0.23 0.28 0.32 0.07 0.07 (b)
Net realized and unrealized gain
(loss) on
investments 2.93 (13.86) 5.68 5.57 4.20
Net realized and unrealized gain
(loss) on foreign currency
transactions 0.00 ++ (0.00)++ -- -- --
------- ------- ------ ------ ------
Total from investment operations 3.16 (13.58) 6.00 5.64 4.27
------- ------- ------ ------ ------
Less dividends and distributions:
From net investment income (0.46) (0.21) (0.08) -- --
From net realized gain on
investments -- (4.55) (3.06) (2.13) (1.31)
------- ------- ------ ------ ------
Total dividends and distributions (0.46) (4.76) (3.14) (2.13) (1.31)
------- ------- ------ ------ ------
Net asset value at end of period $ 25.76 $ 23.06 $41.40 $38.54 $35.03
======= ======= ====== ====== ======
Total investment return (c) 13.96% (36.78%) 16.61% 16.80% 13.54%
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss) 1.01% 0.89% 0.81% 0.17% 0.34%(b)
Net expenses 1.33% 1.30% 1.27% 1.38% 1.30%
Expenses (before
waiver/reimbursement) 1.38% 1.30% 1.27% 1.36% 1.32%
Portfolio turnover rate 60% 96% 76% 100% 56%
Net assets at end of period (in
000's) $14,006 $ 6,427 $8,560 $5,806 $2,122
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income (loss) and the ratio of net investment income (loss)
includes $0.04 per share and 0.11%, respectively as a result of a special one
time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Total return is not annualized.
</Table>
24 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
--------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2009 2008 2007 2006 2005
$23.23 $ 41.69 $ 38.78 $ 35.19 $ 32.13
------ ------- ------- ------- -------
0.27 0.42 0.42 0.19 0.16 (b)
2.94 (14.03) 5.71 5.57 4.21
0.00 ++ (0.00)++ -- -- --
------ ------- ------- ------- -------
3.21 (13.61) 6.13 5.76 4.37
------ ------- ------- ------- -------
(0.60) (0.30) (0.16) (0.04) --
-- (4.55) (3.06) (2.13) (1.31)
------ ------- ------- ------- -------
(0.60) (4.85) (3.22) (2.17) (1.31)
------ ------- ------- ------- -------
$25.84 $ 23.23 $ 41.69 $ 38.78 $ 35.19
====== ======= ======= ======= =======
14.20% (36.67%) 16.89% 17.08% 13.84%
1.21% 1.24% 1.08% 0.51% 0.59%(b)
1.08% 1.01% 1.02% 1.13% 1.05%
1.14% 1.01% 1.02% 1.11% 1.07%
60% 96% 76% 100% 56%
$ 626 $ 232 $12,424 $15,583 $13,379
</Table>
<Table>
<Caption>
CLASS R3
-----------------------------------------------------
APRIL 28,
2006**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
-----------------------------------------------------
2009 2008 2007 2006
$22.97 $ 41.31 $38.49 $37.46
------ ------- ------ ------
0.16 0.19 0.17 (0.02)
2.93 (13.82) 5.73 1.05
0.00 ++ (0.00)++ -- --
------ ------- ------ ------
3.09 (13.63) 5.90 1.03
------ ------- ------ ------
(0.36) (0.16) (0.02) --
-- (4.55) (3.06) --
------ ------- ------ ------
(0.36) (4.71) (3.08) --
------ ------- ------ ------
$25.70 $ 22.97 $41.31 $38.49
====== ======= ====== ======
13.65% (36.96%) 16.37% 2.75%(d)
0.72% 0.61% 0.42% (0.10%)++
1.58% 1.56% 1.52% 1.72% ++
1.63% 1.56% 1.52% 1.73% ++
60% 96% 76% 100%
$1,484 $ 310 $ 256 $ 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
25
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay MAP Fund (the "Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class A shares, Class B
shares, Class C shares and Class I shares commenced operations on June 9, 1999.
Class R1 shares and Class R2 shares commenced operations on January 2, 2004.
Class R3 shares commenced operations on April 28, 2006. Investor Class shares
commenced operations on February 28, 2008. Investor Class and Class A shares are
offered at net asset value ("NAV") 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
at NAV 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 1.00% 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 offered at NAV and 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 a shareholder
service fee 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 R1, Class R2 or Class R3 shares.
The Fund's investment objective is to seek long-term appreciation of capital.
The Fund also seeks to earn income, but this is a secondary objective.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with 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 (as defined in Note 3(A)),
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. Investments in other mutual funds are valued at
their NAVs as of the close of the New York Stock Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
26 MainStay MAP Fund
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issuer in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3(A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures. At October 31, 2009, foreign securities
held by the Fund were not fair valued.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 NAV, 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 securities
purchased, other than short-term investments, 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
investments are accreted and amortized, respectively, on the straight-line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares 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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate. The Fund had no securities on loan
as of October 31, 2009.
(I) CONCENTRATION OF RISK. The Fund invests in foreign securities, which carry
certain risks that are in addition to the usual risks inherent in domestic
instruments. These risks include those resulting from currency fluctuations,
future adverse political and economic developments and possible imposition of
currency exchange blockages or other foreign governmental laws or
28 MainStay MAP Fund
restrictions. These risks are likely to be greater in emerging markets than in
developed markets. The ability of issuers of debt securities held by the Fund to
meet their obligations may be affected by economic or political developments in
a specific country, industry or region.
(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.
(K) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
The effect of derivative instruments on the Statement of Operations for the year
ended October 31, 2009.
REALIZED GAIN (LOSS)
<Table>
<Caption>
STATEMENT OF EQUITY
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net realized
gain(loss)
on security
Rights transactions $(11,797) $(11,797)
--------------------------
Total Realized Gain
(Loss) $(11,797) $(11,797)
==========================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
FOREIGN
STATEMENT OF EXCHANGE EQUITY
OPERATIONS CONTRACTS CONTRACTS
LOCATION RISK RISK TOTAL
Net
change in
unrealized
appreciation
(depreciation)
on security
Warrants transactions $-- $(2,852,894) $(2,852,894)
-------------------------------------
Total Change in
Appreciation
(Depreciation) $-- $(2,852,894) $(2,852,894)
=====================================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS
<Table>
<Caption>
EQUITY
CONTRACTS
RISK TOTAL
Rights (1)(3) 82,450 - 444,375 82,450 - 444,375
Warrants (2)(3) 5,511,870 5,511,870
</Table>
(1) Amount(s) disclosed represent(s) the minimum and maximum held during the
twelve-month period.
(2) Amount disclosed represents the weighted average held during the twelve-
month period.
(3) Amount(s) represent(s) number of contracts or number of shares/units.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. Markston International LLC and Institutional Capital LLC (the
"Subadvisors"), each registered investment advisers, serve as Subadvisors to the
Fund and manage a portion of the Fund's assets, as designated by New York Life
Investments from time to time, subject to the oversight of New York Life
Investments. Each Subadvisor is responsible for the day-to-day portfolio
management of the Fund with respect to its allocated portion of the Fund's
assets. Pursuant to the terms of Amended and Restated Subadvisory Agreements
("Subadvisory Agreements"), between New York Life
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Investments and the Subadvisors, New York Life Investments pays for the services
of the Subadvisors.
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:
0.75% on assets up to $1 billion and 0.70% on assets in excess of $1 billion,
plus a fee for fund accounting services previously provided by New York Life
Investments under a separate fund accounting agreement.
Effective August 1, 2009, New York Life Investments has entered into a written
expense limitation agreement under which it has agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses (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) for the
Fund's Class A shares do not exceed 1.28% of its average daily net assets. New
York Life Investments will apply an equivalent waiver or reimbursement, in an
equal amount of basis points, to the other share classes of the Fund. This
agreement may be modified or terminated only with the approval of the Board of
Trustees. Under the expense limitation agreement, New York Life Investments 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 existing expense limitations and the recoupment is made within the
term of the agreement. Any recoupment amount is generally applied within a
fiscal year. This expense cap agreement expires on July 31, 2010.
Additionally, effective August 1, 2009, New York Life Investments has agreed to
voluntarily waive or reimburse the expenses of the appropriate class of the Fund
so that the total annual operating expenses of a class do not exceed the
following percentages: Class A, 1.27%; Class I, 1.02%; Class R1, 1.12%; Class
R2, 1.37% and Class R3, 1.62%. These voluntary waivers or reimbursements may be
discontinued at any time without notice.
Prior to August 1, 2009, New York Life Investments had a written expense
limitation agreement under which it agreed to waive a portion of the management
fee or reimburse expenses to the extent necessary to ensure that the total
ordinary operating expenses for the appropriate class of the Fund do not exceed
the following percentages of average daily net assets: Investor Class, 1.45%;
Class A, 1.19%; Class B, 2.20%; Class C, 2.20%; Class I, 0.98%; Class R1, 1.08%;
Class R2, 1.33% and Class R3, 1.58%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $8,350,429 and waived its fees in the amount of
$738,258.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares, at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV of the Class B and Class C shares of the Fund. Pursuant
to the Class R3 Plan, the Distributor receives a monthly distribution and
shareholder service fee from the Class R3 shares at an annual rate of 0.50% of
the average daily net assets of the Class R3 shares, which is an expense of the
Class R3 shares 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
$42,685 and
30 MainStay MAP Fund
$27,149, respectively, for the year ended October 31, 2009. 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 $86, $572,
$213,539 and $14,736, respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $2,917,392.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 1,371 0.0%++
- ---------------------------------------------------
Class B 1,047 0.0++
- ---------------------------------------------------
Class C 1,577 0.0++
- ---------------------------------------------------
Class I 57,769,305 10.2
- ---------------------------------------------------
Class R1 1,192 0.2
- ---------------------------------------------------
Class R2 1,176 0.0++
- ---------------------------------------------------
Class R3 16,429 1.1
- ---------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $51,011.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(270,182,770) $-- $(22,031,498) $(292,214,268)
- --------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals and Real Estate Investment Trust ("REIT")
basis adjustments.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(616,609) $679,040 $(62,431)
- -----------------------------------------------
</Table>
The reclassifications for the, Fund are primarily due to foreign currency gain
(loss), distribution redesignation and prior year adjustments, tax over
distributions and capital gain distribution from REIT.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $270,182,770 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. The fund acquired $17,996,178 of capital losses in its
reorganization with the MainStay Mid Cap Core Fund (see Note 9); use of these
losses may be limited due to the provisions of IRC section 382. 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. No capital gain distributions shall be made until any capital loss
carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2015 $ 17,996
2016 104,967
2017 147,220
- ------------------------------------
- ------------------------------------
Total $270,183
- ------------------------------------
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $21,669,071 $110,629,307
Long-Term Capital Gains -- 101,272,618
- -------------------------------------------------------
Total $21,669,071 $211,901,925
- -------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the securities of the Fund.
Custodial fees are charged to the Fund based on
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $649,253 and $684,324, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 383,366 $ 8,240,976
Shares issued in connection
with the acquisition of
MainStay Mid Cap Core Fund 471,960 12,672,446
Shares issued to
shareholders in
reinvestment of dividends 64,654 1,458,575
Shares redeemed (599,693) (12,860,843)
--------------------------
Net increase in shares
outstanding before
conversion 320,287 9,511,154
Shares converted into
Investor Class (See Note
1) 643,791 13,254,045
Shares converted from
Investor Class (See Note
1) (244,045) (6,093,420)
--------------------------
Net increase 720,033 $ 16,671,779
==========================
Period ended October 31,
2008 (a):
Shares sold 897,296 $ 29,561,418
Shares redeemed (482,117) (14,451,525)
--------------------------
Net increase in shares
outstanding before
conversion 415,179 15,109,893
Shares converted into
Investor Class (See Note
1) 2,954,573 94,098,927
Shares converted from
Investor Class (See Note
1) (213,479) (6,263,283)
--------------------------
Net increase 3,156,273 $ 102,945,537
==========================
(a) Investor Class shares were first offered on February
28, 2008.
</Table>
32 MainStay MAP Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 2,244,808 $ 52,654,656
Shares issued in connection
with the acquisition of
MainStay
Mid Cap Core Fund 596,707 16,004,168
Shares issued to
shareholders in
reinvestment of dividends 249,055 5,611,889
Shares redeemed (3,641,400) (77,667,930)
--------------------------
Net increase (decrease) in
shares outstanding before
conversion (550,830) (3,397,217)
Shares converted into Class
A
(See Note 1) 813,072 19,144,146
Shares converted from Class
A (See Note 1) (294,018) (5,757,338)
--------------------------
Net increase (decrease) (31,776) $ 9,989,591
==========================
Year ended October 31, 2008:
Shares sold 2,976,260 $ 96,954,579
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,867,434 66,146,501
Shares redeemed (5,678,084) (179,833,104)
--------------------------
Net decrease in shares
outstanding before
conversion (834,390) (16,732,024)
Shares converted into Class
A
(See Note 1) 626,064 19,786,342
Shares converted from Class
A (See Note 1) (2,771,181) (88,305,403)
--------------------------
Net decrease (2,979,507) $ (85,251,085)
==========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 582,834 $ 11,699,920
Shares issued in connection
with the acquisition of
MainStay Mid Cap Core Fund 403,233 10,127,002
Shares issued to
shareholders in
reinvestment of dividends 26,940 562,784
Shares redeemed (1,821,389) (35,852,163)
--------------------------
Net decrease in shares
outstanding before
conversion (808,382) (13,462,457)
Shares converted from Class
B (See Note 1) (985,900) (20,547,433)
--------------------------
Net decrease (1,794,282) $ (34,009,890)
==========================
Year ended October 31, 2008:
Shares sold 888,786 $ 26,763,964
Shares issued to
shareholders in
reinvestment of
distributions 1,200,918 39,522,170
Shares redeemed (2,354,379) (68,981,699)
--------------------------
Net decrease in shares
outstanding before
conversion (264,675) (2,695,565)
Shares converted from Class
B (See Note 1) (641,021) (19,316,583)
--------------------------
Net decrease (905,696) $ (22,012,148)
==========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 551,592 $ 11,194,866
Shares issued in connection
with the acquisition of
MainStay Mid Cap Core Fund 369,562 9,283,474
Shares issued to
shareholders in
reinvestment of dividends 20,620 432,575
Shares redeemed (2,333,234) (46,017,006)
--------------------------
Net decrease (1,391,460) $ (25,106,091)
==========================
Year ended October 31, 2008:
Shares sold 1,335,542 $ 41,010,006
Shares issued to
shareholders in
reinvestment of
distributions 835,379 27,492,349
Shares redeemed (2,352,365) (67,939,051)
--------------------------
Net increase (decrease) (181,444) $ 563,304
==========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 6,941,766 $ 151,458,215
Shares issued in connection
with the acquisition of
MainStay Mid Cap Core Fund 1,439,148 39,290,316
Shares issued to
shareholders in
reinvestment of dividends 505,597 11,671,808
Shares redeemed (5,262,830) (119,056,348)
--------------------------
Net increase 3,623,681 $ 83,363,991
==========================
Year ended October 31, 2008:
Shares sold 9,737,786 $ 322,047,346
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,424,327 51,472,172
Shares redeemed (3,468,738) (110,296,295)
--------------------------
Net increase 7,693,375 $ 263,223,223
==========================
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 197,166 $ 4,212,936
Shares issued to
shareholders in
reinvestment of dividends 831 21,358
Shares redeemed (183,762) (4,807,602)
--------------------------
Net increase (decrease) 14,235 $ (573,308)
==========================
Year ended October 31, 2008:
Shares sold 14,598 $ 491,633
Shares issued to
shareholders in
reinvestment of dividends
and distributions 40,802 1,456,918
Shares redeemed (343,416) (11,396,682)
--------------------------
Net decrease (288,016) $ (9,448,131)
==========================
</Table>
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 485,479 $10,783,583
Shares issued to shareholders
in reinvestment of
dividends 7,440 177,196
Shares redeemed (227,893) (5,151,546)
----------------------
Net increase 265,026 $ 5,809,233
======================
Year ended October 31, 2008:
Shares sold 130,220 $ 4,181,464
Shares issued to shareholders
in reinvestment of
dividends and distributions 28,015 992,636
Shares redeemed (86,259) (2,636,049)
----------------------
Net increase 71,976 $ 2,538,051
======================
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 56,355 $ 1,172,936
Shares issued in connection
with the acquisition of
MainStay Mid Cap Core Fund 3,153 84,631
Shares issued to shareholders
in reinvestment of
dividends 452 11,256
Shares redeemed (15,699) (331,538)
----------------------
Net increase 44,261 $ 937,285
======================
Year ended October 31, 2008:
Shares sold 7,519 $ 245,771
Shares issued to shareholders
in reinvestment of
dividends and distributions 846 29,906
Shares redeemed (1,055) (35,376)
----------------------
Net increase 7,310 $ 240,301
======================
</Table>
NOTE 9--FUND ACQUISITION:
At a meeting held on June 23, 2009, the Board of Trustees approved a plan of
reorganization whereby the Fund would acquire the assets, including the
investments, and assume the liabilities of MainStay Mid Cap Core Fund, a series
of Eclipse Funds. Shareholders of the MainStay Mid Cap Core Fund approved this
reorganization on October 16, 2009, which was then completed on October 23,
2009. The aggregate net assets of the Fund immediately before the acquisition
were $1,322,818,410 and the combined net assets after the acquisition were
$1,410,280,447.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
MAINSTAY MID CAP CORE FUND
- ------------------------------------------------------
Investor Class 669,183 $12,672,446
- ------------------------------------------------------
Class A 846,392 16,004,168
- ------------------------------------------------------
Class B 550,926 10,127,002
- ------------------------------------------------------
Class C 505,644 9,283,474
- ------------------------------------------------------
Class I 2,048,643 39,290,316
- ------------------------------------------------------
Class R3 4,456 84,631
- ------------------------------------------------------
</Table>
In exchange for the MainStay Mid Cap Core Fund shares and net assets, the Fund
issued 471,960 Investor Class Shares; 596,707 Class A shares; 403,233 Class B
shares; 369,562 Class C shares, 1,439,148 Class I shares and 3,153 Class R3
shares.
MainStay Mid Cap Core Fund's net assets after adjustments for any permanent
book-to-tax differences at the acquisition date were as follows, which include
the following amounts of capital stock, unrealized appreciation and accumulated
net realized loss:
<Table>
<Caption>
ACCUMULATED
TOTAL NET UNREALIZED NET REALIZED
ASSETS CAPITAL STOCK DEPRECIATION LOSS
MainStay Mid Cap Core Fund $87,462,037 $105,576,070 $(149,102) $(17,964,931)
- -----------------------------------------------------------------------------------------------------
</Table>
In December 2007, the Financial Accounting Standards Board issued Accounting
Standards Codification (ASC) 805 (formerly FAS 141R Business Combinations),
which requires the following disclosures by the acquirer, among other things,
when a transaction or other event meets the definition of a business
combination:
- - The identification of the acquiree
- - Recognizing and measuring identifiable assets acquired and liabilities
assumed, at the acquisition date, generally at their fair values
- - Disclosure, by the acquirer, of information that enables users of its
financial statements to evaluate the nature and financial effect of a business
combination that occurs during the current reporting period
ASC 805 requires prospective application to business combinations for which the
acquisition date occurs in an annual reporting period beginning on or after
December 15, 2008.
In accordance with ASC 805, for financial reporting purposes, assets received
and shares issued by the Fund were recorded at fair value; however, the cost
basis of the investments received from MainStay Mid Cap Core Fund was carried
forward to align ongoing reporting of the Fund's realized and unrealized gains
and losses with amounts distributable to shareholders for tax purposes.
34 MainStay MAP Fund
ASC 805 will require disclosure in the semi-annual report as of April 30, 2010,
and in the annual report as of October 31, 2010, of the Fund's pro-forma results
of operations, including net investment income, net gain (loss) on investments
and net increase (decrease) in net assets resulting from operations, assuming
the acquisition had been completed on November 1, 2009, the beginning of the
annual reporting period of the Fund, through the end of the applicable reporting
period.
ASC 805 also requires the Fund to report, if practicable, the amounts of revenue
and earnings of the acquiree since the acquisition date included in the combined
entity's income statement for the reporting period. Because the combined
investment portfolios have been managed as a single integrated portfolio since
the acquisition was completed, it is not practicable to separate the amounts of
revenue and earnings of the MainStay Mid Cap Core Fund that will be included in
the Fund's Statement of Operations since November 24, 2009.
NOTE 10--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 11--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay MAP Fund ("the Fund"), one of the
funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 MAP Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
36 MainStay MAP Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay MAP Fund ("Fund") and New York
Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreements between New York Life Investments and Institutional
Capital LLC ("ICAP") and Markston International LLC ("Markston") ("Subadvisers")
on behalf of the Fund.
In addition, on June 23, 2009, the Board approved New York Life Investments'
proposal to reorganize the MainStay Mid Cap Core Fund with and into the Fund. In
determining to approve this reorganization, the Board took several factors into
account, including the fact that the reorganization would be part of a larger
initiative designed to reposition, rationalize and streamline the MainStay Group
of Funds to reduce duplication among funds, strengthen the overall fund lineup,
and offer funds with more significant asset levels.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including ICAP, and Markston, as subadvisers to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and the
Subadvisers; (ii) the investment performance of the Fund, New York Life
Investments and the Subadvisers; (iii) the costs of the services to be provided,
and profits to be realized, by New York Life Investments and its affiliates,
including ICAP, and by Markston, as subadvisers to the Fund, from their
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 and
subadvisory fee levels and overall total ordinary operating expenses,
particularly as compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing each Subadviser's
compliance with the Fund's policies and
mainstayinvestments.com 37
investment objectives, and for implementing Board directives as they relate to
the Fund. In addition, the Board noted that New York Life Investments also is
responsible for paying all of the salaries and expenses for the Fund's officers.
The Board also considered the benefits to shareholders of being part of the
MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that each
Subadviser proposed to provide to the Fund. The Board evaluated each
Subadviser's experience in serving as subadviser to the Fund and managing other
portfolios. It examined each Subadviser's track record and experience in
providing investment advisory services, the experience of investment advisory,
senior management and administrative personnel at each Subadviser, and each
Subadviser's overall legal and compliance environment. The Board also reviewed
each Subadviser's willingness to invest in personnel designed to benefit the
Fund. In this regard, the Board considered the experience of the Fund's
portfolio managers, the number of accounts managed by the portfolio managers and
the method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and each Subadviser'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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
The Board considered the costs of the services provided by New York Life
Investments and the Subadvisers under the Agreements, and the profits expected
to be realized by New York Life Investments, its affiliates and Markston due to
their relationships with the Fund. Because ICAP is an affiliate of New York Life
Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and ICAP in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including ICAP, and Markston, as subadvisers to the Fund, due to
their relationships with the Fund, the Board considered, among other things,
each party's investments in personnel, systems, equipment and other resources
necessary to manage the Fund, and the fact that New York Life Investments is
responsible for paying the subadvisory fees for the Fund. The Board acknowledged
that New York Life Investments and the Subadvisers must be in a position to pay
and retain experienced professional
38 MainStay MAP Fund
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments, its
affiliates and Markston regarding their estimated profitability due to their
overall relationships with the Fund. For New York Life Investments and the
Subadvisers, the Board considered information illustrating the revenues and
expenses allocated to the Fund. With respect to Markston, which is a subadviser
not affiliated with New York Life Investments whose fees are paid directly by
New York Life Investments, the Board focused primarily on the profitability of
the relationship between New York Life Investments, its affiliates and the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments, its affiliates and Markston due to their relationships with the
Fund. The Board recognized, for example, the benefits to the Subadvisers from
legally permitted "soft-dollar" arrangements by which brokers provide research
and other services to the Subadvisers in exchange for commissions paid by the
Fund with respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including ICAP) and Markston due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and the Subadvisers may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses of the
Fund. The Board primarily considered the reasonableness of the overall
management fees paid by the Fund to New York Life Investments, since the fees to
be paid to the Subadvisers are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and the Subadvisers on fees
mainstayinvestments.com 39
charged 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 explanations from New York Life Investments
and the Subadvisers about the different scope of services provided to retail
mutual funds as compared with other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to modify
the expense limitation arrangements on the Fund's share classes to decrease the
amount of New York Life Investments' subsidization of class expenses. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
modify the expense limitations on the Fund's share classes in order to reduce
the amount of class expenses subsidized by New York Life Investments. The Board
acknowledged that New York Life Investments may recoup amounts waived or
reimbursed under contractual expense limitations if such action does not cause a
share class to exceed an expense limitation, and the recoupment is made during
the term of the agreement. The Board further acknowledged that New York Life
Investments may determine voluntarily to waive expenses of Fund share classes
without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
40 MainStay MAP Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$25,927,080 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, 2009,
should be multiplied by 1.6% to arrive at the amount eligible for qualified
interest income and 60.9% for the corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND
PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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 41
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Chief Executive Officer,
Director since 2008 (20 NYLIFE Distributors LLC and
portfolios). Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
42 MainStay MAP Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 43
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
44 MainStay MAP Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 45
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
46 MainStay MAP Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
---------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017198 (RECYCLE LOGO) MS283-09 MSMP11-12/09
30
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts of Congress, the Treasury
Department, the Federal Deposit Insurance Corporation, the Federal Reserve and
other central banks to address the credit crisis. The turning point for the U.S.
stock market came in March 2009, when investors became convinced that the worst
was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 25
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT 26
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 30
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 30
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 30
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 31
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
INVESTOR CLASS SHARES(2,3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
0.12% 2.74% 2.62%
7-DAY CURRENT YIELD: 0.01%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MAINSTAY MONEY MONEY MARKET
MARKET FUND FUND
-------------- --------------
10/31/99 10000 10000
10571 10552
11039 10995
11191 11127
11258 11186
11319 11242
11568 11474
12052 11939
12617 12488
12940 12815
10/31/09 12956 12862
</Table>
CLASS A SHARES(2)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
0.16% 2.76% 2.64%
7-DAY CURRENT YIELD: 0.01%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MAINSTAY MONEY MONEY MARKET
MARKET FUND FUND
-------------- --------------
10/31/99 25000 25000
26428 26380
27597 27488
27978 27816
28145 27965
28297 28104
28920 28684
30130 29848
31543 31221
32379 32037
10/31/09 32431 32155
</Table>
CLASS B SHARES(2)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
0.12% 2.74% 2.62%
7-DAY CURRENT YIELD: 0.01%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MAINSTAY MONEY MONEY MARKET
MARKET FUND FUND
-------------- --------------
10/31/99 10000 10000
10571 10552
11039 10995
11191 11127
11258 11186
11319 11242
11568 11474
12052 11939
12617 12488
12942 12815
10/31/09 12957 12862
</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 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. Effective
September 15, 2008, no minimum initial investment with no minimum subsequent
investment is required for Class A shares of the Money Market Fund if all of
your other accounts with any MainStay Fund contain Class A shares only.
Additionally, please note that if at any time you hold any class of shares
other than Class A shares of any MainStay Fund, your holdings in the Money
Market Fund will immediately become subject to the applicable investment
minimums, subsequent purchase minimums and subsequent conversion features.
Investor Class shares and Class A, B and C shares are sold with no initial
sales charge or contingent deferred sales charge ("CDSC") and have no annual
12b-1 fees. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain management fee waivers or expense reimbursements
from the Fund pursuant to the agreement, if such action does not cause the
Fund to exceed existing expense limitations and the recoupment is made within
the term of the agreement. Any recoupment amount is generally applied within
a fiscal year. This agreement expires on February 28, 2011.
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(2)--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
0.12% 2.74% 2.62%
7-DAY CURRENT YIELD: 0.01%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MAINSTAY MONEY MONEY MARKET
MARKET FUND FUND
-------------- --------------
10/31/99 10000 10000
10571 10552
11039 10995
11191 11127
11258 11186
11319 11242
11568 11474
12052 11939
12617 12488
12942 12815
10/31/09 12957 12862
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- --------------------------------------------------------------------
Average Lipper money market fund(4) 0.36% 2.70% 2.55%
</Table>
2. As of October 31, 2009, MainStay Money Market Fund had an effective 7-day
yield of 0.01%, 0.01%, 0.01% and 0.01% for Investor Class, Class A, B and C
shares, respectively. The 7-day current yield was 0.01%, 0.01%, 0.01% and
0.01% for Investor Class, Class A, B and C shares, respectively. These yields
reflect certain expense limitations. Had these expense limitations not been
in effect, the effective 7-day yield would have been -0.51%, -0.46%, -0.52%
and -0.52% for Investor Class, Class A, B and C shares, respectively, and the
7-day current yield would have been -0.51% for Investor Class, -0.46% for
Class A, -0.52% for Class B and -0.52% for Class C. The fee waivers and/or
expense limitations are contractual and may be modified or terminated only
with the approval of the Board of Trustees. The current yield reflects the
Fund's earnings better than does the Fund's total return.
3. 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.
4. The average Lipper money market fund is an equally weighted performance
average adjusted for capital gains distributions and income dividends of all
of the money market funds in the Lipper Universe. Lipper Inc., a wholly-owned
subsidiary of Reuters Group PLC, is an independent monitor of mutual fund
performance. Results do not reflect any deduction of sales charges. Lipper
averages are not class specific. Lipper returns are unaudited. 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 Money Market Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MONEY MARKET FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,000.10 $2.02 $1,023.20 $2.04
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,000.10 $2.02 $1,023.20 $2.04
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,000.10 $2.02 $1,023.20 $2.04
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,000.10 $2.02 $1,023.20 $2.04
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(0.40% for Investor Class, Class A, Class B and Class C) multiplied by the
average account value over the period, divided by 365 and multiplied by 184
(to reflect the one-half year period). The table above represents the actual
expenses incurred during the one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
COMMERCIAL PAPER 46.1
- ---------------- ----
U.S. Government & Federal Agencies 31.90
Repurchase Agreements 11.20
Corporate Bonds 8.40
Asset-Backed Securities 2.20
Yankee Bond 0.30
Liabilities in Excess of Cash and Other
Assets (0.10)
</Table>
See Portfolio of Investments beginning on page 11 for specific holdings within
these categories.
8 MainStay Money Market Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS DAVID E. CLEMENT, CFA, AND THOMAS J.
GIRARD OF NEW YORK LIFE INVESTMENTS,(1) THE FUND'S MANAGER.
HOW DID MAINSTAY MONEY MARKET FUND PERFORM RELATIVE TO ITS PEERS DURING THE 12
MONTHS ENDED OCTOBER 31, 2009?
As of October 31, 2009, MainStay Money Market Fund provided a 7-day current
yield of 0.01% for Investor Class, Class A, Class B and Class C shares. As of
the same date, the Fund provided a 7-day effective yield of 0.01% for all share
classes. For the 12 months ended October 31, 2009, MainStay Money Market Fund
returned 0.12% for Investor Class shares, 0.16% for Class A shares and 0.12% for
Class B and Class C shares. All share classes underperformed the 0.36% return of
the average Lipper(2) money market fund for the 12 months ended October 31,
2009.
WERE THERE CHANGES IN THE FUND'S PORTFOLIO MANAGEMENT DURING THE REPORTING
PERIOD?
Effective March 2, 2009, the Subadvisory Agreement between the Manager and
MacKay Shields LLC, the Fund's Subadvisor, was terminated. At the same time,
David E. Clement, CFA, and Thomas J. Girard of New York Life Investments became
the Fund's portfolio managers and assumed day-to-day portfolio management
responsibilities for the Fund.
WHAT FACTORS INFLUENCED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
From November 2008 through early January 2009, the Fund maintained a shorter
duration(3) than it normally would when interest rates are expected to fall in
response to reduced market liquidity. This decision hurt performance relative to
the Fund's Lipper peers during these months because interest rates fell. During
the second half of the reporting period, we lengthened the Fund's duration,
which helped the Fund's results relative to its peers when short-term interest
rates rallied. Throughout the reporting period, the Fund benefited from active
participation in the market for fixed- and floating-rate securities with
government backing.
WHAT ECONOMIC AND MARKET FORCES AFFECTED THE FUND DURING THE REPORTING PERIOD?
The Federal Open Market Committee (FOMC) lowered its targeted federal funds rate
to a range from 0% to 0.25% in December 2008. The FOMC's decision to maintain
this low target range had a dramatic impact on short-term interest rates during
the reporting period. The FOMC's decision kept short-term interest rates low,
which in turn led to a lower yield for the Fund.
HOW DID YOU MANAGE THE FUND'S DURATION DURING THE REPORTING PERIOD?
As noted above, from November 2008 into early January 2009, the Fund maintained
a duration that was shorter than the portfolio manager would normally have
maintained when interest rates were expected to fall. This stance was maintained
in response to reduced market liquidity. The FOMC's low federal funds target
range influenced our decision to increase the Fund's duration during the second
half of the reporting period. We lengthened the Fund's duration from
approximately 30 to 40 days at the beginning of the reporting period to between
70 and 75 days at the end. This longer duration was beneficial to the Fund's
performance.
WHICH POSITIONS WERE STRONG CONTRIBUTORS TO THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
During the reporting period, the Fund benefited from its exposure to government-
backed securities. In the floating-rate security sector, the Fund invested in
bonds backed by the Federal Deposit Insurance Corporation (FDIC), including
issues from Bank of America, General Electric Capital and SunTrust Bank (all due
December 2010).
In the fixed-rate sector, the Fund extended its duration by investing in short-
term agency and
- ----------
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information and changes in tax or currency laws or monetary policy. The Fund's
principal investments include variable-rate notes, floaters and mortgage-related
and asset-backed securities. If the Fund's Manager is incorrect about its
expectations regarding changes in interest rates, its assessment of an issuer's
creditworthiness or market conditions, the use of such investments could result
in a loss. The principal risk of mortgage-related and asset-backed securities is
that the underlying debt may be prepaid ahead of schedule if interest rates
fall, thereby reducing the value of the Fund's investments. If interest rates
rise, less of the debt may be prepaid, which would cause the average bond
maturity to rise and increase the potential for the Fund to lose money.
1. "New York Life Investments" is a service mark used by New York Life
Investment Management LLC.
2. See footnote on page 6 for more information on Lipper Inc.
3. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
mainstayinvestments.com 9
Treasury coupon securities. This decision benefited the Fund's performance as
the yield curve(4) flattened during the reporting period. Significant purchases
during the reporting period included issues of the Federal Home Loan Bank (due
October 2010), the Federal National Mortgage Association (Fannie Mae) (due
October 2010), the Federal Farm Credit Bank (due May 2010) and the U.S. Treasury
(due June 2010 and September 2010).
The Fund was also successful in adding yield during the period through
investments in eligible first-pay tranches of some asset-backed transactions.
Holdings in this area included issues of Honda, Volkswagen, Ford and Huntington
Auto.
WERE THERE ANY SIGNIFICANT WEIGHTING CHANGES DURING THE REPORTING PERIOD?
During the reporting period, we increased the Fund's weightings in FDIC-backed
floating-rate securities, fixed-rate short-term agency coupon securities and
repurchase agreements. A notable decrease occurred in the commercial paper
sector.
- ----------
4. The yield curve is a line that plots the yields of various securities of
similar quality--typically U.S. Treasury issues--across a range of
maturities. The U.S. Treasury yield curve serves as a benchmark for other
debt and is used in economic forecasting. The money market yield curve is
said to flatten when the difference between the short end and the long end of
the curve decreases.
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.
10 MainStay Money Market Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS 100.5%+
- ----------------------------------------------------------------
ASSET-BACKED SECURITIES 1.3%
BMW Vehicle Lease Trust
Series 2009-1, Class A1
0.792%, due 6/15/10 $ 457,721 $ 457,721
Carmax Auto Owner Trust
Series 2009-2, Class A1
1.00%, due 11/15/10 1,700,000 1,700,000
CIT Equipment Collateral
Series 2009-VT1, Class A1
1.22%, due 6/15/10 (a) 1,130,101 1,130,101
CNH Equipment Trust
Series 2009-A, Class A1
1.736%, due 4/15/10 13,402 13,402
Ford Credit Auto Owner Trust
Series 2009-B, Class A1
0.988%, due 6/15/10 (a) 649,731 649,731
Honda Auto Receivables Owner
Trust
Series 2009-2, Class A1
1.318%, due 5/17/10 480,063 480,063
Huntington Auto Trust
Series 2009-1A, Class A1
1.989%, due 4/15/10 (a) 518,392 518,392
Nissan Auto Lease Trust
Series 2009-A, Class A1
1.043%, due 6/15/10 687,109 687,109
Nissan Auto Receivables Owner
Trust
Series 2009-A, Class A1
1.764%, due 4/15/10 901,948 901,948
Volkswagen Auto Lease Trust
Series 2009-A, Class A1
1.452%, due 5/17/10 284,246 284,246
-------------
6,822,713
-------------
COMMERCIAL PAPER 57.0%
Abbot Laboratories
0.08%, due 11/30/09 (a)(b) 5,000,000 4,999,678
Avery Dennison Corp.
0.23%, due 11/2/09 (a)(b) 3,500,000 3,499,978
Basin Electric Power
Cooperative
0.20%, due 11/3/09 (a)(b) 5,000,000 4,999,944
BNP Paribas Finance, Inc.
0.18%, due 11/9/09 (b) 5,500,000 5,499,780
0.18%, due 11/12/09 (b) 5,500,000 5,499,697
BP Capital Markets PLC
0.90%, due 11/3/09 (a)(b) 7,000,000 6,999,650
Brown-Forman Corp.
0.16%, due 11/13/09 (a)(b) 3,500,000 3,499,813
0.22%, due 1/5/10 (a)(b) 3,350,000 3,348,669
Campbell Soup Co.
0.19%, due 11/3/09 (a)(b) 5,400,000 5,399,943
0.50%, due 4/29/10 (a)(b) 4,000,000 3,990,056
0.60%, due 7/30/10 (a)(b) 3,500,000 3,484,192
Cargill, Inc.
0.11%, due 11/4/09 (a)(b) 9,000,000 8,999,917
0.14%, due 11/13/09 (a)(b) 7,000,000 6,999,673
Clorox Co. (The)
0.20%, due 11/5/09 (a)(b) 1,000,000 999,978
Coca-Cola Co. (The)
0.12%, due 11/19/09 (a)(b) 4,600,000 4,599,724
0.15%, due 11/16/09 (a)(b) 6,000,000 5,999,625
Colgate Palmolive Co.
0.10%, due 11/10/09 (a)(b) 4,000,000 3,999,900
Deutsche Bank Financial LLC
0.14%, due 11/30/09 (b) 5,000,000 4,999,436
Devon Energy Corp.
0.20%, due 11/12/09 (a)(b) 2,700,000 2,699,835
Diageo Capital PLC
0.27%, due 11/23/09 (a)(b) 3,400,000 3,399,439
Duke Energy Corp.
0.28%, due 11/12/09 (a)(b) 1,250,000 1,249,893
Dupont EI De Nemours Co.
0.12%, due 11/19/09 (a)(b) 5,100,000 5,099,694
Export Development Corp.
0.85%, due 11/9/09 (b) 11,100,000 11,097,903
FPL Group, Inc.
0.12%, due 11/2/09 (a)(b) 3,900,000 3,899,987
0.14%, due 11/5/09 (a)(b) 4,000,000 3,999,938
General Electric Capital
Corp.
0.12%, due 11/18/09 (b) 7,000,000 6,999,603
GlaxoSmithKline Finance PLC
0.12%, due 11/25/09 (a)(b) 10,000,000 9,999,200
0.14%, due 11/4/09 (a)(b) 4,000,000 3,999,953
Honeywell International, Inc.
0.13%, due 12/14/09 (a)(b) 1,500,000 1,499,767
0.14%, due 12/21/09 (a)(b) 1,000,000 999,806
0.70%, due 11/2/09 (a)(b) 10,000,000 9,999,806
JPMorgan Chase Funding, Inc.
0.16%, due 11/18/09 (a)(b) 6,750,000 6,749,490
0.18%, due 11/4/09 (a)(b) 5,000,000 4,999,925
Merck & Co., Inc.
0.13%, due 11/20/09 (a)(b) 7,000,000 6,999,520
0.13%, due 12/14/09 (a)(b) 7,000,000 6,998,913
Northern Il Gas Corp.
0.10%, due 11/2/09 (b) 6,900,000 6,899,981
NSTAR Electric Co.
0.11%, due 11/4/09 (b) 2,000,000 1,999,982
0.11%, due 11/16/09 (b) 5,700,000 5,699,739
</Table>
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
Paccar Financial Corp.
0.12%, due 11/13/09 (b) $ 2,900,000 $ 2,899,884
0.12%, due 11/17/09 (b) 5,000,000 4,999,733
0.13%, due 11/5/09 (b) 5,000,000 4,999,928
PepsiAmericas, Inc.
0.15%, due 11/9/09 (a)(b) 6,000,000 5,999,800
0.15%, due 11/16/09 (a)(b) 6,000,000 5,999,625
Pitney Bowes, Inc.
0.10%, due 11/12/09 (a)(b) 2,000,000 1,999,939
Private Export Funding Corp.
0.10%, due 11/13/09 (a)(b) 6,000,000 5,999,800
Procter & Gamble Co.
0.22%, due 11/10/09 (a)(b) 8,000,000 7,999,560
0.24%, due 11/20/09 (a)(b) 3,000,000 2,999,620
Roche Holding, Inc.
0.10%, due 11/6/09 (a)(b) 4,500,000 4,499,937
Siemens Capital Co. LLC
0.11%, due 11/3/09 (a)(b) 2,150,000 2,149,987
0.11%, due 11/12/09 (a)(b) 1,500,000 1,499,950
0.11%, due 11/23/09 (a)(b) 8,000,000 7,999,462
Societe Generale North
America, Inc.
0.15%, due 11/5/09 (b) 6,000,000 5,999,900
0.18%, due 11/6/09 (b) 5,000,000 4,999,875
Southern Co. Funding Corp.
0.11%, due 11/23/09 (a)(b) 4,700,000 4,699,684
0.13%, due 11/2/09 (a)(b) 500,000 499,998
0.13%, due 11/17/09 (a)(b) 7,000,000 6,999,596
Transocean, Ltd.
0.28%, due 11/24/09 (a)(b) 3,500,000 3,499,374
United Parcel Service, Inc.
0.10%, due 12/1/09 (a)(b) 5,750,000 5,749,521
Wal-Mart Stores, Inc.
0.10%, due 11/4/09 (a)(b) 2,890,000 2,889,976
0.10%, due 11/10/09 (a)(b) 3,100,000 3,099,923
0.10%, due 12/7/09 (a)(b) 3,780,000 3,779,622
Wisconsin Energy Corp.
0.20%, due 11/6/09 (a)(b) 3,800,000 3,799,894
-------------
299,176,615
-------------
CORPORATE BONDS 8.0%
Bank of America Corp.
0.848%, due 12/2/10 (c)(d) 1,000,000 1,006,492
Bank of America N.A.
0.33%, due 9/13/10 (c)(d) 4,875,000 4,875,000
Citigroup, Inc.
0.859%, due 12/9/10 (c)(d) 4,000,000 4,027,396
General Electric Capital
Corp.
0.379%, due 3/11/11 (c)(d) 3,250,000 3,250,000
0.939%, due 12/9/10 (c)(d) 2,000,000 2,016,413
Goldman Sachs Group, Inc.
(The)
4.50%, due 6/15/10 3,400,000 3,478,665
International Bank for
Reconstruction &
Development (Discount Note)
0.174%, due 11/17/09 (b) 7,000,000 6,999,471
Keycorp
0.949%, due 12/15/10 (c)(d) 5,000,000 5,041,055
Praxair, Inc.
0.477%, due 5/26/10 (c) 3,700,000 3,700,000
Roche Holdings, Inc.
1.393%, due 2/25/10 (a)(c) 5,500,000 5,500,000
SunTrust Bank
0.945%, due 12/16/10 (c)(d) 1,750,000 1,764,981
-------------
41,659,473
-------------
REPURCHASE AGREEMENT 6.0%
SG Americas Securities LLC
0.07%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$31,641,185 (Collateralized
by a U.S. Treasury Bill,
with a rate of 4.50% and a
maturity date of 2/15/36,
with a Principal Amount of
$31,194,400 and a Market
Value of $32,771,073) 31,641,000 31,641,000
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 27.8%
Federal Farm Credit Bank
0.164%, due 7/28/10 (c) 6,000,000 6,000,000
1.05%, due 3/18/10 6,500,000 6,499,634
2.75%, due 5/4/10 2,000,000 2,020,165
5.25%, due 9/13/10 4,625,000 4,810,257
Federal Farm Credit Bank
(Discount Note)
0.40%, due 5/3/10 (b) 4,000,000 3,991,867
Federal Home Loan Bank
0.173%, due 3/26/10 (c) 4,945,000 4,945,146
0.396%, due 2/19/10 (c) 7,250,000 7,252,869
0.50%, due 10/29/10 3,500,000 3,500,000
0.55%, due 8/4/10 3,000,000 3,000,976
0.60%, due 6/15/10 4,000,000 4,004,352
0.60%, due 6/25/10 10,000,000 10,006,721
0.68%, due 7/2/10 4,000,000 4,000,000
0.70%, due 6/23/10 4,500,000 4,500,000
0.80%, due 4/23/10 6,000,000 6,000,000
1.05%, due 2/26/10 4,000,000 3,999,766
1.10%, due 3/16/10 6,500,000 6,497,307
Federal Home Loan Bank
(Discount Notes)
0.41%, due 4/27/10 (b) 1,000,000 997,984
0.82%, due 12/4/09 (b) 6,925,000 6,919,795
</Table>
12 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
Federal Home Loan Mortgage
Corporation
2.875%, due 6/28/10 $ 2,000,000 $ 2,032,043
Federal Home Loan Mortgage
Corporation (Discount Note)
0.20%, due 11/9/09 (b) 5,300,000 5,299,764
Federal National Mortgage
Association
2.875%, due 10/12/10 2,000,000 2,045,053
3.25%, due 2/10/10 4,000,000 4,024,211
4.125%, due 5/15/10 4,400,000 4,489,929
United States Treasury Bills
0.24%, due 7/15/10 (b) 700,000 698,805
0.295%, due 4/1/10 (b) 1,000,000 998,763
0.305%, due 12/17/09 (b) 2,000,000 1,999,220
0.41%, due 6/10/10 (b) 3,000,000 2,992,449
0.478%, due 7/29/10 (b) 3,800,000 3,786,605
United States Treasury Notes
1.50%, due 10/31/10 6,200,000 6,266,969
2.00%, due 9/30/10 9,200,000 9,334,445
2.375%, due 8/31/10 3,400,000 3,457,213
2.875%, due 6/30/10 4,000,000 4,059,156
3.50%, due 11/15/09 5,500,000 5,506,819
-------------
145,938,283
-------------
YANKEE BOND 0.4% (E)
Procter & Gamble
International Funding SCA
0.525%, due 2/8/10 (c) 1,950,000 1,950,000
-------------
Total Short-Term Investments
(Amortized Cost
$527,188,084) (f) 100.5% 527,188,084
Liabilities in Excess of
Cash and Other Assets (0.5) (2,544,045)
----- ------------
Net Assets 100.0% $ 524,644,039
===== ============
</Table>
<Table>
(a) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Interest rate presented is yield to
maturity.
(c) Floating rate. Rate shown is the rate in
effect at October 31, 2009.
(d) The debt is guaranteed under the Federal
Deposit Insurance Corporation (FDIC)
Temporary Liquidity Guarantee Program and
is backed by the full faith and credit of
the United States. The expiration date
of the FDIC's guarantee is the earlier of
the maturity date of the debt or June 30,
2012.
(e) Yankee Bond - dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(f) The cost stated also represents the
aggregate cost for federal income tax
purposes.
</Table>
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Short-Term Investments
Asset-Backed Securities $ -- $ 6,822,713 $ -- $ 6,822,713
Commercial Paper -- 299,176,615 -- 299,176,615
Corporate Bonds -- 41,659,473 -- 41,659,473
Repurchase Agreement -- 31,641,000 -- 31,641,000
U.S. Government & Federal Agencies -- 145,938,283 -- 145,938,283
Yankee Bond -- 1,950,000 -- 1,950,000
---------- ------------ ---------- ------------
Total Investments in Securities $-- $527,188,084 $-- $527,188,084
========== ============ ========== ============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with
significant unobservable inputs (Level 3).
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, 2009 (CONTINUED)
The table below sets forth the diversification of the Money Market Fund
investments by industry.
INDUSTRY DIVERSIFICATION (UNAUDITED)
<Table>
<Caption>
AMORTIZED
COST PERCENT(+)
Agriculture $ 15,999,590 3.1%
Automobile ABS 5,679,210 1.1
Banks 58,941,692 11.2
Beverages 32,846,695 6.3
Chemicals 8,799,694 1.7
Cosmetics & Personal Care 16,949,080 3.2
Diversified Financial Services 45,164,514 8.6
Electric 37,848,655 7.2
Food 12,874,191 2.5
Gas 6,899,981 1.3
Health Care--Services 9,999,937 1.9
Household Products & Wares 4,499,956 0.9
Miscellaneous--Manufacturing 24,148,778 4.6
Multi-National 6,999,471 1.3
Office & Business Equipment 1,999,939 0.4
Oil & Gas 13,198,859 2.5
Other ABS 1,143,503 0.2
Pharmaceuticals 18,998,111 3.6
Repurchase Agreement 31,641,000 6.0
Retail 9,769,521 1.9
Sovereign 11,097,903 2.1
Transportation 5,749,521 1.1
U.S. Government & Agencies 145,938,283 27.8
------------ -----
527,188,084 100.5
Liabilities in Excess of Cash
and Other Assets (2,544,045) (0.5)
------------ -----
Net Assets $524,644,039 100.0%
============ =====
</Table>
<Table>
+ Percentages indicated are based on Fund
net assets.
</Table>
14 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $527,188,084) $527,188,084
Cash 135
Receivables:
Fund shares sold 2,002,700
Interest 592,511
Manager (See Note 3) 18,239
Other assets 36,933
------------
Total assets 529,838,602
------------
LIABILITIES:
Payables:
Fund shares redeemed 3,110,185
Investment securities purchased 1,700,000
Transfer agent (See Note 3) 253,793
Shareholder communication 73,338
Professional fees 39,941
Custodian 9,738
Trustees 2,288
Accrued expenses 5,139
Dividend payable 141
------------
Total liabilities 5,194,563
------------
Net assets $524,644,039
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 5,246,259
Additional paid-in capital 519,382,574
------------
524,628,833
Accumulated undistributed net
investment income 15,206
------------
Net assets $524,644,039
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 67,220,369
============
Shares of beneficial interest
outstanding 67,219,672
============
Net asset value and offering price
per share outstanding $ 1.00
============
CLASS A
Net assets applicable to
outstanding shares $279,765,967
============
Shares of beneficial interest
outstanding 279,762,399
============
Net asset value and offering price
per share outstanding $ 1.00
============
CLASS B
Net assets applicable to
outstanding shares $144,463,527
============
Shares of beneficial interest
outstanding 144,451,925
============
Net asset value and offering price
per share outstanding $ 1.00
============
CLASS C
Net assets applicable to
outstanding shares $ 33,194,176
============
Shares of beneficial interest
outstanding 33,191,876
============
Net asset value and offering price
per share outstanding $ 1.00
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 3,901,618
-----------
EXPENSES:
Manager (See Note 3) 2,745,389
Transfer agent--Investor Class
(See Note 3) 258,367
Transfer agent--Class A (See Note
3) 431,909
Transfer agent--Classes B and C
(See Note 3) 754,519
Insurance guarantee (See Note 7) 233,073
Shareholder communication 199,571
Professional fees 160,783
Registration 123,819
Custodian 31,452
Trustees 28,279
Miscellaneous 32,058
-----------
Total expenses before waiver 4,999,219
Expense waiver from Manager (See
Note 3) (2,048,742)
-----------
Net expenses 2,950,477
-----------
Net investment income 951,141
-----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 4,423
-----------
Net increase in net assets resulting
from operations $ 955,564
===========
</Table>
16 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 951,141 $ 16,314,511
Net realized gain on
investments 4,423 34,557
-----------------------------
Net increase in net assets
resulting from operations 955,564 16,349,068
-----------------------------
Dividends to shareholders:
From net investment
income:
Investor Class (88,466) (631,850)
Class A (568,332) (9,843,192)
Class B (218,829) (4,649,885)
Class C (63,098) (1,202,040)
-----------------------------
Total dividends to
shareholders (938,725) (16,326,967)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares 405,818,659 782,086,058
Net asset value of shares
issued to shareholders in
reinvestment of dividends 882,086 15,282,265
Cost of shares redeemed (571,445,207) (668,002,065)
-----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions (164,744,462) 129,366,258
-----------------------------
Net increase (decrease)
in net assets (164,727,623) 129,388,359
NET ASSETS:
Beginning of year 689,371,662 559,983,303
-----------------------------
End of year $ 524,644,039 $ 689,371,662
=============================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of year $ 15,206 $ (1,633)
=============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
-----------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
-----------------------------
2009 2008
Net asset value at beginning of period $ 1.00 $ 1.00
------- -------
Net investment income 0.00 ++ 0.01
Net realized and unrealized gain on
investments 0.00 ++ 0.00 ++
------- -------
Total from investment operations 0.00 ++ 0.01
------- -------
Less dividends and distributions:
From net investment income (0.00)++ (0.01)
From net realized gain on investments -- --
------- -------
Total dividends and distributions (0.00)++ (0.01)
------- -------
Net asset value at end of period $ 1.00 $ 1.00
======= =======
Total investment return 0.12% 1.24%(a)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.13% 1.67%++
Net expenses 0.50% 0.80%++
Expenses (before waiver) 0.95% 0.88%++
Net assets at end of period (in 000's) $67,220 $72,721
</Table>
<Table>
<Caption>
CLASS B
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net investment income 0.00 ++ 0.03 0.05 0.04 0.02
Net realized and
unrealized gain on
investments 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- -------- -------- --------
Total from investment
operations 0.00 ++ 0.03 0.05 0.04 0.02
-------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.00)++ (0.03) (0.05) (0.04) (0.02)
From net realized gain
on investments -- -- -- -- --
-------- -------- -------- -------- --------
Total dividends and
distributions (0.00)++ (0.03) (0.05) (0.04) (0.02)
-------- -------- -------- -------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 0.12% 2.57% 4.69% 4.18% 2.20%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 0.14% 2.54% 4.59% 4.14% 2.21%
Net expenses 0.51% 0.76% 0.70% 0.70% 0.70%
Expenses (before waiver) 0.95% 0.84% 0.83% 0.93% 0.99%
Net assets at end of
period (in 000's) $144,464 $187,237 $176,753 $189,216 $246,104
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Total return is not annualized.
</Table>
18 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
0.00 ++ 0.03 0.05 0.04 0.02
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- -------- -------- --------
0.00 ++ 0.03 0.05 0.04 0.02
-------- -------- -------- -------- --------
(0.00)++ (0.03) (0.05) (0.04) (0.02)
-- -- -- -- --
-------- -------- -------- -------- --------
(0.00)++ (0.03) (0.05) (0.04) (0.02)
-------- -------- -------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
0.16% 2.65% 4.69% 4.18% 2.20%
0.18% 2.65% 4.59% 4.14% 2.21%
0.47% 0.68% 0.70% 0.70% 0.70%
0.73% 0.71% 0.83% 0.93% 0.99%
$279,766 $372,956 $346,960 $260,642 $205,154
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
0.00 ++ 0.03 0.05 0.04 0.02
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------- ------- ------- ------- -------
0.00 ++ 0.03 0.05 0.04 0.02
------- ------- ------- ------- -------
(0.00)++ (0.03) (0.05) (0.04) (0.02)
-- -- -- -- --
------- ------- ------- ------- -------
(0.00)++ (0.03) (0.05) (0.04) (0.02)
------- ------- ------- ------- -------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
0.12% 2.57% 4.69% 4.18% 2.20%
0.15% 2.51% 4.59% 4.14% 2.21%
0.52% 0.76% 0.70% 0.70% 0.70%
0.95% 0.83% 0.83% 0.93% 0.99%
$33,194 $56,458 $36,270 $23,306 $20,426
</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
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Money Market Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on May 1,
1986. Class C shares commenced operations on September 1, 1998. Investor Class
shares commenced operations on February 28, 2008. 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 four 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.
The Fund's investment objective is to seek as high a level of current income
while preserving capital and maintaining liquidity.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) VALUATION OF FUND SHARES. The Fund seeks to maintain a net asset value
("NAV") of $1.00 per share, although there is no assurance that it will be able
to do so on a continuous basis, and it has adopted certain investment, portfolio
and dividend and distribution policies designed to enable it to do as such. An
investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
(B) SECURITIES VALUATION. Securities are valued at their amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between such cost and the value on maturity date.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that might have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(C) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
20 Mainstay Money Market Fund
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund declares dividends of net
investment income daily and the Fund pays them monthly and declares and pays
distribution of net realized capital gains, if any, annually. All dividends and
distributions are reinvested in shares of the Fund, at NAV, 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.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily and discounts and premiums on securities purchased for the Fund
are accreted and amortized, respectively, on the straight-line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and 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 NAV
on the date the expenses are incurred. The expenses borne by the Fund, including
those of related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(H) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager to be creditworthy, pursuant to
guidelines established by the Fund's Board of Trustees. Repurchase agreements
are considered under the 1940 Act to be collateralized loans by a Fund to the
seller secured by the securities transferred to the Fund.
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 and possible
realized loss to the Fund.
(I) CONCENTRATION OF RISK. The Fund's principal investments include derivatives
such as variable rate master demand notes, "floating-rate notes" and mortgage-
related and asset-backed securities. If expectations about changes in interest
rates, or assessments of an issuer's credit worthiness or market conditions are
incorrect, the use of these types of investments could result in a loss.
The Fund also invests in securities of foreign issuers, which carry certain
risks in addition to the usual risks inherent in domestic instruments. These
risks include those resulting from future adverse political or economic
developments and possible imposition of currency exchange blockages or other
foreign governmental laws and restrictions. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific country, industry or region.
(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.
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 ("New York Life
Investments" 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, conducts
clerical, recordkeeping and bookkeeping services, and keeps most of 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 New York Life Investments directly, without a
subadvisor.
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:
0.45% on assets up to $500 million, 0.40% on assets from $500 million to $1
billion, and 0.35% on assets in excess of $1 billion, plus a fee for fund
accounting services previously provided by New York Life Investments under a
separate fund accounting agreement.
Effective August 1, 2009, New York Life Investments has 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, and other transaction expenses relating to the purchase or sale of
portfolio investments in which the Fund invests) do not exceed the following
percentages of average daily net assets: Investor Class, 0.80%; Class A, 0.70%;
Class B, 0.80% and Class C, 0.80%. The expense limitation agreement may be
modified or terminated only with the approval of the Board of Trustees. Under
the expense limitation agreement, New York Life Investments 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 limitations and the recoupment is made during the term of the
agreement. Any recoupment amount is generally applied within a fiscal year. This
expense limitation agreement was set to expire on July 31, 2010. On December 11,
2009, the Board of Trustees approved an extension of the agreement to February
28, 2011.
Prior to August 1, 2009, New York Life Investments had written expense
limitation agreements that set the expense limitations for Investor Class, Class
A, Class B and Class C shares at the same levels as the August 1, 2009
agreement.
From time to time, the Manager may limit expenses of the Fund to the extent it
deems appropriate to enhance the yield of the Fund, or a particular class of the
Fund, during periods when expenses have a significant impact on the yield of the
Fund, or a particular class of the Fund, as applicable, because of low interest
rates. This expense limitation policy is voluntary and in addition to any
contractual arrangements that may be in place with respect to the Fund and
described in the Fund's prospectus. It may be revised or terminated by the
Manager at any time without notice.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $2,745,389 and waived its fees in the amount of
$2,048,742.
State Street Bank and Trust Company ("State Street"), 1 Lincoln Street, Boston,
Massachusetts 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with New York Life Investments. These services
include calculating the daily NAVs of the Fund, maintaining the general ledger
and sub-ledger accounts for the calculation of the Fund's respective NAVs, and
assisting New York Life Investments in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, State
Street is compensated by New York Life Investments.
(B) CONTINGENT DEFERRED SALES CHARGE. Although the Fund does not assess a
contingent deferred sales charge upon redemption of Class B or Class C shares of
the Fund, the applicable contingent deferred sales charge will be assessed when
shares were redeemed from the Fund if the shareholder previously exchanged his
or her investment into the Fund from another Fund in the Trust. The Fund was
advised that NYLIFE Distributors LLC (the "Distributor"), an indirect wholly
owned subsidiary of New York Life, received from shareholders the proceeds from
contingent deferred sales charges of Investor Class, Class A, Class B and Class
C of $2,247, $15,217, $344,743 and $27,468, respectively for the year ended
October 31, 2009.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer
22 Mainstay Money Market Fund
agent expenses incurred by the Fund for the year ended October 31, 2009,
amounted to $1,444,795.
(D) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(E) CAPITAL. At October 31, 2009, 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 $610 0.0%++
- -----------------------------------------------
Class C 117 0.0++
- -----------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(F) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $30,689.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, 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)
$15,347 $-- $(141) $-- $15,206
- ------------------------------------------------------------------------
</Table>
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
gain on investments arising from permanent differences; net assets at October
31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$4,423 $(4,423) $--
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to distribution
redesignations.
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $938,725 $16,326,967
- -----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS (AT $1 PER SHARE) SHARES
Year ended October 31, 2009:
Shares sold 65,903,696
Shares issued to shareholders in
reinvestment of dividends 84,957
Shares redeemed (62,623,592)
-----------
Net increase in shares outstanding
before conversion 3,365,061
Shares converted into Investor Class
(See Note 1) 5,050,264
Shares converted from Investor Class
(See Note 1) (13,919,066)
-----------
Net decrease (5,503,741)
===========
Period ended October 31, 2008 (a):
Shares sold 69,342,767
Shares issued to shareholders in
reinvestment of dividends 601,846
Shares redeemed (41,587,702)
-----------
Net increase in shares outstanding
before conversion 28,356,911
Shares converted into Investor Class
(See Note 1) 57,346,493
Shares converted from Investor Class
(See Note 1) (12,979,992)
-----------
Net increase 72,723,412
===========
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS A (AT $1 PER SHARE) SHARES
Year ended October 31, 2009:
Shares sold 257,260,638
Shares issued to shareholders in
reinvestment of dividends 533,055
Shares redeemed (360,583,179)
------------
Net decrease in shares outstanding
before conversion (102,789,486)
Shares converted into Class A (See
Note 1) 14,106,124
Shares converted from Class A (See
Note 1) (4,510,377)
------------
Net decrease (93,193,739)
============
Year ended October 31, 2008:
Shares sold 516,333,756
Shares issued to shareholders in
reinvestment of dividends 9,148,174
Shares redeemed (456,855,791)
------------
Net increase in shares outstanding
before conversion 68,626,139
Shares converted into Class A (See
Note 1) 14,555,219
Shares converted from Class A (See
Note 1) (57,205,497)
------------
Net increase 25,975,861
============
</Table>
<Table>
<Caption>
CLASS B (AT $1 PER SHARE) SHARES
Year ended October 31, 2009:
Shares sold 51,857,844
Shares issued to shareholders in
reinvestment of dividends 205,583
Shares redeemed (94,117,333)
-----------
Net decrease in shares outstanding
before conversion (42,053,906)
Shares converted from Class B (See
Note 1) (726,945)
-----------
Net decrease (42,780,851)
===========
Year ended October 31, 2008:
Shares sold 104,815,056
Shares issued to shareholders in
reinvestment of dividends 4,406,951
Shares redeemed (97,026,193)
-----------
Net increase in shares outstanding
before conversion 12,195,814
Shares converted from Class B (See
Note 1) (1,716,223)
-----------
Net increase 10,479,591
===========
</Table>
<Table>
<Caption>
CLASS C (AT $1 PER SHARE) SHARES
Year ended October 31, 2009:
Shares sold 30,796,481
Shares issued to shareholders in
reinvestment of dividends 58,491
Shares redeemed (54,121,103)
-----------
Net decrease (23,266,131)
===========
Year ended October 31, 2008:
Shares sold 91,594,479
Shares issued to shareholders in
reinvestment of dividends 1,125,294
Shares redeemed (72,532,379)
-----------
Net increase 20,187,394
===========
</Table>
NOTE 7--MONEY MARKET GUARANTEE:
The Fund participated in the U.S. Treasury Department's Temporary Money Market
Fund Guarantee Program (the "Program"). The Program sought to guarantee the NAV
of certain shares of participating money market funds as of September 19, 2008.
To the extent that funds were available in the Program, any shares held by an
investor in the Fund as of the close of business September 19, 2008 were insured
against loss during the duration of the Program, September 19, 2008 through
September 18, 2009. The total cost of these payments equaled 0.04% of the
applicable assets of the Fund. This expense is borne by the Fund without regard
to any expense limitation currently in effect.
NOTE 8--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 9--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
24 Mainstay Money Market Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Money Market Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Money Market Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
mainstayinvestments.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT (UNAUDITED)
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 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Money Market Fund ("Fund") and New
York Life Investment Management LLC ("New York Life Investments").
In reaching its decision to approve the Agreement set forth above (the
"Agreement"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 fees and ordinary
operating expenses. The Board also requested and received information on the
profitability of the Fund to New York Life Investments and its affiliates, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreement, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments; (ii) the
investment performance of the Fund and New York Life Investments; (iii) the
costs of the services to be provided, and profits to be realized, by New York
Life Investments and its affiliates from their 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 levels and overall total ordinary
operating expenses, particularly as compared to similar funds and 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,
including information provided to the Board throughout the year with respect to
New York Life Investments and specifically in connection with the contract
review processes. The Board's conclusions with respect to the Agreement also
were based, in part, 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, and that the Fund's shareholders, having
had the opportunity to consider alternative investment products and services,
have chosen to invest in the Fund. 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 TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS
In considering the approval of the Agreement, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds and serves a variety of other investment advisory clients,
including pooled investment vehicles, generally, and other money market funds
specifically. The Board considered the experience of senior personnel at New
York Life Investments providing investment advisory, management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. In this regard, the Board considered the
experience of the Fund's portfolio managers, the number of accounts managed by
the portfolio managers and New York Life Investments' method for compensating
portfolio managers. The Board considered New York Life Investments' performance
in fulfilling its responsibilities for overseeing the Fund's legal and
compliance environment, for overseeing compliance with the Fund's policies and
investment objectives, and for implementing Board directives as they relate to
the Fund. In addition, the Board noted that New York Life Investments also is
responsible for paying all of the salaries and expenses for the Fund's officers.
The Board also considered the benefits to shareholders of being part of the
MainStay Group of Funds, including the privilege of exchanging investments
between the same class of shares without the
26 Mainstay Money Market Fund
imposition of a sales charge, as described more fully in the Fund's prospectus.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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, 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
The Board favorably noted that during the recent economic crisis the Fund
experienced no liquidity concerns.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS
The Board considered the costs of the services provided by New York Life
Investments under the Agreement, and the profits expected to be realized by New
York Life Investments and its affiliates due to their relationships with the
Fund.
In evaluating the costs and profits of New York Life Investments and its
affiliates due to their relationships with the Fund, the Board considered, among
other things, New York Life Investments' investments in personnel, systems,
equipment and other resources necessary to manage the Fund. The Board
acknowledged that New York Life Investments must be in a position to pay and
retain experienced professional personnel to provide services to the Fund, and
that New York Life Investments' ability to maintain a strong financial position
is important in order for New York Life Investments to continue to provide high-
quality ongoing services to the Fund. The Board noted, for example, increased
costs borne by New York Life Investments and its affiliates due to new and
ongoing regulatory and compliance requirements. The Board also noted that the
Fund benefits from the allocation of certain fixed costs across the MainStay
Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. The Board considered information illustrating the
revenues and expenses of New York Life Investments allocated to the Fund.
The Board noted 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 profitability with respect to the Fund, and
noting that other profitability methodologies may also be reasonable, the Board
concluded that the profitability
mainstayinvestments.com 27
methodology presented by New York Life Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreement, the Board considered
the profitability of New York Life Investments' 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 profits to be realized by New York Life Investments and its affiliates due
to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments may realize a larger profit margin as the Fund's assets grow over
time.
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 grows over time.
MANAGEMENT FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreement and the Fund's expected total ordinary operating expenses. The Board
also considered the impact of the Fund's expense limitation arrangements
pursuant to which New York Life Investments has agreed to limit the Fund's total
ordinary operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments on fees charged 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 explanations from New York Life Investments about the different scope of
services provided to retail mutual funds as compared with other investment
advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of
28 Mainstay Money Market Fund
Funds. The impact of transfer agent fees on the expense ratios of these MainStay
Funds tends to be greater than for other open-end retail funds because the
MainStay Group of Funds generally has a significant number of small accounts
relative to competitor funds. The Board noted the role that the MainStay Group
of Funds historically has played in serving the investment needs of New York
Life Insurance Company ("New York Life") policyholders, who often maintain
smaller account balances than other fund investors. The Board discussed measures
that it and New York Life Investments have taken in recent years to mitigate the
effect of small accounts on the expense ratios of Fund share classes, including:
(i) encouraging New York Life agents to consolidate multiple small accounts held
by the same investor into one MainStay Asset Allocation Fund account; (ii)
increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small
accounts with balances below $500; (iv) since 2007, charging an annual $20.00
small account fee on accounts with balances below $1,000; (v) modifying the
approach for billing transfer agent expenses to reduce the degree of
subsidization by large accounts of smaller accounts; and (vi) introducing
Investor Class shares for certain MainStay Funds in early 2008 to consolidate
smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management fees 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, support a conclusion that these fees and
expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreement.
mainstayinvestments.com 29
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2009,
should be multiplied by 100.0% to arrive at the amount eligible for qualified
interest income.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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.
30 Mainstay Money Market Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Chief Executive Officer,
Director since 2008 (20 NYLIFE Distributors LLC and
portfolios). Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 31
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
32 Mainstay Money Market Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
34 Mainstay Money Market Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 35
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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ---------------------------------------------
Not FDIC/NCUA Not a May Lose Value
Insured Deposit
- ---------------------------------------------
No Bank Not Insured by Any Government
Guarantee Agency
- ---------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO17116 (RECYCLE LOGO) MS283-09 MSMM11-12/09
12
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
PRINCIPAL PRESERVATION FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
PRINCIPAL PRESERVATION FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 8
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 10
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 18
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 22
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT 23
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 27
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 27
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 27
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 28
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
CLASS I SHARES(2)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
0.93% 3.25% 3.08%
7-DAY CURRENT YIELD: 0.02%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY PRINCIPAL AVERAGE LIPPER AVERAGE LIPPER
PRESERVATION FUND MONEY MARKET INSTITUTIONAL MONEY
CLASS I FUND MARKET FUND
------------------ -------------- -------------------
10/31/99 10000 10000 10000
10598 10552 10603
11120 10995 11098
11311 11127 11282
11432 11186 11385
11544 11242 11483
11847 11474 11775
12400 11939 12309
13040 12488 12933
13424 12815 13329
10/31/09 13548 12862 13408
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Average Lipper money market fund(3) 0.36% 2.70% 2.55%
Average Lipper institutional money market fund(4) 0.57 3.13 2.98
</Table>
1. On November 11, 2007, McMorgan Principal Preservation Fund was reorganized
into MainStay Principal Preservation Fund Class I shares. Prior to November
11, 2007, performance for MainStay Principal Preservation Fund Class I shares
includes the historical performance of the McMorgan Class shares of the
McMorgan Principal Preservation Fund.
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price and reinvestment of dividend and
capital gain distributions. The graphs assume an initial investment of
$10,000. Class I shares are sold with no initial sales charge or contingent
deferred sales charge and have no annual 12b-1 fees, 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 Manager 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 existing expense limitations
and the recoupment is made within the term of the agreement. Any recoupment
amount is generally applied within a fiscal year. This agreement expires on
February 28, 2011.
2. As of October 31, 2009, MainStay Principal Preservation Fund had an effective
7-day yield of 0.02% for Class I shares. The 7-day current yield was 0.02%
for Class I shares. These yields reflect certain fee waivers and/or expense
limitations. Had these expense limitations not been in effect, the effective
7-day yield would have been -0.11% for Class I shares and the 7-day current
yield would have been -0.11% for Class I shares. The fee waivers and/or
expense limitations are contractual and may be modified or terminated only
with the approval of the Board of Trustees. The current yield reflects the
Fund's earnings better than the Fund's total return.
3. The average Lipper money market fund is representative of funds that invest
in high-quality financial instruments rated in the top two grades with
dollar-weighted average maturities of less than 90 days. These funds intend
to keep constant net asset value. This benchmark is a product of Lipper Inc.
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.
4. The average Lipper institutional money market fund is representative of funds
that invest in high-quality financial instruments rated in the top two grades
with dollar-weighted average maturities of less than 90 days. These funds are
commonly limited to 401K and pension participants and often require high
minimum investments and have lower total expense ratios relative to other
money market funds. They intend to keep constant net asset value. This
benchmark is a product of Lipper Inc.
mainstayinvestments.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY PRINCIPAL PRESERVATION FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
CLASS I SHARES $1,000.00 $1,001.30 $1.66 $1,023.50 $1.68
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's Class I annualized expense ratio (0.33%)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period). The table above
represents the actual expenses incurred during the one-half year period.
6 MainStay Principal Preservation Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Commercial Paper 54.00
U.S. Government & Federal Agencies 25.30
Corporate Bonds 13.90
Repurchase Agreement 5.80
Asset-Backed Securities 1.10
Liabilities in Excess of Cash and Other
Assets (0.10)
</Table>
See Portfolio of Investments beginning on page 10 for specific holdings within
these categories.
mainstayinvestments.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS DAVID E. CLEMENT, CFA, AND THOMAS J.
GIRARD OF NEW YORK LIFE INVESTMENTS,(1) THE FUND'S MANAGER.
HOW DID MAINSTAY PRINCIPAL PRESERVATION FUND PERFORM RELATIVE TO ITS PEERS
DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
As of October 31, 2009, MainStay Principal Preservation Fund Class I shares
provided a 7-day current yield of 0.02% and a 7-day effective yield of 0.02%.
For the 12 months ended October 31, 2009, MainStay Principal Preservation Fund
Class I shares returned 0.93%. The Fund outperformed the 0.57% return of the
average Lipper(2) institutional money market fund and the 0.36% return of the
average Lipper money market fund for the 12 months ended October 31, 2009.
WERE THERE CHANGES IN THE FUND'S PORTFOLIO MANAGEMENT DURING THE REPORTING
PERIOD?
Effective April 15, 2009, the Subadvisory Agreement between the Manager and
McMorgan & Company LLC, the Fund's Subadvisor, was terminated. At the same time,
David E. Clement, CFA, and Thomas J. Girard of New York Life Investments became
the Fund's portfolio managers and assumed day-to-day portfolio management
responsibilities for the Fund.
WHAT FACTORS INFLUENCED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
During the second half of the 12-month reporting period, we lengthened the
Fund's duration.(3) This positioning helped the Fund's performance relative to
its peers when short-term interest rates rallied. The Fund also benefited from
active participation in the market for fixed- and floating-rate securities with
government backing.
WHAT ECONOMIC AND MARKET FORCES AFFECTED THE FUND DURING THE REPORTING PERIOD?
The Federal Open Market Committee (FOMC) lowered its targeted federal funds rate
to a range from 0% to 0.25% on December 16, 2008. The FOMC's decision to
maintain this low target range had a dramatic negative impact on short-term
interest rates from mid-December through the end of the reporting period.
HOW DID YOU MANAGE THE FUND'S DURATION DURING THE REPORTING PERIOD?
The FOMC's low federal funds target range influenced our decision to increase
the Fund's duration during the second half of the reporting period. The Fund
maintained a duration from 70 to 75 days throughout the 12-month reporting
period. This longer duration was beneficial to the Fund's performance.
WHICH POSITIONS WERE STRONG CONTRIBUTORS TO THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
During the reporting period, the Fund benefited from its exposure to government-
backed securities. In the floating-rate sector, we invested in bonds backed by
the Federal Deposit Insurance Corporation (FDIC), including issues from Bank of
America, General Elec-tric Capital and SunTrust Bank (all due December 2010).
In the fixed-rate sector, the Fund extended its duration by investing in short-
term agency and Treasury coupon securities. This decision benefited the Fund's
performance as the yield curve(4) flattened during the reporting period.
Significant purchases during the reporting period included issues of the Federal
Home Loan Bank
(due October 2010), the Federal National Mortgage Association (Fannie Mae) (due
October 2010), the Federal Farm Credit Bank (due May 2010) and the U.S. Treasury
(due June 2010 and September 2010).
The Fund was also successful in adding yield during the period through
investments in eligible first-pay tranches of some asset-backed transactions.
Holdings
- ----------
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
The Fund's yield typically fluctuates with changes in short-term interest rates.
Not all U.S. government securities are insured or guaranteed by the U.S.
government--some are backed only by the issuing agency, which must rely on its
own resources to repay the debt. An issuer once believed to be an issuer of
higher-quality securities may experience a sudden collapse in creditworthiness,
becoming insolvent and defaulting on its interest and principal payments.
1. "New York Life Investments" is a service mark used by New York Life
Investment Management LLC.
2. See footnote on page 5 for more information on Lipper Inc.
3. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
4. The yield curve is a line that plots the yields of various securities of
similar quality--typically U.S. Treasury issues--across a range of
maturities. The U.S. Treasury yield curve serves as a benchmark for other
debt and is used in economic forecasting. The money market yield curve is
said to flatten when the difference between the short end and the long end of
the curve decreases.
8 MainStay Principal Preservation Fund
in this area included issues of Honda, Volkswagen, Ford and Huntington Auto.
WERE THERE ANY SIGNIFICANT WEIGHTING CHANGES DURING THE REPORTING PERIOD?
During the reporting period, we increased the Fund's weightings in FDIC-backed
floating-rate securities, fixed-rate short-term agency coupon securities and
repurchase agreements. A notable decrease occurred in the commercial-paper
sector.
- ----------
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 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS 100.1%+
- --------------------------------------------------------------
ASSET-BACKED SECURITIES 1.1%
BMW Vehicle Lease Trust
Series 2009-1, Class A1
0.792%, due 6/15/10 $ 150,073 $ 150,073
Carmax Auto Owner Trust
Series 2009-2, Class A1
0.279%, due 11/15/10 550,000 550,000
CIT Equipment Collateral
Series 2009-VT1, Class A1
1.22%, due 6/15/10 (a) 343,066 343,066
Ford Credit Auto Owner Trust
Series 2009-B, Class A1
0.988%, due 6/15/10 (a) 196,430 196,430
Honda Auto Receivables Owner
Trust
Series 2009-2, Class A1
1.318%, due 5/17/10 184,639 184,639
Nissan Auto Lease Trust
Series 2009-A, Class A1
1.043%, due 6/15/10 264,273 264,273
Volkswagen Auto Lease Trust
Series 2009-A, Class A1
1.452%, due 5/17/10 109,326 109,326
-------------
1,797,807
-------------
COMMERCIAL PAPER 54.0%
Abbot Laboratories
0.08%, due 11/30/09 (a)(b) 1,000,000 999,936
Avery Dennison Corp.
0.23%, due 11/2/09 (a)(b) 1,100,000 1,099,993
Basin Electric Power
Cooperative
0.20%, due 11/3/09 (a)(b) 1,000,000 999,989
BNP Paribas Finance, Inc.
0.18%, due 11/9/09 (b) 1,500,000 1,499,940
0.18%, due 11/12/09 (b) 1,500,000 1,499,918
Brown-Forman Corp.
0.16%, due 11/13/09 (a)(b) 1,400,000 1,399,925
0.22%, due 1/5/10 (a)(b) 1,000,000 999,603
Campbell Soup Co.
0.50%, due 4/29/10 (a)(b) 2,000,000 1,995,028
0.60%, due 7/30/10 (a)(b) 1,500,000 1,493,225
Cargill, Inc.
0.11%, due 11/4/09 (a)(b) 3,000,000 2,999,972
0.14%, due 11/13/09 (a)(b) 3,000,000 2,999,860
Clorox Co. (The)
0.20%, due 11/5/09 (a)(b) 563,000 562,987
Coca-Cola Co. (The)
0.12%, due 11/19/09 (a)(b) 1,400,000 1,399,916
0.15%, due 11/16/09 (a)(b) 2,000,000 1,999,875
Colgate Palmolive Co.
0.10%, due 11/10/09 (a)(b) 2,000,000 1,999,950
Deutsche Bank Financial LLC
0.14%, due 11/30/09 2,000,000 1,999,774
Devon Energy Corp.
0.20%, due 11/12/09 (a)(b) 850,000 849,948
Diageo Capital PLC
0.27%, due 11/23/09 (a)(b) 1,000,000 999,835
Duke Energy Corp.
0.28%, due 11/12/09 (a)(b) 250,000 249,979
Dupont EI De Nemours Co.
0.12%, due 11/19/09 (a)(b) 1,100,000 1,099,934
FPL Group, Inc.
0.12%, due 11/2/09 (a)(b) 1,900,000 1,899,994
0.14%, due 11/5/09 (a)(b) 3,000,000 2,999,953
General Electric Capital
Corp.
0.12%, due 11/18/09 (b) 2,000,000 1,999,887
GlaxoSmithKline Finance PLC
0.12%, due 11/25/09 (a)(b) 3,000,000 2,999,760
0.14%, due 11/4/09 (a)(b) 1,000,000 999,988
Honeywell International, Inc.
0.13%, due 12/14/09 (a)(b) 3,000,000 2,999,534
0.14%, due 12/21/09 (a)(b) 500,000 499,903
JPMorgan Chase Funding, Inc.
0.16%, due 11/18/09 (a)(b) 2,500,000 2,499,811
0.18%, due 11/4/09 (a)(b) 1,000,000 999,985
Merck & Co., Inc.
0.13%, due 11/20/09 (a)(b) 2,000,000 1,999,863
0.13%, due 12/14/09 (a)(b) 2,000,000 1,999,689
Northern Il Gas Corp.
0.10%, due 11/2/09 (b) 2,100,000 2,099,994
NSTAR Electric Co.
0.11%, due 11/4/09 (b) 1,000,000 999,991
0.11%, due 11/16/09 (b) 1,300,000 1,299,940
Paccar Financial Corp.
0.12%, due 11/13/09 (b) 1,900,000 1,899,924
0.12%, due 11/17/09 (b) 1,500,000 1,499,920
0.13%, due 11/5/09 (b) 1,000,000 999,986
PepsiAmericas, Inc.
0.15%, due 11/9/09 (a)(b) 1,000,000 999,967
0.15%, due 11/16/09 (a)(b) 2,000,000 1,999,875
Pitney Bowes, Inc.
0.10%, due 11/12/09 (a)(b) 3,000,000 2,999,908
Private Export Funding Corp.
0.10%, due 11/13/09 (a)(b) 1,000,000 999,967
Procter & Gamble Co.
0.22%, due 11/10/09 (a)(b) 500,000 499,973
0.24%, due 11/20/09 (a)(b) 1,000,000 999,873
</Table>
+ Percentages indicated are based on Fund net assets.
10 MainStay Principal Preservation Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
Roche Holding, Inc.
0.10%, due 11/6/09 (a)(b) $2,500,000 $ 2,499,965
Siemens Capital Co. LLC
0.11%, due 11/3/09 (a)(b) 850,000 849,995
0.11%, due 11/12/09 (a)(b) 1,000,000 999,966
0.11%, due 11/23/09 (a)(b) 3,000,000 2,999,798
Societe Generale North
America, Inc.
0.15%, due 11/5/09 (b) 2,000,000 1,999,967
0.18%, due 11/6/09 (b) 1,500,000 1,499,963
Southern Co. Funding Corp.
0.11%, due 11/23/09 (a)(b) 3,000,000 2,999,798
0.13%, due 11/2/09 (a)(b) 500,000 499,998
0.13%, due 11/17/09 (a)(b) 1,000,000 999,942
Transocean, Ltd.
0.28%, due 11/24/09 (a)(b) 1,100,000 1,099,803
United Parcel Service, Inc.
0.10%, due 12/1/09 (a)(b) 1,250,000 1,249,896
Wal-Mart Stores, Inc.
0.10%, due 11/4/09 (a)(b) 1,870,000 1,869,984
0.10%, due 11/10/09 (a)(b) 500,000 499,988
0.10%, due 12/7/09 (a)(b) 1,260,000 1,259,874
Wisconsin Energy Corp.
0.20%, due 11/6/09 (a)(b) 1,200,000 1,199,967
-------------
90,876,176
-------------
CORPORATE BONDS 13.9%
3M Co.
5.125%, due 11/6/09 5,000,000 5,003,045
Amgen, Inc.
4.00%, due 11/18/09 3,765,000 3,769,021
Bank of America Corp.
0.848%, due 12/2/10(c)(d) 1,100,000 1,107,142
General Electric Capital
Corp.
0.379%, due 3/11/11(c)(d) 1,100,000 1,101,504
0.939%, due 12/9/10 (c)(d) 2,200,000 2,218,054
Goldman Sachs Group, Inc.
(The)
4.50%, due 6/15/10 1,100,000 1,125,450
International Bank for
Reconstruction &
Development (Discount Note)
0.174%, due 11/17/09 (b) 1,000,000 999,924
Praxair, Inc.
0.477%, due 5/26/10(c) 1,200,000 1,200,000
Roche Holdings, Inc.
1.393%, due 2/25/10(a)(c) 5,000,000 5,008,759
SunTrust Bank
0.945%, due 12/16/10(c)(d) 1,900,000 1,916,265
-------------
23,449,164
-------------
REPURCHASE AGREEMENT 5.8%
SG Americas Securities LLC
0.07%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$9,775,057 (Collateralized
by a United States Treasury
Note, with a rate of 4.50%
and a maturity date of
2/15/36, with a Principal
Amount of $9,637,100 and a
Market Value of
$10,124,193) 9,775,000 9,775,000
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 25.3%
Federal Farm Credit Bank
0.164%, due 7/28/10 (c) 2,000,000 2,000,000
2.75%, due 5/4/10 1,000,000 1,010,083
5.25%, due 9/13/10 1,000,000 1,040,056
Federal Farm Credit Bank
(Discount Note)
0.40%, due 5/3/10 (b) 2,000,000 1,995,933
Federal Home Loan Bank
0.50%, due 10/29/10 500,000 500,000
0.55%, due 8/4/10 1,000,000 1,000,326
0.60%, due 6/15/10 1,000,000 1,001,088
0.60%, due 6/25/10 4,000,000 4,002,688
0.68%, due 7/2/10 2,000,000 2,000,000
0.70%, due 6/23/10 1,500,000 1,500,000
0.80%, due 4/23/10 1,000,000 1,000,000
0.90%, due 4/7/10 2,000,000 2,000,773
Federal Home Loan Bank
(Discount Note)
0.41%, due 4/27/10 (b) 1,000,000 997,984
Federal Home Loan Mortgage
Corporation
2.68%, due 11/16/09 5,000,000 5,004,478
2.875%, due 6/28/10 1,000,000 1,016,021
Federal National Mortgage
Association
2.875%, due 10/12/10 2,000,000 2,045,053
4.125%, due 5/15/10 1,400,000 1,428,614
United States Treasury Bills
0.242%, due 7/15/10 (b) 250,000 249,573
0.295%, due 4/1/10 (b) 500,000 499,381
0.305%, due 12/17/09 (b) 1,000,000 999,610
0.41%, due 6/10/10 (b) 1,000,000 997,483
0.478%, due 7/29/10 (b) 1,200,000 1,195,770
United States Treasury Notes
1.50%, due 10/31/10 2,000,000 2,021,598
2.00%, due 9/30/10 3,000,000 3,043,827
2.375%, due 8/31/10 1,100,000 1,118,510
</Table>
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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
United States Treasury Notes (continued)
2.875%, due 6/30/10 $1,000,000 $ 1,014,789
3.50%, due 11/15/09 2,000,000 2,002,480
-------------
42,686,118
-------------
Total Short-Term Investments
(Amortized Cost
$168,584,265) (e) 100.1% 168,584,265
Liabilities in Excess of
Cash and Other Assets (0.1) (202,416)
----- ------------
Net Assets 100.0% $ 168,381,849
===== ============
</Table>
<Table>
(a) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Interest rate presented is yield to
maturity.
(c) Floating rate. Rate shown is the rate in
effect at October 31, 2009.
(d) The debt is guaranteed under the Federal
Deposit Insurance Corporation (FDIC)
Temporary Liquidity Guarantee Program and
is backed by the full faith and credit of
the United States. The expiration date
of the FDIC's guarantee is the earlier of
the maturity date of the debt or June 30,
2012.
(e) The cost stated also represents the
aggregate cost for federal income tax
purposes.
</Table>
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Short-Term Investments
Asset-Backed Securities $ -- $ 1,797,807 $ -- $ 1,797,807
Commercial Paper -- 90,876,176 -- 90,876,176
Corporate Bonds -- 23,449,164 -- 23,449,164
Repurchase Agreement -- 9,775,000 -- 9,775,000
U.S. Government & Federal Agencies -- 42,686,118 -- 42,686,118
------------- ------------ ------------- ------------
Total Investments in Securities $-- $168,584,265 $-- $168,584,265
============= ============ ============= ============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with significant
unobservable inputs (Level 3).
12 MainStay Principal Preservation Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
The table below sets forth the diversification of the Principal Preservation
Fund investments by industry.
INDUSTRY DIVERSIFICATION (UNAUDITED)
<Table>
<Caption>
AMORTIZED
COST PERCENT(+)
Agriculture $ 5,999,832 3.6%
Automobile ABS 1,454,741 0.9
Banks 16,148,215 9.5
Beverages 9,798,996 5.8
Biotechnology 3,769,021 2.2
Chemicals 2,299,934 1.4
Cosmetics & Personal Care 3,499,796 2.1
Diversified Financial
Services 14,718,990 8.7
Electric 14,149,551 8.4
Food 3,488,253 2.1
Gas 2,099,994 1.2
Health Care--Services 7,508,724 4.5
Household Products & Wares 1,662,980 1.0
Miscellaneous--Manufacturing 13,352,241 7.8
Multi-National 999,924 0.6
Office & Business Equipment 2,999,908 1.8
Oil & Gas 1,949,751 1.2
Other ABS 343,066 0.2
Pharmaceuticals 4,999,488 3.0
Repurchase Agreements 9,775,000 5.8
Retail 3,629,846 2.2
Transportation 1,249,896 0.7
U.S. Government & Agency 42,686,118 25.4
------------ -----
168,584,265 100.1
Liabilities in Excess of
Cash and Other Assets (202,416) (0.1)
------------ -----
Net Assets $168,381,849 100.0%
============ =====
</Table>
<Table>
+ Percentages indicated are based on Fund
net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $168,584,265) $168,584,265
Cash 186
Receivables:
Interest 444,621
Fund shares sold 72,023
Other assets 22,720
------------
Total assets 169,123,815
------------
LIABILITIES:
Payables:
Investment securities purchased 550,000
Fund shares redeemed 111,708
Professional fees 25,728
Shareholder communication 25,295
Manager (See Note 3) 15,508
Transfer agent (See Note 3) 6,027
Custodian 4,920
Trustees 642
Accrued expenses 2,138
------------
Total liabilities 741,966
------------
Net assets $168,381,849
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 1,683,361
Additional paid-in capital 166,635,459
------------
168,318,820
Accumulated undistributed net
investment income 63,029
------------
Net assets $168,381,849
============
CLASS I
Net assets applicable to
outstanding shares $168,381,849
============
Shares of beneficial interest
outstanding 168,336,066
============
Net asset value and offering price
per share outstanding $ 1.00
============
</Table>
14 MainStay Principal Preservation 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, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest $2,206,645
----------
EXPENSES:
Manager (See Note 3) 480,970
Registration 85,816
Professional fees 76,339
Insurance guarantee 66,909
Shareholder communication 63,333
Transfer agent (See Note 3) 37,216
Custodian 17,196
Trustees 8,176
Miscellaneous 13,687
----------
Total expenses before waiver 849,642
Expense waiver from Manager (See
Note 3) (258,752)
----------
Net expenses 590,890
----------
Net investment income 1,615,755
----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 65,201
----------
Net increase in net assets resulting
from operations $1,680,956
==========
</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
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2009 2008 (A) 2007 (B)
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment
income $ 1,615,755 $ 5,568,734 $ 3,195,821
Net realized gain
(loss) on
investments 65,201 260,226 (252,190)
------------------------------------------
Net increase in
net assets
resulting from
operations 1,680,956 5,828,960 2,943,631
------------------------------------------
Dividends and distributions to
shareholders:
Net investment
income (1,622,662) (5,571,288) (3,196,423)
Return of Capital -- -- (747)
------------------------------------------
Total dividends
and distributions
to shareholders (1,622,662) (5,571,288) (3,197,170)
------------------------------------------
Capital share transactions:
Net proceeds from
sale of shares 104,424,689 376,550,447 53,059,317
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions 1,590,770 5,415,744 3,139,301
Cost of shares
redeemed (136,976,130) (381,611,693) (39,352,577)
------------------------------------------
Increase
(decrease) in
net assets
derived from
capital share
transactions (30,960,671) 354,498 16,846,041
------------------------------------------
Net increase
(decrease) in
net assets (30,902,377) 612,170 16,592,502
NET ASSETS:
Beginning of period 199,284,226 198,672,056 182,079,554
------------------------------------------
End of period $ 168,381,849 $ 199,284,226 $198,672,056
==========================================
Accumulated
undistributed net
investment income
at end of period $ 63,029 $ 4,735 $ --
==========================================
</Table>
(a) Effective November 27, 2007, shareholders of the McMorgan Principal
Preservation Fund Class McMorgan shares became owners of Class I shares of
the MainStay Principal Preservation Fund. Additionally, the accounting and
performance history of the McMorgan Principal Preservation Fund was
redesignated as that of Class I shares of MainStay Principal Preservation
Fund.
(b) The Fund changed its fiscal year end from June 30 to October 31.
16 MainStay Principal Preservation 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 I
------------------------------------------------------------------------
PERIOD
YEAR ENDED OCTOBER ENDED
31, OCTOBER 31, YEAR ENDED JUNE 30,
------------------------------------------------------------------------
2009 2008 (A) 2007*** 2007 2006 2005
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Net investment income 0.01 0.03 0.02 0.05 0.04 0.02
Net realized and
unrealized gain (loss)
on investments -- 0.00 ++ (0.00)++ 0.00 ++ (0.00)++ --
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.01 0.03 0.02 0.05 0.04 0.02
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.01) (0.03) (0.02) (0.05) (0.04) (0.02)
From net realized gain
on investments -- -- -- -- -- (0.00)++
Return of capital -- -- (0.00)++ -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (0.01) (0.03) (0.02) (0.05) (0.04) (0.02)
-------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total investment return 0.93% 2.94% 1.69%(b) 5.20%(c) 4.01% 1.92%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 0.92% 2.91% 4.97%++ 5.08% 3.93% 1.90%
Net expenses 0.34% 0.30% 0.30%++ 0.30% 0.30% 0.30%
Expenses (before
waiver/reimbursement) 0.49% 0.39% 0.49%++ 0.46% 0.50% 0.49%
Net assets at end of
period (in 000's) $168,382 $199,284 $198,672 $182,080 $146,766 $147,215
</Table>
<Table>
*** The McMorgan Principal Preservation Fund changed its fiscal year end from June
30 to October 31.
++ Annualized.
++ Less than one cent per share.
(a) Effective November 27, 2007, shareholders of the McMorgan Principal
Preservation Fund Class McMorgan shares became owners of Class I shares of the
MainStay Principal Preservation Fund. Additionally, the accounting and
performance history of the McMorgan Principal Preservation Fund was
redesignated as that of Class I shares of MainStay Principal Preservation
Fund.
(b) Total return is not annualized.
(c) The loss resulting from a compliance violation did not have an effect on total
return.
</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
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Principal Preservation Fund (the "Fund"), a diversified fund.
The Fund currently offers one class of shares, Class I shares, which commenced
operations on November 27, 2007. Class I shares are offered at net asset value
without imposition of a front-end sales charge or a contingent deferred sales
charge.
The Fund's investment objective is to maximize current income consistent with
maintaining liquidity and preserving capital.
The financial statements of the Fund reflect the historical results of McMorgan
Principal Preservation Fund, a series of McMorgan Funds (the "McMorgan Trust"),
prior to its reorganization. Upon the completion of the reorganization, the
Class I shares of the Fund assumed the performance, financial and other
historical information of the McMorgan Principal Preservation Fund.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) VALUATION OF FUND SHARES. The Fund seeks to maintain a net asset value
("NAV") of $1.00 per share, although there is no assurance that it will be able
to do so on a continuous basis, and it has adopted certain investment, portfolio
and dividend and distribution policies designed to enable it to do as such. An
investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
(B) SECURITIES VALUATION. Securities are valued at their amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between such cost and the value on maturity date.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value by using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(C) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
18 MainStay Principal Preservation Fund
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Funds' tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund declares dividends of net
investment income daily and the Fund pays them monthly and declares and pays
distribution of net realized capital gains, if any, annually. All dividends and
distributions are reinvested in shares of the Fund, at NAV, 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.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily and discounts and premiums on securities purchased for the Fund
are accreted and amortized, respectively, on the straight-line method.
(F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(G) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(H) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager to be creditworthy, pursuant to
guidelines established by the Fund's Board of Trustees. Repurchase agreements
are considered under the 1940 Act to be collateralized loans by a Fund to the
seller secured by the securities transferred to the Fund.
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 and possible
realized loss to the Fund.
(I) 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 AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. On April 8, 2009, at a meeting of the Board of Trustees of the Fund
("Board"), the Board approved the termination of the Subadvisory Agreement
between the Manager and McMorgan & Company LLC, effective as of the close of
business on April 14, 2009. The Fund is now advised by New York Life Investments
directly, without a subadvisor.
mainstayinvestments.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Fund pays the Manager a monthly fee for services performed and facilities
furnished at an annual rate of 0.25% of the Fund's average daily net assets,
plus a fee for fund accounting services previously provided by New York Life
Investments under a separate Fund accounting agreement.
Effective August 1, 2009, New York Life Investments has 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 Fund so that the Fund's
total ordinary operating expenses (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 0.30% of the Fund's average daily net assets. The expense limitation
agreement may be modified or terminated only with the approval of the Board.
Under the expense limitation agreement, New York Life Investments 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
existing expense limitations and the recoupment is made within the term of the
agreement. Any recoupment amount is generally applied within a fiscal year. This
agreement was set to expire on July 31, 2010. On December 11, 2009, the Board of
the Fund approved an extension of the agreement to February 28, 2011.
Prior to August 1, 2009, New York Life Investments had written expense
limitation agreement that set the expense limitation for Class I shares at the
same level as the August 1, 2009 agreement.
From time to time, the Manager may limit expenses of the Fund to the extent it
deems appropriate to enhance the yield of the Fund, or a particular class of the
Fund, during periods when expenses have a significant impact on the yield of the
Fund, or a particular class of the Fund, as applicable, because of a low
interest rates. This expense limitation policy is voluntary and in addition to
any contractual arrangements that may be in place with respect to the Fund and
described in the Fund's prospectus. It may be revised or terminated by the
Manager at any time without notice.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $480,970 and waived its fees in the amount of
$258,752.
State Street Bank and Trust Company ("State Street"), 1 Lincoln Street, Boston,
Massachusetts 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with New York Life Investments. These services
include calculating the daily NAV of the Fund, maintaining the general ledger
and sub-ledger accounts for the calculation of the Fund's NAV, and assisting New
York Life Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $37,216.
(C) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $8,882.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$63,029 $-- $-- $-- $63,029
- -------------------------------------------------------------------------------
</Table>
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, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$65,201 $(65,201) $--
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to distribution
redesignations.
20 MainStay Principal Preservation Fund
The tax character of distributions paid during the periods ended October 31,
2009, October 31, 2008 and October 31, 2007, shown in the Statement of Changes
in Net Assets, was as follows:
<Table>
<Caption>
2009 2008 2007
Distributions paid
from:
Ordinary Income $1,622,662 $5,571,288 $3,196,423
Return of Capital -- -- 747
- ------------------------------------------------------------
$1,622,662 $5,571,288 $3,197,170
- ------------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
CLASS I (AT $1 PER SHARE) SHARES
Year ended October 31, 2009:
Shares sold 104,424,689
Shares issued to shareholders in
reinvestment of dividends 1,590,770
Shares redeemed (136,976,130)
------------
Net decrease (30,960,671)
============
Year ended October 31, 2008:
Shares sold 376,550,447
Shares issued to shareholders in
reinvestment of dividends 5,415,744
Shares redeemed (381,611,693)
------------
Net increase 354,498
============
</Table>
NOTE 7--MONEY MARKET GUARANTEE:
The Fund participated in the U.S. Treasury Department's Temporary Money Market
Fund Guarantee Program (the "Program"). The Program sought to guarantee the NAV
of certain shares of participating money market funds as of September 19, 2008.
To the extent that funds were available in the Program, any shares held by an
investor in the Fund as of the close of business September 19, 2008 were insured
against loss during the duration of the Program, September 19, 2008 through
September 18, 2009. The total cost of these payments equaled 0.04% of the
applicable assets of the Fund. This expense was borne by the Fund without regard
to any expense limitation currently in effect.
NOTE 8--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 9--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Principal Preservation Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2009, 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
two-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The statement of changes in net assets and financial highlights
for each of the years or periods presented through October 31, 2007, were
audited by other auditors, whose report dated December 14, 2007, expressed an
unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2009, 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 Principal Preservation Fund of The MainStay Funds as of October 31,
2009, 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 two-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2009
22 MainStay Principal Preservation Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT (UNAUDITED)
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 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Principal Preservation Fund
("Fund") and New York Life Investment Management LLC ("New York Life
Investments").
In reaching its decision to approve the Agreement set forth above (the
"Agreement"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 fees and ordinary
operating expenses. The Board also requested and received information on the
profitability of the Fund to New York Life Investments and its affiliates, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreement, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments; (ii) the
investment performance of the Fund and New York Life Investments; (iii) the
costs of the services to be provided, and profits to be realized, by New York
Life Investments and its affiliates from their 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 levels and overall total ordinary
operating expenses, particularly as compared to similar funds and 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,
including information provided to the Board throughout the year with respect to
New York Life Investments and specifically in connection with the contract
review processes. The Board's conclusions with respect to the Agreement also
were based, in part, 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, and that the Fund's shareholders, having
had the opportunity to consider alternative investment products and services,
have chosen to invest in the Fund. 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 TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS
In considering the approval of the Agreement, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds and serves a variety of other investment advisory clients,
including pooled investment vehicles, generally, and other money market funds
specifically. The Board considered the experience of senior personnel at New
York Life Investments providing investment advisory, management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. In this regard, the Board considered the
experience of the Fund's portfolio managers, the number of accounts managed by
the portfolio managers and New York Life Investments' method for compensating
portfolio managers. The Board considered New York Life Investments' performance
in fulfilling its responsibilities for overseeing the Fund's legal and
compliance environment, for overseeing compliance with the Fund's policies and
investment objectives, and for implementing Board directives as they relate to
the Fund. In addition, the Board noted that New York Life Investments also is
responsible for paying all of the salaries and expenses for the Fund's officers.
The Board also considered the benefits to shareholders of being part of the
MainStay Group of Funds, including the privilege of exchanging investments
between the same class of shares without the
mainstayinvestments.com 23
imposition of a sales charge, as described more fully in the Fund's prospectus.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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, 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
The Board favorably noted that during the recent economic crisis the Fund
experienced no liquidity concerns.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS
The Board considered the costs of the services provided by New York Life
Investments under the Agreement, and the profits expected to be realized by New
York Life Investments and its affiliates due to their relationships with the
Fund.
In evaluating the costs and profits of New York Life Investments and its
affiliates due to their relationships with the Fund, the Board considered, among
other things, New York Life Investments' investments in personnel, systems,
equipment and other resources necessary to manage the Fund. The Board
acknowledged that New York Life Investments must be in a position to pay and
retain experienced professional personnel to provide services to the Fund, and
that New York Life Investments' ability to maintain a strong financial position
is important in order for New York Life Investments to continue to provide high-
quality ongoing services to the Fund. The Board noted, for example, increased
costs borne by New York Life Investments and its affiliates due to new and
ongoing regulatory and compliance requirements. The Board also noted that the
Fund benefits from the allocation of certain fixed costs across the MainStay
Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. The Board considered information illustrating the
revenues and expenses of New York Life Investments allocated to the Fund.
The Board noted 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 profitability with respect to the Fund, and
noting that other profitability methodologies may also be reasonable, the Board
concluded that the profitability
24 MainStay Principal Preservation Fund
methodology presented by New York Life Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreement, the Board considered
the profitability of New York Life Investments' 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 profits to be realized by New York Life Investments and its affiliates due
to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments may realize a larger profit margin as the Fund's assets grow over
time.
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 grows over time.
MANAGEMENT FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreement and the Fund's expected total ordinary operating expenses. The Board
also considered the impact of the Fund's expense limitation arrangements
pursuant to which New York Life Investments has agreed to limit the Fund's total
ordinary operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments on fees charged 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 explanations from New York Life Investments about the different scope of
services provided to retail mutual funds as compared with other investment
advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of
mainstayinvestments.com 25
Funds. The impact of transfer agent fees on the expense ratios of these MainStay
Funds tends to be greater than for other open-end retail funds because the
MainStay Group of Funds generally has a significant number of small accounts
relative to competitor funds. The Board noted the role that the MainStay Group
of Funds historically has played in serving the investment needs of New York
Life Insurance Company ("New York Life") policyholders, who often maintain
smaller account balances than other fund investors. The Board discussed measures
that it and New York Life Investments have taken in recent years to mitigate the
effect of small accounts on the expense ratios of Fund share classes, including:
(i) encouraging New York Life agents to consolidate multiple small accounts held
by the same investor into one MainStay Asset Allocation Fund account; (ii)
increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small
accounts with balances below $500; (iv) since 2007, charging an annual $20.00
small account fee on accounts with balances below $1,000; (v) modifying the
approach for billing transfer agent expenses to reduce the degree of
subsidization by large accounts of smaller accounts; and (vi) introducing
Investor Class shares for certain MainStay Funds in early 2008 to consolidate
smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management fees 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, support a conclusion that these fees and
expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreement.
26 MainStay Principal Preservation Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2009,
should be multiplied by 100.0% to arrive at the amount eligible for qualified
interest income.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND
PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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 27
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
28 MainStay Principal Preservation Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 29
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay Principal Preservation Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 31
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
32 MainStay Principal Preservation 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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO17048 (RECYCLE LOGO) MS283-09 MSPP11-12/09
D2
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 17
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS 31
- ---------------------------------------------
SPECIAL MEETING OF SHAREHOLDERS 36
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 36
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 36
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 36
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 37
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 6.65% 1.43% 3.67%
Excluding sales charges 11.67 2.37 4.15
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY TAX BARCLAYS CAPITAL 3-15 YEAR
FREE BOND MUNICIPAL BOND BLENDED MUNICIPAL
FUND INDEX BOND INDEX
------------ ---------------- -----------------
10/31/99 9550 10000 10000
10335 10851 10756
11399 11991 11829
11868 12695 12546
12180 13344 13195
12753 14149 13889
12979 14508 14049
13684 15341 14762
13836 15788 15265
12837 15266 15346
10/31/09 14335 17342 17098
</Table>
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 6.69% 1.45% 3.68%
Excluding sales charges 11.72 2.39 4.16
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY TAX BARCLAYS CAPITAL 3-15 YEAR
FREE BOND MUNICIPAL BOND BLENDED MUNICIPAL
FUND INDEX BOND INDEX
------------ ---------------- -----------------
10/31/99 23875 25000 25000
25837 27127 26889
28498 29977 29572
29669 31736 31364
30449 33359 32987
31883 35372 34723
32448 36269 35122
34209 38353 36904
34591 39469 38163
32111 38166 38365
10/31/09 35874 43356 42744
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges 6.32% 1.73% 3.87%
Excluding sales charges 11.32 2.07 3.87
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY TAX BARCLAYS CAPITAL 3-15 YEAR
FREE BOND MUNICIPAL BOND BLENDED MUNICIPAL
FUND INDEX BOND INDEX
------------ ---------------- -----------------
10/31/99 10000 10000 10000
10784 10851 10756
11866 11991 11829
12321 12695 12546
12614 13344 13195
13188 14149 13889
13374 14508 14049
14065 15341 14762
14186 15788 15265
13128 15266 15346
10/31/09 14614 17342 17098
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. Investor Class shares and
Class A shares are sold with a maximum initial sales charge of 4.50% 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 0.50%. 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 0.50%. 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 agreement if such action does
not cause the Fund to exceed existing expense limitations and the recoupment
is made within the term of the agreement. Any recoupment is generally applied
within a fiscal year. This agreement expires on February 28, 2011.
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--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 10.31% 2.07% 3.87%
Excluding sales charges 11.31 2.07 3.87
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BARCLAYS CAPITAL
MAINSTAY TAX BARCLAYS CAPITAL 3-15 YEAR
FREE BOND MUNICIPAL BOND BLENDED MUNICIPAL
FUND INDEX BOND INDEX
------------ ---------------- -----------------
10/31/99 10000 10000 10000
10784 10851 10756
11866 11991 11829
12321 12695 12546
12614 13344 13195
13188 14149 13889
13374 14508 14049
14065 15341 14762
14186 15788 15265
13127 15266 15346
10/31/09 14612 17342 17098
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Barclays Capital Municipal Bond Index(3) 13.60% 4.15% 5.66%
Barclays Capital 3-15 Year Blended Municipal Bond Index(4) 11.42 4.25 5.51
Average Lipper general municipal debt fund(5) 13.92 2.78 4.47
</Table>
2. Performance figures for Investor Class shares, first offered on February 28,
2008, includes the historical performance of Class B 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. The Barclays Capital Municipal Bond Index includes approximately, 15,000
municipal bonds, rated Baa or better by Moody's, with a maturity of at least
two years. Bonds subject to the Alternative Minimum Tax or with floating or
zero coupons are excluded. Total returns assume the reinvestment of all
dividends and capital gains. Effective July 1, 2009, the Fund selected the
Barclays Capital Municipal Bond Index as its primary benchmark in replacement
of the Barclays Capital 3-15 Year Blended Municipal Bond Index. The Fund
selected the Barclays Capital Municipal Bond Index in connection with a
change in subadvisor. The Barclays Capital Municipal Bond Index is the Fund's
broad-based securities market index for comparison purposes. An investment
cannot be made directly in an index.
4. The Barclays Capital 3-15 Year Blended Municipal Bond Index is an index of
investment grade municipal bonds with maturities of 3-15 years. The index is
calculated on a total return basis. Results assume reinvestment of all income
and capital gains. An investment cannot be made directly in an index.
5. The average Lipper general municipal debt fund is representative of funds
that invest primarily in municipal debt issues in the top four credit
ratings. This benchmark is a product of Lipper Inc. 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 Tax Free Bond Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TAX FREE BOND FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,059.60 $5.40 $1,020.00 $5.30
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,060.50 $4.78 $1,020.60 $4.69
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,058.60 $6.69 $1,018.70 $6.56
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,057.30 $6.74 $1,018.70 $6.61
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.04% for Investor Class, 0.92% for Class A, 1.29% for Class B and 1.30% for
Class C) multiplied by the average account value over the period, divided by
365 and multiplied by 184 (to reflect the one-half year period). The table
above represents the actual expenses incurred during the one-half year
period.
mainstayinvestments.com 7
STATE COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
California 18.7%
New Jersey 9.6
Florida 8.4
Illinois 8.2
Texas 7.8
North Carolina 6.9
Georgia 5.8
Puerto Rico 4.7
Louisiana 4.4
Michigan 3.8
Arizona 3.3
New York 3.3
Pennsylvania 2.9
Ohio 2.0
Nevada 1.8
Massachusetts 1.6
Hawaii 1.4
Kansas 1.4
New Mexico 1.3
Delaware 1.0
Alaska 0.9
Wyoming 0.9
Wisconsin 0.7
Indiana 0.5
South Carolina 0.5
Washington 0.5
District of Columbia 0.2
Missouri 0.2
Liabilities in Excess of Cash and
Other Assets -2.7
-----
100.0%
=====
</Table>
See Portfolio of Investments beginning on page 12 for specific holdings within
these categories.
TOP TEN ISSUERS HELD AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. California State, 5.25%-5.625%, due
4/1/26-10/1/29
2. Chicago, Illinois Housing Authority
Capital Program Revenue, 5.00%, due
7/1/23
3. North Carolina Municipal Power Agency
N1, Catawba Electric Revenue, 6.50%, due
1/1/20
4. California Housing Finance Agency
Revenue, Multifamily Housing, 0.40%, due
2/1/40
5. Detroit, Michigan Sewer Disposal
Revenue, 6.50%-7.50%, due 7/1/24-7/1/33
6. San Antonio, Texas Electric & Gas
(Escrow Shares), 5.00%, due 2/1/17
7. South Florida Water Management District,
5.00%, due 10/1/20
8. OMWD, California Financing Authority
Revenue, Water Treatment Project, 5.00%,
due 6/1/39
9. Highlands County Florida Health
Facilities Authority Revenue Hospital,
Adventist Health Systems, 5.375%, due
11/15/35
10. Puerto Rico Commonwealth Infrastructure
Financing Authority, Special Tax
Revenue, 5.50%, due 7/1/23
</Table>
8 MainStay Tax Free Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY STANDISH MELLON ASSET MANAGEMENT COMPANY LLC (STANDISH
MELLON), THE FUND'S FORMER SUBADVISOR, AND JOHN LOFFREDO, CFA, AND ROBERT
DIMELLA, CFA, OF MACKAY SHIELDS LLC (MACKAY SHIELDS), THE FUND'S SUBADVISOR.(1)
HOW DID MAINSTAY TAX FREE BOND FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Tax Free Bond Fund returned 11.67% for
Investor Class shares, 11.72% for Class A shares, 11.32% for Class B shares and
11.31% for Class C shares for the 12 months ended October 31, 2009. All share
classes underperformed the 13.92% return of the average Lipper(2) general
municipal debt fund and the 13.60% return of the Barclays Capital Municipal Bond
Index,(3) for the 12 months ended October 31, 2009. Investor Class and Class A
shares outperformed and Class B and Class C shares underperformed the 11.42%
return of the Barclays Capital 3-15 Year Blended Municipal Bond Index,(4) during
the reporting period. The Barclays Capital Municipal Bond 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 OR
INVESTMENT APPROACH DURING THE REPORTING PERIOD?
The Fund's Board of Trustees approved the termination of Standish Mellon as the
Subadvisor to the Fund effective July 1, 2009. For the period from November 1,
2008, to June 30, 2009, the Fund's performance figures referenced above reflect
the performance of the Fund while it was managed by its former Subadvisor,
Standish Mellon.
Also effective July 1, 2009, the Board approved changing the Fund's primary
benchmark index from the Barclays Capital 3-15 Year Blended Municipal Bond Index
to the Barclays Capital Municipal Bond Index.
WHAT MAJOR FACTORS AFFECTED THE FUND DURING THE 12 MONTHS ENDED OCTOBER 31,
2009?
During the first eight months of the reporting period, several factors affected
the Fund. The passage of the American Recovery and Reinvestment Act of 2009
(ARRA) in February 2009 provided support to the municipal market. ARRA provides
temporary budget relief to help states with health and education funding. This
aid eased some of the credit concerns that were negatively affecting the market
at the beginning of 2009. In addition, ARRA included the Build America Bond
(BAB) program, which allows municipal issuers to access the taxable debt market
with the federal government subsidizing 35% of the interest expense over the
life of the bonds. It is estimated that this program will replace $100 billion
to $150 billion of tax-exempt issuance over the next two years. The realization
that municipal issuance could be scarce for the next two years as a result of
the BAB program created a powerful rally in the tax-exempt market in the spring
of 2009.
During the last four months of the reporting period, the municipal market
experienced strong technical support from a combination of robust demand from
retail investors and lower tax-exempt issuance. As retail investors began to
move out of cash and into fixed-income products, anticipation that income taxes
would increase resulted in strong cash flows into municipal bond funds. As
demand increased, new-issue tax-exempt supply declined because of the BAB
program. From a credit quality perspective, the municipal bond market continued
to reflect concerns about recession-related budget gaps.
WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, the Fund's performance
was affected by market dislocations, which the Fund tried to use to its
advantage. The Fund also benefited from the market's expectation of diminished
municipal bond supply.
In the last four months of the reporting period, the Fund sought to increase
yield to be more competitive with peer funds. The Fund was restructured to
- ----------
The values of debt securities fluctuate depending on various factors including
interest rates, issuer creditworthiness, market conditions and maturities. 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. Industrial development,
pollution control and revenue bonds are generally not secured by the taxing
power of the municipality, but are secured by revenues paid by the industrial
user. This means that if the industrial user cannot repay principal and/or
interest on the bonds, the Fund may lose money.
1. During the reporting period, New York Life Investments delegated day-to-day
portfolio management responsibilities to Standish Mellon Asset Management LLC
from November 1, 2008, to June 30, 2009, and to MacKay Shields LLC beginning
on October 17, 2009. From July 1, 2009, through October 16, 2009, Messrs.
Loffredo and DiMella served as portfolio managers of the Fund in their
positions as officers of New York Life Investments. MacKay Shields LLC is an
affiliate of New York Life Investments. "New York Life Investments" is a
service mark used by New York Life Investment Management LLC.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Barclays Capital Municipal
Bond Index.
4. See footnote on page 6 for more information on the Barclays Capital 3-15 Year
Blended Municipal Bond Index.
mainstayinvestments.com 9
improve value, while keeping duration(5) in line with the Barclays Capital
Municipal Bond Index.
The Fund's yield-curve(6) positioning was adjusted as part of the restructuring.
At the end of June, the Fund was overweighted relative to the Barclays Capital
Municipal Bond Index in bonds with three to seven years before they would
mature. At that time, these bonds were trading at prices the Subadvisor took to
be high in relation to their historical averages. The Fund sold these securities
and reinvested in bonds with longer maturities to take advantage of a steep
yield curve. The Fund also focused on higher-coupon new money issues that were
perceived to have a greater probability of being refunded(7) over the next 24
months. The Fund's restructuring strategy helped strengthen performance during
the last four months of the reporting period, as the yield curve flattened
(bringing short- and long-term yields closer together) and spreads(8) on higher-
coupon securities tightened.
WHAT WAS THE FUND'S DURATION STRATEGY DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, the Fund had a longer
duration than the Barclays Capital 3-15 Year Blended Municipal Bond Index. This
duration posture helped the Fund's performance relative to that Index as
historically attractive valuations in the municipal market prompted buying
interest from individual investors and mutual funds.
During the last four months of the reporting period, the Fund's strategy was to
keep duration close to that of the Barclays Capital Municipal Bond Index,
adjusting it modestly shorter or longer to mitigate significant volatility in
the market rather than to add value potential.
WHAT OTHER POSITIONING DECISIONS AFFECTED THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
During the first eight months of the reporting period, the market anticipated
that a new cigarette tax might lower cigarette consumption. The Fund sold
longer-maturity tobacco bonds that might be affected. The Fund replaced these
bonds with shorter-maturity bonds that offered a similar yield, and the strategy
benefited the Fund.
During the last four months of the reporting period, the Fund's investment
process centered on relative value analysis. The Fund bought securities believed
to be mispriced in the market. This analysis prompted the Fund to move further
out the yield curve, or spectrum of maturities, and into refundable issues.
After an assessment was made of the relative value of higher-rated investment-
grade bonds, specifically those rated AAA and AA+ without credit enhancement,
the Fund determined that lower-rated investment-grade issues were more
attractive. These positions helped the Fund's performance during the last four
months of the reporting period.
DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS WERE STRONG CONTRIBUTORS TO
THE FUND'S PERFORMANCE AND WHICH SEGMENTS DETRACTED?
During the first eight months of the reporting period, the Fund benefited from
exposure to Puerto Rico tax-free bonds and prepaid gas-contract tax-exempt bonds
secured by Goldman Sachs. The advantage came as municipal buyers gravitated
toward securities that were the weakest performers during the flight-to-quality
in 2008. The Fund's large weighting in prerefunded issues, which are backed by
U.S. Treasurys, detracted from the Fund's performance.
During the last four months of the reporting period, new purchases in the
primary market helped the Fund's performance relative to the Barclay's Capital
Municipal Bond Index. The Fund concentrated on long-maturity, solid credits with
larger coupons. Specific issues included Louisiana Public Facility for
Franciscan Mission Aries and Newark Housing Authority for the South Ward Police
Facility. The Fund also purchased water and sewer bonds that performed well from
the time of purchase through the end of October. These issues included
Indianapolis Waterworks Project, Detroit Sewer Authority and Atlanta Water &
Wastewater bonds. These positions contrib-
- ----------
5. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
6. The yield curve is a line that plots the yields of various securities of
similar quality-typically U.S. Treasury issues-across a range of maturities.
The U.S. Treasury yield curve serves as a benchmark for other debt and is
used in economic forecasting. The yield curve is said to be steep when yields
on longer-maturity bonds are significantly higher than yields on bonds with
shorter maturities.
7. Prerefunding or advance refunding is a procedure in which a bond issuer
floats a second bond at a lower interest rate, and the proceeds from the sale
of the second bond are safely invested, usually in Treasury securities, which
in turn, are held in escrow collateralizing the first bond. Given that the
advance refunded bonds become, essentially, fully tax-exempt U.S. Treasury
securities and no longer represent the credit risk profile of the original
borrower, they often increase in value--sometimes significantly.
8. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
10 MainStay Tax Free Bond Fund
uted positively to the Fund's performance during the last four months of the
reporting period.
Laggards during the last four months of the reporting period included bonds with
ultrashort maturities (less than two or three years) that did not participate in
the market rally. In addition, some of the newer issues the Fund purchased in
mid-September came under pressure when interest rates increased in October.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, the Fund took advantage
of market dislocations to purchase credits that appeared to have high quality
and depressed prices. The Fund added Washington Energy Northwest and San Antonio
Electric & Gas bonds, because they were perceived to have high quality within
the power segment and relatively large service areas. The companies' strong debt
ratios and experienced management teams also factored into the Fund's purchase
decision. The Fund sold Ohio bonds on the state's poor economic outlook. The
Fund also eliminated Yankee Stadium bonds to protect the Fund if ticket sales
were lower than projected.
During the last four months of the reporting period, the Fund increased its
exposure to California tax-exempt securities to a benchmark-neutral position.
Spreads for California tax-exempt bonds had reached unusually wide levels, and
the Fund increased its exposure on anticipation that the state would resolve
concerns about its budget gap. The decision helped the Fund's performance, as
California securities outperformed the broader tax-exempt market for three of
the four months ended October 31, 2009.
The Fund concentrated its sales in the five- to 10-year portions of the yield
curve. In light of the yield curve's steep slope, the Fund moved away from
shorter maturity bonds which appeared likely to underperform--and they did.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
As noted above, during the last four months of the reporting period, the Fund
increased its exposure to California tax-exempt issues from significantly
underweight at the beginning of July to an overweight position. The Fund
increased exposure to water and sewer bonds and local general obligation bonds,
on the perception of value in essential service revenue bonds and so-called ad
valorem-backed debt, or debt backed by taxes levied on the actual value of
properties and other assets.
The Fund decreased its exposure to prerefunded bonds during the shift in the
Fund's yield-curve focus. While the Fund's overall exposure to the health care
sector did not change, diversification was added within the sector by reducing
overweight positions in two credits and adding several other credits in the
primary market.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund was overweight relative to the Barclays Capital
Municipal Bond Index in bonds with maturities greater than 22 years. The Fund
sought value potential in longer-dated maturities. The overweight only
marginally increased the Fund's overall duration, well within 10% of the
duration of the Index.
Toward the end of the reporting period, the Fund increased its average call
protection to an overweight position. Call protection prevents a bond from being
redeemed by the issuer before a specified date. This strategy was implemented to
take advantage of the refunding potential among issues that have come to market
since early 2008 with current 10-year calls and high original-yields.
As of October 31, 2009, the Fund was underweight bonds with maturities of five
years or less.
- ----------
The opinions expressed are those of the responders 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.
11 MainStay Tax Free Bond Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BONDS 102.7%+
- --------------------------------------------------------------
ALASKA 0.9%
Alaska Housing Finance Corp.
Series C
5.50%, due 6/1/37 $1,885,000 $ 1,904,887
-------------
ARIZONA 3.3%
Arizona Health Facilities
Authority Revenue, Banner
Health
Series A
5.00%, due 1/1/19 700,000 736,533
Pima County Industrial
Development Authority Lease
Revenue, Metro
Police Facility
Series A
6.00%, due 7/1/41 4,000,000 4,269,600
Scottsdale Arizona Industrial
Development Authority
Hospital Revenue,
Scottsdale Healthcare
5.00%, due 9/1/17 1,720,000 1,805,123
5.00%, due 9/1/18 590,000 610,408
-------------
7,421,664
-------------
CALIFORNIA 18.7%
California Health Facilities
Financing Authority
Revenue, Catholic
Healthcare
Series A
6.00%, due 7/1/34 3,000,000 3,164,010
California Health Facilities
Financing Authority
Revenue, Providence
Health Services
Series B
5.50%, due 10/1/39 750,000 761,422
V California Housing Finance
Agency Revenue, Multifamily
Housing
Series B
0.40%, due 2/1/40 5,955,000 5,955,000
V California State
5.25%, due 10/1/29 5,000,000 4,957,100
5.625%, due 4/1/26 5,500,000 5,751,295
California State Public Works
Revenue, Various Capital
Project
Series G1
5.75%, due 10/1/30 1,000,000 997,530
Golden State Tobacco
Securitization Corp.
Series A
4.50%, due 6/1/27 4,620,000 4,004,524
Los Angeles, California
Harbor
Department Revenue
Series B
5.25%, due 8/1/34 3,500,000 3,643,395
Los Rios, California
Community College
District Election
Series D
5.375%, due 8/1/34 4,000,000 4,114,320
Morongo, California Unified
School
District Election
Series B
5.25%, due 8/1/38 3,600,000 3,626,136
V OMWD, California Financing
Authority Revenue, Water
Treatment Project
5.00%, due 6/1/39 5,210,000 5,138,467
-------------
42,113,199
-------------
DELAWARE 1.0%
Delaware State Economic
Development Authority
Revenue Pollution Control,
Delmarva Power
Series C, Insured: AMBAC
4.90%, due 5/1/26 (a)(b) 2,250,000 2,284,830
-------------
DISTRICT OF COLUMBIA 0.2%
Columbia Water and Sewer
Authority Revenue, Public
Utilities
5.50%, due 10/1/28 400,000 476,124
-------------
FLORIDA 8.4%
Citizens Property Insurance
Corp. Revenue
Series A-1
6.00%, due 6/1/16 (a) 2,220,000 2,383,814
Florida Hurricane Catastrophe
Fund, Florida Finance Corp.
Revenue
Series A
5.00%, due 7/1/14 2,000,000 2,156,700
V Highlands County Florida
Health Facilities Authority
Revenue Hospital, Adventist
Health Systems
Series D
5.375%, due 11/15/35 (c) 4,500,000 5,072,805
Miami-Dade County Florida
Aviation International
Airport Revenue
Series A
5.50%, due 10/1/26 2,000,000 2,038,000
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest issuers held, as of October 31, 2009, excluding
short-term investment. 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
12
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Miami-Dade County Florida
Solid Waste System Revenue
Insured: MBIA
5.00%, due 10/1/19 (a)(d) $1,735,000 $ 1,827,735
V South Florida Water
Management District,
Insured: AMBAC
5.00%, due 10/1/20 (a)(b) 5,000,000 5,339,000
-------------
18,818,054
-------------
GEORGIA 5.8%
Atlanta, Georgia Water &
Wastewater
Revenue
Series A
6.00%, due 11/1/22 2,000,000 2,164,100
Series A
6.25%, due 11/1/39 4,000,000 4,238,560
Dahlonega, Georgia Downtown
Development Authority,
North Georgia PHD LLC
5.25%, due 7/1/40 (a) 3,400,000 3,414,586
Monroe County, Georgia
Development Authority,
Oglethorpe Power Corp.
Series B
4.625%, due 1/1/36 (a) 3,250,000 3,295,565
-------------
13,112,811
-------------
HAWAII 1.4%
Hawaii State Department of
Budget and Finance Revenue,
Hawaiian Electric Co.
6.50%, due 7/1/39 3,000,000 3,203,820
-------------
ILLINOIS 8.2%
V Chicago, Illinois Housing
Authority Capital Program
Revenue
Insured: FSA
5.00%, due 7/1/23 (a)(e) 7,000,000 7,213,570
Chicago, Illinois Waterworks
Revenue
Insured: FGIC
6.50%, due 11/1/15 (a)(f) 3,005,000 3,573,396
Illinois State Sales Tax
Revenue
Second Series, Insured:
FGIC
5.50%, due 6/15/17 (a)(f) 4,000,000 4,610,920
Kane McHenry Cook & De Kalb
Counties Illinois Unit
School District No. 300
Insured: XLCA
5.00%, due 12/1/20 (a)(g) 3,000,000 3,163,200
-------------
18,561,086
-------------
INDIANA 0.5%
Indianapolis, Indiana Public
Improvement Bond Bank
Series A
5.50%, due 1/1/38 (a) 1,100,000 1,179,266
-------------
KANSAS 1.4%
Arkansas City Public Building
Commission Revenue, South
Central Regional Medical
Center
7.00%, due 9/1/29 3,000,000 3,136,230
-------------
LOUISIANA 4.4%
Louisiana Public Facilities
Authority Hospital Revenue,
Franciscan Mission Aries
6.75%, due 7/1/39 4,000,000 4,377,000
Louisiana Public Facilities
Authority Revenue, Christus
Health
Series A
6.00%, due 7/1/29 1,600,000 1,683,744
New Orleans, Louisiana Sewer
Service Revenue
6.00%, due 6/1/24 (a) 500,000 522,575
6.25%, due 6/1/29 (a) 750,000 785,175
State of Louisiana Offshore
Terminal Authority
Deepwater Port Revenue
Series C
5.25%, due 9/1/16 2,500,000 2,587,475
-------------
9,955,969
-------------
MASSACHUSETTS 1.6%
Massachusetts State Health &
Educational Facilities
Authority Revenue,
Caregroup
Series E2
5.00%, due 7/1/18 3,500,000 3,543,995
-------------
MICHIGAN 3.8%
V Detroit, Michigan Sewer
Disposal Revenue
Series C-1
6.50%, due 7/1/24 1,000,000 1,091,370
Series B
7.50%, due 7/1/33 (a) 3,900,000 4,826,133
Michigan State Hospital
Finance Authority Revenue,
Refunding
5.75%, due 11/15/39 2,500,000 2,413,400
Michigan Tobacco Settlement
Finance Authority
6.00%, due 6/1/34 250,000 208,647
-------------
8,539,550
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BONDS (CONTINUED)
MISSOURI 0.2%
Manchester/Ballas Community
Improvement District Sales
Tax Revenue
6.125%, due 9/1/29 $ 500,000 $ 467,090
-------------
NEVADA 1.8%
Clark County Nevada Passenger
Facility Charge Revenue,
Las Vegas-McCarran
International Airport
Series A-2, Insured: AMBAC
5.00%, due 7/1/26 (a)(b) 4,000,000 4,130,880
-------------
NEW JERSEY 9.6%
New Jersey Health Care
Facilities Financing
Authority Revenue,
Cigarette Tax
5.625%, due 6/15/18 5,000,000 4,999,750
New Jersey Health Care
Facilities Financing
Authority Revenue,
Hackensack University
Medical Center
5.25%, due 1/1/31 3,020,000 3,108,697
New Jersey Health Care
Facilities Financing
Authority, Hospital Asset
Transformation Program
Series A
5.75%, due 10/1/31 2,000,000 2,139,840
New Jersey State Higher
Education Assistance
Authority Revenue, Student
Loan
Series A
6.125%, due 6/1/30 4,000,000 4,191,320
Newark, New Jersey Housing
Authority Revenue, South
Ward Police Facility
6.75%, due 12/1/38 (a) 4,000,000 4,495,000
Tobacco Settlement Financing
Corp.
Series 1A
4.50%, due 6/1/23 2,925,000 2,629,341
-------------
21,563,948
-------------
NEW MEXICO 1.3%
New Mexico Finance Authority
State Transportation
Revenue
Series A, Insured: MBIA
5.00%, due 6/15/22 (a)(d) 2,750,000 2,970,220
-------------
NEW YORK 3.3%
Albany Industrial Development
Agency Civic Facility
Revenue
Series A
5.50%, due 5/1/32 1,215,000 1,275,507
New York State Dormitory
Authority Lease Revenue
Court Facilities City of
New York
7.375%, due 5/15/10 1,375,000 1,424,486
New York State Dormitory
Authority
Revenue
Series A, Insured: MBIA
6.00%, due 7/1/19 (a)(d) 2,000,000 2,387,120
Series B
7.50%, due 5/15/11 (c) 1,250,000 1,367,613
New York State Dormitory
Authority Revenue Non State
Supported Debt
Series A
5.50%, due 5/1/37 1,000,000 1,014,030
New York State Environmental
Facilities Corp. Pollution
Control Revenue, State
Water Revolving Fund
Series A
7.50%, due 6/15/12 60,000 60,360
-------------
7,529,116
-------------
NORTH CAROLINA 6.9%
North Carolina Eastern
Municipal Power Agency
Systems Revenue
Series A
5.50%, due 1/1/12 2,000,000 2,138,120
Series D
6.75%, due 1/1/26 2,000,000 2,041,720
V North Carolina Municipal
Power Agency N1, Catawba
Electric Revenue
Series B
6.50%, due 1/1/20 7,000,000 7,140,700
North Carolina Turnpike
Authority
Series A
5.75%, due 1/1/39 (a) 4,000,000 4,206,160
-------------
15,526,700
-------------
OHIO 2.0%
Ohio State Hospital Facility
Revenue, Cleveland Clinic
Health
Series B
5.50%, due 1/1/34 3,500,000 3,640,245
Toledo-Lucas County Port
Authority Development
Revenue
Series B
6.25%, due 5/15/24 1,030,000 935,745
-------------
4,575,990
-------------
PENNSYLVANIA 2.9%
Pennsylvania State Turnpike
Commission Revenue
Series B
5.75%, due 6/1/39 4,000,000 4,227,960
</Table>
14 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
University of Pittsburgh
Series B
5.50%, due 9/15/21 $2,000,000 $ 2,307,400
-------------
6,535,360
-------------
PUERTO RICO 4.7%
V Puerto Rico Commonwealth
Infrastructure Financing
Authority, Special Tax
Revenue
Series C
5.50%, due 7/1/23 (a) 5,000,000 5,013,900
Puerto Rico Electric Power
Authority
Revenue
Series WW
5.25%, due 7/1/33 3,000,000 2,987,700
Puerto Rico Financing Corp.
Sales
Tax Revenue
Series A
5.50%, due 8/1/23 2,500,000 2,652,825
-------------
10,654,425
-------------
SOUTH CAROLINA 0.5%
South Carolina Jobs-Economic
Development
Authority/Economic
Development Revenue, Bon
Secours-St. Francis Medical
Center
Series A
5.625%, due 11/15/30 935,000 1,057,457
-------------
TEXAS 7.8%
Dallas-Fort Worth, Texas
International Airport
Facilities Improvement
Revenue
Series A, Insured: FGIC
6.00%, due 11/1/28
(a)(f)(h) 4,000,000 4,002,240
La Vernia Texas Higher
Education Finance Corp.
Revenue
Series A
6.25%, due 8/15/39 865,000 859,118
North Texas Throughway
Authority Revenue
Series F
5.75%, due 1/1/38 3,000,000 3,034,800
North Texas Tollway Authority
Revenue
Series C
5.25%, due 1/1/44 2,500,000 2,363,600
V San Antonio, Texas
Electric & Gas (Escrow
Shares)
Series 2000
5.00%, due 2/1/17 (i) 5,040,000 5,528,729
Texas State College Student
Loan
5.50%, due 8/1/10 (h) 1,760,000 1,814,419
-------------
17,602,906
-------------
WASHINGTON 0.5%
FYI Properties Wash Lease
Revenue
5.50%, due 6/1/39 1,000,000 1,049,000
-------------
WISCONSIN 0.7%
Wisconsin State Health and
Educational Facilities
Authority Revenue
5.25%, due 4/1/39 1,500,000 1,484,400
-------------
WYOMING 0.9%
Campbell County, Wyoming
Solid Waste Facilities
Revenue
Series A
5.75%, due 7/15/39 2,000,000 2,106,220
-------------
Total Investments
(Cost $222,510,671) (j) 102.7% 231,505,197
Liabilities in Excess of
Cash and Other Assets (2.7) (6,139,155)
----- ------------
Net Assets 100.0% $ 225,366,042
===== ============
</Table>
<Table>
+++ On a daily basis New York Life
Investments 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) The debt is guaranteed under the Federal
Deposit Insurance Corporation (FDIC)
Temporary Liquidity Guarantee Program and
is backed by the full faith and credit of
the United States. The expiration date of
the FDIC's guarantee is the earlier of
the maturity date of the debt or June 30,
2012.
(b) AMBAC--Ambac Assurance Corp.
(c) Pre-refunding Security--issuer has or
will issue new bonds and use the proceeds
to purchase Treasury securities that
mature at or near the same date as the
original issue's call date.
(d) MBIA--MBIA Insurance Corp.
(e) FSA--Financial Security Assurance, Inc.
(f) FGIC--Financial Guaranty Insurance Co.
(g) XLCA--XL Capital Assurance, Inc.
(h) Interest on these securities is subject
to alternative minimum tax.
(i) Non-income producing security.
(j) At October 31, 2009, cost is $222,510,671
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $9,699,758
Gross unrealized depreciation (705,232)
----------
Net unrealized appreciation $8,994,526
==========
</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, 2009 (CONTINUED)
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Municipal Bonds $ -- $231,505,197 $ -- $231,505,197
-------- ------------ -------- ------------
Total Investments in Securities $-- $231,505,197 $-- $231,505,197
======== ============ ======== ============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with
significant unobservable inputs (Level 3).
16 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $222,510,671) $231,505,197
Cash 272,005
Receivables:
Interest 3,340,341
Fund shares sold 1,730,098
Other assets 17,585
------------
Total assets 236,865,226
------------
LIABILITIES:
Payables:
Investment securities purchased 10,914,834
Manager (See Note 3) 73,680
NYLIFE Distributors (See Note 3) 57,183
Fund shares redeemed 57,103
Shareholder communication 38,033
Transfer agent (See Note 3) 31,968
Professional fees 28,426
Custodian 6,067
Trustees 635
Accrued expenses 3,697
Dividend payable 287,558
------------
Total liabilities 11,499,184
------------
Net assets $225,366,042
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 249,159
Additional paid-in capital 238,410,090
------------
238,659,249
Accumulated undistributed net
investment income 276,420
Accumulated net realized loss on
investments and swap transactions (22,564,153)
Net unrealized appreciation on
investments 8,994,526
------------
Net assets $225,366,042
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 21,682,644
============
Shares of beneficial interest
outstanding 2,388,103
============
Net asset value per share
outstanding $ 9.08
Maximum sales charge (4.50% of
offering price) 0.43
------------
Maximum offering price per share
outstanding $ 9.51
============
CLASS A
Net assets applicable to
outstanding shares $162,920,586
============
Shares of beneficial interest
outstanding 18,019,661
============
Net asset value per share
outstanding $ 9.04
Maximum sales charge (4.50% of
offering price) 0.43
------------
Maximum offering price per share
outstanding $ 9.47
============
CLASS B
Net assets applicable to
outstanding shares $ 18,219,305
============
Shares of beneficial interest
outstanding 2,015,455
============
Net asset value and offering price
per share outstanding $ 9.04
============
CLASS C
Net assets applicable to
outstanding shares $ 22,543,507
============
Shares of beneficial interest
outstanding 2,492,683
============
Net asset value and offering price
per share outstanding $ 9.04
============
</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, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 9,617,575
------------
EXPENSES:
Manager (See Note 3) 1,213,401
Distribution/Service--Investor
Class (See Note 3) 53,832
Distribution/Service--Class A
(See Note 3) 352,819
Service--Class B (See Note 3) 53,648
Service--Class C (See Note 3) 26,069
Transfer agent--Investor Class
(See Note 3) 48,754
Transfer agent--Class A (See Note
3) 68,741
Transfer agent--Classes B and C
(See Note 3) 71,719
Professional fees 99,865
Shareholder communication 97,344
Distribution--Class B (See Note
3) 53,648
Distribution--Class C (See Note
3) 26,069
Registration 55,332
Custodian 23,259
Trustees 8,923
Miscellaneous 18,825
------------
Total expenses before waiver 2,272,248
Expense waiver from Manager (See
Note 3) (374,432)
------------
Net expenses 1,897,816
------------
Net investment income 7,719,759
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND SWAP CONTRACTS:
Net realized loss on:
Security transactions (8,347,414)
Swap transactions (3,975,000)
------------
Net realized loss on investments
and swap transactions (12,322,414)
------------
Net change in unrealized
depreciation on:
Investments 25,278,723
Swap contracts 378,600
------------
Net change in unrealized
depreciation on investments and
swap contracts 25,657,323
------------
Net realized and unrealized gain on
investments and swap transactions 13,334,909
------------
Net increase in net assets
resulting from operations $ 21,054,668
============
</Table>
18 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 7,719,759 $ 8,312,351
Net realized loss on
investments, futures
transactions and swap
transactions (12,322,414) (1,730,546)
Net change in unrealized
appreciation (depreciation)
on investments, futures
contracts and swap
contracts 25,657,323 (21,834,467)
---------------------------
Net increase (decrease) in
net assets resulting from
operations 21,054,668 (15,252,662)
---------------------------
Dividends to shareholders:
From net investment income:
Investor Class (898,748) (546,593)
Class A (6,125,325) (6,574,648)
Class B (843,706) (1,054,404)
Class C (433,702) (281,903)
---------------------------
Total dividends to
shareholders (8,301,481) (8,457,548)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 45,502,223 15,521,438
Net asset value of shares
issued to shareholders in
reinvestment of dividends 5,623,582 5,779,899
Cost of shares redeemed (28,103,439) (35,884,106)
---------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 23,022,366 (14,582,769)
---------------------------
Net increase (decrease)
in net assets 35,775,553 (38,292,979)
NET ASSETS:
Beginning of year 189,590,489 227,883,468
---------------------------
End of year $225,366,042 $189,590,489
===========================
Accumulated undistributed net
investment income at end of
year $ 276,420 $ 1,339,988
===========================
</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**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
----------------------------
2009 2008
Net asset value at beginning of period $ 8.48 $ 9.07
------- -------
Net investment income 0.34 (a) 0.25
Net realized and unrealized gain (loss)
on investments 0.63 (0.60)
------- -------
Total from investment operations 0.97 (0.35)
------- -------
Less dividends:
From net investment income (0.37) (0.24)
------- -------
Net asset value at end of period $ 9.08 $ 8.48
======= =======
Total investment return (b) 11.67% (4.03%)(c)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.93% 3.92% ++
Net expenses 1.02% 0.99% ++
Expenses (before waiver/reimbursement) 1.25% 1.21% ++
Portfolio turnover rate 94% 90%
Net assets at end of period (in 000's) $21,683 $21,450
</Table>
<Table>
<Caption>
CLASS B
------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 8.44 $ 9.48 $ 9.75 $ 9.62 $ 9.85
------- ------- ------- ------- --------
Net investment income 0.32 (a) 0.33 0.34 0.36 (a) 0.36
Net realized and
unrealized gain (loss)
on investments 0.63 (1.03) (0.26) 0.13 (e) (0.22)
------- ------- ------- ------- --------
Total from investment
operations 0.95 (0.70) 0.08 0.49 0.14
------- ------- ------- ------- --------
Less dividends:
From net investment
income (0.35) (0.34) (0.35) (0.36) (0.37)
------- ------- ------- ------- --------
Net asset value at end of
period $ 9.04 $ 8.44 $ 9.48 $ 9.75 $ 9.62
======= ======= ======= ======= ========
Total investment return
(b) 11.32% (7.46%) 0.86% 5.16%(d)(e) 1.41%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 3.68% 3.63% 3.63% 3.68% 3.67%
Net expenses 1.26% 1.20% 1.14% 1.14% 1.14%
Expenses (before
waiver/reimbursement) 1.50% 1.40% 1.31% 1.34%(d) 1.31%
Portfolio turnover rate 94% 90% 59% 55% 26%
Net assets at end of
period (in 000's) $18,219 $23,935 $31,921 $45,529 $228,206
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions.
(c) Total return is not annualized.
(d) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
0.01% per share on net realized gains on investments and the effect on total
investment return was less than 0.01%.
</Table>
20 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
2009 2008 2007 2006 2005
$ 8.45 $ 9.48 $ 9.75 $ 9.62 $ 9.84
-------- -------- -------- -------- -------
0.35 (a) 0.36 0.38 0.38 (a) 0.38
0.62 (1.02) (0.27) 0.13 (e) (0.21)
-------- -------- -------- -------- -------
0.97 (0.66) 0.11 0.51 0.17
-------- -------- -------- -------- -------
(0.38) (0.37) (0.38) (0.38) (0.39)
-------- -------- -------- -------- -------
$ 9.04 $ 8.45 $ 9.48 $ 9.75 $ 9.62
======== ======== ======== ======== =======
11.72% (7.17%) 1.12% 5.43%(d)(e)1.77%
4.04% 3.94% 3.88% 3.93% 3.92%
0.90% 0.88% 0.89% 0.89% 0.89%
1.08% 1.04% 1.06% 1.09%(d) 1.06%
94% 90% 59% 55% 26%
$162,921 $136,781 $189,210 $200,593 $38,508
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------
2009 2008 2007 2006 2005
$ 8.45 $ 9.48 $ 9.75 $ 9.62 $ 9.85
------- ------ ------ ------ ------
0.32 (a) 0.34 0.35 0.36 (a) 0.36
0.61 (1.03) (0.27) 0.13 (e) (0.22)
------- ------ ------ ------ ------
0.93 (0.69) 0.08 0.49 0.14
------- ------ ------ ------ ------
(0.34) (0.34) (0.35) (0.36) (0.37)
------- ------ ------ ------ ------
$ 9.04 $ 8.45 $ 9.48 $ 9.75 $ 9.62
======= ====== ====== ====== ======
11.31% (7.46%) 0.86% 5.16%(d)(e) 1.41%
3.68% 3.64% 3.63% 3.68% 3.67%
1.28% 1.20% 1.14% 1.14% 1.14%
1.51% 1.40% 1.31% 1.34%(d) 1.31%
94% 90% 59% 55% 26%
$22,544 $7,425 $6,752 $5,949 $6,231
</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:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Tax Free Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on May 1,
1986. Class C shares commenced operations on September 1, 1998. Investor Class
shares commenced operations on February 28, 2008. Investor Class and Class A
shares are offered at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. 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 four
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 and
service 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 were first offered to the public on December 18, 2009.
The Fund's investment objective is to provide a high level of current income
free from regular federal income tax, consistent with the preservation of
capital.
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 (as defined in Note 3(A)),
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"). Futures contracts are valued at the last posted settlement
price on the market where such futures are primarily traded.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based
22 MainStay Tax Free Bond Fund
on market data obtained from sources independent of the reporting entity.
Unobservable inputs are inputs that reflect the reporting entity's own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the information available in the
circumstances. The inputs or methodology used for valuing securities may not be
an indication of the risks associated with investing in those securities. The
three-tier hierarchy of inputs is summarized in the three broad Levels listed
below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at NAV, 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. Interest income is
accrued as earned using the effective interest rate method. Discounts and
premiums on securities purchased, other than short-term investments, 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 investments 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 NAV
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
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. These securities are
subject to income price risk in the normal course of investing in these
transactions. Premiums received are recorded as assets, and the market value of
the written options are recorded as liabilities. The liabilities are
subsequently adjusted and unrealized appreciation or depreciation is recorded to
reflect the current value of the options written. Premiums received from writing
options that expire are treated as realized gains. Premiums received from
writing options that are exercised or are cancelled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, in exchange for the premium, the Fund foregoes the opportunity for
capital appreciation above the exercise price should the price of the underlying
security or foreign currency increase. The Fund, in exchange for the premium,
accepts the risk of a decline in the market value of the underlying security or
foreign currency below the exercise price. A call option may be covered by the
call writer's owning the underlying security throughout the option period. A
call option may also be covered by the call writer's maintaining liquid assets
valued at greater than the exercise price of the call written. When writing a
covered call option, the Fund, in return for the premium on the option, gives up
the opportunity to profit from a price increase in the underlying securities
above the exercise price. However, as long as the obligation as the writer
continues, the Fund has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur risk
exposure equal to the difference between the exercise price of the option and
the sum of the market value of the underlying security plus the premium received
from the sale of the option. The Fund writes covered call options to try to
realize greater return on the sale of a stock. The Fund writes put options to
help protect against unanticipated adverse developments.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing or to increase its current return. The Fund may purchase put options
on its securities or foreign currencies to protect against a decline in the
value of the security or foreign currency or to close out covered written put
positions. The Fund may also purchase options to seek to enhance returns. Risks
may arise from an imperfect correlation between the change in market value of
the securities or foreign currencies held by the Fund and the prices of options
relating to the securities or foreign currencies purchased or sold by the Fund
and from the possible lack of a liquid secondary market for an option. The
maximum risk exposure for any purchased option is limited to the premium
initially paid for the option. The fund did not invest in purchased or written
options during the year ended October 31, 2009.
(H) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(I) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a financial
instrument (i.e., foreign currency, interest rate, security, or securities
index.) The Fund is subject to equity price risk and interest rate risk in the
normal course of investing in these transactions. The Fund enters into futures
contracts for hedging purposes, managing the duration and yield curve profile,
market exposure or to enhance income. 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. A 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 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
24 MainStay Tax Free Bond Fund
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 have minimal counterparty
risk as they are conducted through regulated exchanges that guarantee the
futures against default by the counterparty. The Fund invests in futures
contracts to help manage the duration and yield curve of the portfolio. The
Fund's investment in futures contracts and other derivatives may increase the
volatility of the Fund's NAV and may result in a loss to the Fund. The Fund did
not invest in futures contracts during the year ended October 31, 2009.
(J) SWAP AGREEMENTS. The Fund enters into interest rate swap agreements
("swaps") for the purpose of attempting to protect against changes in interest
rates or for other portfolio management purposes. In a standard swaps
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a notional amount. Credit default swaps are
contracts whereby one party makes periodic payments to a counterparty in
exchange for the right to receive a specified return in the event of a default
by a third party on its obligation. Credit default swaps may be used to provide
a measure of protection against defaults of sovereign or corporate issuers. In
connection with these agreements, cash or securities may be set aside as
collateral in accordance with the terms of the swap agreement.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an agreed-
upon level, while the seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. An interest rate collar combines elements of buying a cap and selling a
floor.
The Fund bears the risk of loss of the amount expected to be received under a
swap agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Fund may be able to eliminate its exposure under a swap
agreement either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly creditworthy party.
Swaps are marked to market daily based upon quotations from market makers and
vendors and the change in value, if any, is recorded as unrealized gain or loss.
Payments received or made on swap contracts are recorded as realized gain or
loss. Gains or losses are realized upon early termination of the swap
agreements. These financial instruments are not actively traded on financial
markets. Entering into these agreements involves elements of credit, market and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements may
default on its obligation to perform or disagree as to the meaning of the
contractual terms in the agreements and that there may be unfavorable changes in
interest rates or the price of the index or security underlying these
transactions.
(K) CONCENTRATION OF RISK. The ability of issuers of debt securities held by
the Fund to meet their obligations may be affected by economic or political
developments in a specific country, industry or region.
(L) 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.
(M) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
The effect of derivative instruments on the Statement of Operations for the year
ended October 31, 2009.
REALIZED GAIN (LOSS)
<Table>
<Caption>
INTEREST
STATEMENT OF RATE
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net realized gain
(loss) on swap
Swap Contracts transactions $(3,975,000) $(3,975,000)
-------------------------
Total Realized
Gain (Loss) $(3,975,000) $(3,975,000)
=========================
</Table>
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
INTEREST
STATEMENT OF RATE
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net change in
unrealized
appreciation
(depreciation) on
Swap Contracts swap contracts $378,600 $ 378,600
-------------------------
Total Change in
Appreciation
(Depreciation) $378,600 $378,600
=========================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
INTEREST
RATE
CONTRACTS
RISK TOTAL
Swap Contracts (2) $(3,474,500) $(3,474,500)
</Table>
(1) Amount disclosed represents the weighted average held during the twelve-
month period.
(2) Amount(s) represent(s) notional amount.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. Effective as of the close of business on June 30, 2009, the subadvisory
agreement between New York Life Investments and Standish Mellon Asset Management
Company LLC was terminated. From July 1, 2009, through October 16, 2009, New
York Life Investments managed the Fund directly without the use of a subadvisor.
On October 16, 2009, shareholders of the Fund approved a subadvisory agreement
between New York Life Investments and MacKay Shields LLC ("MacKay Shields").
Accordingly, MacKay Shields (the "Subadvisor"), is responsible for the day-to-
day portfolio management of the Fund. Pursuant to the terms of a subadvisory
agreement ("Subadvisory Agreement") between New York Life Investments and the
Subadvisor, New York Life Investments pays for the services of the Subadvisor.
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:
0.60% on assets up to $500 million; 0.575% on assets from $500 million to $1
billion and 0.55% on assets in excess of $1 billion. New York Life Investments
has contractually agreed to waive a portion of its management fee so that the
management fee does not exceed 0.45% on assets up to $500 million and 0.425% on
assets from $500 million to $1 billion and to 0.40% on assets in excess of $1
billion, plus a fee for fund accounting services previously provided by New York
Life Investments under a separate accounting agreement.
Effective August 1, 2009, New York Life Investments has entered into a written
expense limitation agreement under which it has agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses (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) for the
Fund's Class A shares do not exceed 0.94% of its average net assets. New York
Life Investments will apply an equivalent waiver or reimbursement, in an equal
amount of basis points, to the other share classes of the Fund. The expense
limitation agreement may be modified or terminated only with the approval of the
Board. Under the expense limitation agreement, New York Life Investments 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 existing expense limitations and the recoupment is made within the
term of the agreement. Any recoupment amount is generally applied within a
fiscal year. This expense limitation agreement was set to expire on July 31,
2010. On December 11, 2009, the Board of the Fund approved an extension of the
expense limitation agreement to February 28, 2011.
Prior to August 1, 2009, New York Life Investments had entered into a written
expense limitation agreement under which it agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses of the appropriate class of shares did not
exceed the following percentages of average daily net assets: Investor Class,
0.99%; Class A, 0.89%; Class B, 1.24%; and Class C, 1.24%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $1,213,401 and waived its fees in the amount of
$374,432.
State Street Bank and Trust Company ("State Street"), 1 Lincoln Street, Boston,
Massachusetts 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with New York Life Investments. These services
include calculating the daily NAVs of the
26 MainStay Tax Free Bond Fund
Fund, maintaining the general ledger and sub-ledger accounts for the calculation
of the Fund's respective NAVs, and assisting New York Life Investments in
conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street is compensated by New York
Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the 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 0.25% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a shareholder service fee at the annual rate of 0.25% of the average daily
net asset value of the Class B and Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares was $2,628
and $49,635, respectively, for the year ended October 31, 2009. The Fund was
also advised that the Distributor retained contingent deferred sales charges on
redemptions of Class B and Class C shares of $16,754 and $327, respectively, for
the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $189,214.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $54,775 0.0%++
- -------------------------------------------------
Class C 110 0.0++
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $9,329.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY TAX EXEMPT CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$50,554 $513,424 $(22,564,153) $(287,558) $8,994,526 $(13,293,207)
- ------------------------------------------------------------------------------------------------
</Table>
The other temporary differences are primarily due to dividends payable.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(481,846) $- $481,846
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to income from partnership
investments.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $22,564,153 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. No capital gain distributions shall be
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2011 $ 8,117
2012 478
2016 1,647
2017 12,322
- ------------------------------------
Total $22,564
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distribution paid from:
Ordinary Income $ 370,756 $ -
Exempt Interest Dividends 7,930,725 8,457,548
- ------------------------------------------------------
Total $8,301,481 $8,457,548
- ------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $209,033 and $180,485 respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 91,282 $ 808,244
Shares issued to shareholders
in reinvestment of
dividends 86,590 753,775
Shares redeemed (302,466) (2,644,594)
-----------------------
Net decrease in shares
outstanding before
conversion (124,594) (1,082,575)
Shares converted into
Investor Class (See Note 1) 117,038 1,032,575
Shares converted from
Investor Class (See Note 1) (133,943) (1,212,371)
-----------------------
Net decrease (141,499) $(1,262,371)
=======================
Period ended October 31, 2008
(a):
Shares sold 53,586 $ 490,019
Shares issued to shareholders
in reinvestment of
dividends 50,149 454,743
Shares redeemed (258,927) (2,369,444)
-----------------------
Net decrease in shares
outstanding before
conversion (155,192) (1,424,682)
Shares converted into
Investor Class (See Note 1) 2,890,374 26,562,988
Shares converted from
Investor Class (See Note 1) (205,580) (1,854,651)
-----------------------
Net increase 2,529,602 $23,283,655
=======================
</Table>
(a) Investor Class Shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 3,026,444 $ 27,215,955
Shares issued to
shareholders in
reinvestment of dividends 465,198 4,038,840
Shares redeemed (2,208,318) (19,125,509)
-------------------------
Net increase in shares
outstanding before
conversion 1,283,324 12,129,286
Shares converted into Class
A (See Note 1) 575,013 5,062,692
Shares converted from Class
A (See Note 1) (34,659) (311,996)
-------------------------
Net increase 1,823,678 $ 16,879,982
=========================
Year ended October 31, 2008:
Shares sold 982,364 $ 9,053,080
Shares issued to
shareholders in
reinvestment of dividends 483,108 4,420,090
Shares redeemed (2,773,607) (25,549,663)
-------------------------
Net decrease in shares
outstanding before
conversion (1,308,135) (12,076,493)
Shares converted into Class
A (See Note 1) 413,208 3,759,242
Shares converted from Class
A (See Note 1) (2,864,814) (26,244,489)
-------------------------
Net decrease (3,759,741) $(34,561,740)
=========================
</Table>
28 MainStay Tax Free Bond Fund
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 164,271 $ 1,433,748
Shares issued to
shareholders in
reinvestment of dividends 69,749 602,494
Shares redeemed (529,475) (4,617,021)
-------------------------
Net decrease in shares
outstanding before
conversion (295,455) (2,580,779)
Shares converted from Class
B (See Note 1) (523,358) (4,570,900)
-------------------------
Net decrease (818,813) $ (7,151,679)
=========================
Year ended October 31, 2008:
Shares sold 200,590 $ 1,850,180
Shares issued to
shareholders in
reinvestment of dividends 81,349 743,777
Shares redeemed (573,355) (5,269,969)
-------------------------
Net decrease in shares
outstanding before
conversion (291,416) (2,676,012)
Shares converted from Class
B (See Note 1) (241,642) (2,223,090)
-------------------------
Net decrease (533,058) $ (4,899,102)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 1,788,795 $ 16,044,276
Shares issued to
shareholders in
reinvestment of dividends 26,029 228,473
Shares redeemed (201,133) (1,716,315)
-------------------------
Net increase 1,613,691 $ 14,556,434
=========================
Year ended October 31, 2008:
Shares sold 443,102 $ 4,128,159
Shares issued to
shareholders in
reinvestment of dividends 17,675 161,289
Shares redeemed (293,940) (2,695,030)
-------------------------
Net increase 166,837 $ 1,594,418
=========================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Tax Free Bond Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Tax Free Bond Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
30 MainStay Tax Free Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Tax Free Bond Fund ("Fund") and
New York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and Standish Mellon
Asset Management Company LLC ("Standish Mellon"), on behalf of the Fund.
Separately, on June 23, 2009, the Board approved New York Life Investments'
recommendation to replace Standish Mellon with MacKay Shields LLC ("MacKay
Shields" and together with Standish Mellon, the "Subadvisers") as the subadviser
to the Fund pursuant to a new subadvisory agreement ("New Subadvisory
Agreement"), effective upon shareholder approval.(1) At the same meeting, the
Board also approved the appointment of John Loffredo and Robert DiMella as
portfolio managers of the Fund, in their positions as officers of New York Life
Investments, effective upon the termination of Standish Mellon. In determining
to approve these actions, the Board took several factors into account, including
the fact that the actions would be part of a larger initiative designed to
reposition, rationalize and streamline the MainStay Group of Funds to reduce
duplication among funds, strengthen the overall fund lineup, and offer funds
with more significant asset levels.
In reaching its decisions to approve the Agreements, other than the New
Subadvisory Agreement, the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates and responses to several comprehensive lists of questions
encompassing a variety of topics prepared on behalf of the Board by independent
legal counsel to the Board. 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
Investments. 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 legal and compliance matters, portfolio
turnover, and sales and marketing activity.
In reaching its decision to approve the New Subadvisory Agreement, the Board
considered information furnished to the Board that was prepared specifically in
connection with a special contract review process that took place at various
meetings of the Board and its Committees between April 2009 and June 2009. The
Board also considered information regarding New York Life Investments' larger
fund rationalization initiatives. The Board further considered responses from
MacKay Shields 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 determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and the
Subadvisers; (ii) the investment performance of the Fund, New York Life
Investments and Standish Mellon as subadviser to the Fund (and with respect to
MacKay Shields, the historical investment performance of similar portfolios
managed by MacKay Shields); (iii) the costs of the services to be provided, and
profits to be realized, by New York Life Investments and its affiliates, aside
from MacKay Shields, from their relationship with the Fund (and with respect to
MacKay Shields, the anticipated costs of the services to be provided, and the
profits expected to be realized, by MacKay Shields); (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 and subadvisory fee levels and overall total ordinary
operating expenses, particularly as compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements in prior years. In addition to considering the above-
referenced factors, the Board
- ----------
(1) All of the agreements described herein may be referred to as the
"Agreements."
mainstayinvestments.com 31
observed that in the marketplace there are a range of investment options
available to shareholders of the Fund, and that the Fund's shareholders, having
had the opportunity to consider alternative investment products and services,
have chosen to invest in the Fund. A more detailed discussion of the factors
that figured prominently in the Board's decisions to approve the Agreements is
provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing Standish Mellon's
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that each
Subadviser proposed to provide to the Fund. The Board evaluated Standish
Mellon's experience in serving as subadviser to the Fund and each Subadviser's
experience in managing other portfolios. It examined each Subadviser's track
record and experience in providing investment advisory services, the experience
of investment advisory, senior management and administrative personnel at each
Subadviser, and each Subadviser's overall legal and compliance environment. The
Board also reviewed each Subadviser's willingness to invest in personnel
designed to benefit the Fund. In this regard, the Board considered the
experience of each Subadviser's portfolio managers, the number of accounts
managed by the portfolio managers and the method for compensating portfolio
managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and Standish Mellon's experience,
personnel, operations and resources, and, with respect to the New Subadvisory
Agreement, that the Fund likely would benefit from the nature, extent and
quality of these services as a result of MacKay Shields' 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. With respect to the Board's
consideration of the New Subadvisory Agreement, the Board considered the
historical investment performance results of similar portfolios managed by
MacKay Shields, as well as the strength of MacKay Shields' resources (including
research capabilities) that may result in stronger long-term investment
performance for the Fund over time. The Board acknowledged that the Fund would
be making modifications to its primary benchmark to align it with MacKay
Shields' investment approach. The Board particularly considered the detailed
investment analytics reports in regards to New York Life Investments and
Standish Mellon provided by New York Life Investments' Investment Consulting
Group on the Fund throughout the year. These reports, which were prepared by New
York Life Investments 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.
32 MainStay Tax Free Bond Fund
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at New York Life Investments
concerning the Fund's investment performance, as well as discussions between
each Subadviser's portfolio managers and the Board that occurred at meetings
from time to time throughout the year and in previous years. In connection with
its consideration of the New Subadvisory Agreement, the Board took into account
its discussions with senior management and investment personnel at MacKay
Shields. The Board also considered any specific actions that New York Life
Investments had taken, or had agreed with the Board to take, to enhance Fund
investment performance, and the results of those actions. In considering the
Fund's investment performance, the Board focused principally on the Fund's long-
term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements that, while the Fund's
investment performance over time has been satisfactory, in the case of the New
Subadvisory Agreement, the selection of MacKay Shields as subadviser to the Fund
is likely to strengthen the Fund's long-term investment performance to the
benefit of shareholders. The Fund discloses more information about investment
performance in the Portfolio Management Discussion and Analysis, Investment and
Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
The Board considered the costs of the services provided by New York Life
Investments and Standish Mellon under the Agreements, the estimated costs of the
services to be provided by MacKay Shields under the New Subadvisory Agreement,
and the profits expected to be realized by New York Life Investments and its
affiliates, including MacKay Shields, and Standish Mellon due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, due to their relationships with the Fund, the Board considered,
among other things, each party's investments in personnel, systems, equipment
and other resources necessary to manage the Fund, and the fact that New York
Life Investments is responsible for paying the subadvisory fees for the Fund.
The Board acknowledged that New York Life Investments and Standish Mellon must
be in a position to pay and retain experienced professional personnel to provide
services to the Fund and that New York Life Investments' ability to maintain a
strong financial position is important in order for New York Life Investments to
continue to provide high-quality ongoing services to the Fund. The Board noted,
for example, increased costs borne by New York Life Investments and its
affiliates due to new and ongoing regulatory and compliance requirements. The
Board also noted that the Fund benefits from the allocation of certain fixed
costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates, including MacKay Shields, and Standish Mellon regarding their
profitability or anticipated profitability due to their overall relationships
with the Fund. For New York Life Investments and Standish Mellon, the Board
considered information illustrating the revenues and expenses allocated to the
Fund. With respect to MacKay Shields, the Board did not consider specific
profitability information from MacKay Shields' relationship with the Fund, since
MacKay Shields had not commenced its service as subadviser at the time the Board
considered its approval of the New Subadvisory Agreement. However, the Board
considered information provided by MacKay Shields reflecting MacKay Shields'
profitability with respect to similar mutual funds managed by MacKay Shields,
and other information that allowed the Board to estimate the expected costs and
profits of MacKay Shields in connection with its service as subadviser to the
Fund. With respect to Standish Mellon, which is a subadviser not affiliated with
New York Life Investments whose fees are paid directly by New York Life
Investments, the Board focused primarily on the profitability of the
relationship among New York Life Investments, its affiliates and the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments and its affiliates
arising directly from these
mainstayinvestments.com 33
other arrangements was not excessive. The Board noted that, although it assessed
the overall profitability of the Fund to New York Life Investments and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to New York Life Investments and its
affiliates under the Agreements, the Board considered the profitability of New
York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) and Standish Mellon due to their relationships with
the Fund are fair and reasonable. With respect to Standish Mellon, the Board
concluded that any profits realized by Standish Mellon due to its relationship
with the Fund are the result of arm's-length negotiations between New York Life
Investments and Standish Mellon, and are based on subadvisory fees paid to
Standish Mellon by New York Life Investments, not the Fund.
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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements, as
applicable. While recognizing that any precise determination of future economies
of scale is necessarily subjective, the Board considered the extent to which New
York Life Investments and the Subadvisers may realize a larger profit margin as
the Fund's assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to each
Subadviser are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and the Subadvisers on fees charged 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 explanations from New York Life Investments and the
Subadvisers about the different scope of services provided to retail mutual
funds as compared with other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in
34 MainStay Tax Free Bond Fund
serving the investment needs of New York Life Insurance Company ("New York
Life") policyholders, who often maintain smaller account balances than other
fund investors. The Board discussed measures that it and New York Life
Investments have taken in recent years to mitigate the effect of small accounts
on the expense ratios of Fund share classes, including: (i) encouraging New York
Life agents to consolidate multiple small accounts held by the same investor
into one MainStay Asset Allocation Fund account; (ii) increasing investment
minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances
below $500; (iv) since 2007, charging an annual $20.00 small account fee on
accounts with balances below $1,000; (v) modifying the approach for billing
transfer agent expenses to reduce the degree of subsidization by large accounts
of smaller accounts; and (vi) introducing Investor Class shares for certain
MainStay Funds in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to modify
the expense limitation arrangements on the Fund's share classes to decrease the
amount of New York Life Investments' subsidization of class expenses. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
modify the expense limitations on the Fund's share classes in order to reduce
the amount of class expenses subsidized by New York Life Investments.(2) The
Board acknowledged that New York Life Investments may recoup amounts waived or
reimbursed under contractual expense limitations if such action does not cause a
share class to exceed an expense limitation, and the recoupment is made during
the term of the agreement. The Board further acknowledged that New York Life
Investments may determine voluntarily to waive expenses of Fund share classes
without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements and the New Subadvisory Agreement.
- ----------
(2) In addition, at its September 30-October 1, 2009 meeting, the Board
unanimously approved the replacement of the Fund's 0.15% management fee
waiver with a 0.10% waiver and a reduction in the management fee payable
under the Management Agreement by 0.10%, effective as of November 1, 2009.
The changes to the Management Agreement also resulted in a reduction of the
subadvisory fee.
mainstayinvestments.com 35
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of the Fund was held on
October 16, 2009, at the offices of New York Life Investments in Parsippany, New
Jersey. The purpose of the meeting was to approve a Subadvisory Agreement
between New York Life Investments and Mackay Shields, LLC to appoint Mackay
Shields, LLC as the subadvisor to the Fund.
No other business came before the special meeting. The proposal to appoint
Mackay Shields, LLC was approved by the shareholders of the Fund as shown below:
<Table>
<Caption>
VOTES
VOTES FOR AGAINST ABSTENTIONS TOTAL
11,435,248 266,737 661,010 12,362,995
- ------------------------------------------------------------------------
</Table>
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For Federal individual income tax purposes, the Fund hereby designates 95.5% of
the ordinary income dividends paid during its fiscal year ended October 31, 2009
as attributable to interest income from Tax Exempt Municipal Bonds. Such
dividends are currently exempt from Federal income taxes under Section 103 (a)
of the Internal Revenue Code.
The dividends paid by the Fund during the fiscal year ended October 31, 2009,
should be multiplied by 93.0% to arrive at the amount eligible for qualified
interest income.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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).
36 MainStay Tax Free Bond Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Chief Executive Officer,
Director since 2008 (20 NYLIFE Distributors LLC and
portfolios). Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Tax Free Bond Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
40 MainStay Tax Free Bond Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 41
42 MainStay Tax Free Bond Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO17199 (RECYCLE LOGO) MS283-09 MST11-12/09
13
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INCOME BUILDER FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INCOME BUILDER FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 13
- ---------------------------------------------
FINANCIAL STATEMENTS 32
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 39
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 52
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS 53
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 58
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 58
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 58
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 59
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 7.33% 0.78% -0.61%
Excluding sales charges 13.57 1.93 -0.04
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
TOTAL RETURN BARCLAYS CAPITAL
MAINSTAY INCOME MSCI WORLD RUSSELL 1000(R) CORE COMPOSITE S&P 500(R) U.S. AGGREGATE
BUILDER FUND INDEX INDEX INDEX INDEX BOND INDEX
--------------- ---------- --------------- -------------- ---------- ----------------
10/31/99 9450 10000 10000 10000 10000 10000
10427 10109 10906 10862 10609 10730
8224 7530 8066 9633 7967 12292
7210 6412 6888 9028 6764 13016
8219 7932 8425 10418 8170 13654
8552 8983 9212 11236 8940 14410
9273 10175 10176 11996 9720 14573
10249 12344 11807 13391 11308 15329
11497 14860 13582 14888 12954 16154
8285 8641 8584 11398 8278 16203
10/31/09 9410 10233 9545 12869 9090 18438
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 7.56% 0.84% -0.58%
Excluding sales charges 13.82 1.99 -0.01
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
TOTAL RETURN BARCLAYS CAPITAL
MAINSTAY INCOME MSCI WORLD RUSSELL 1000(R) CORE COMPOSITE S&P 500(R) U.S. AGGREGATE
BUILDER FUND INDEX INDEX INDEX INDEX BOND INDEX
--------------- ---------- --------------- -------------- ---------- ----------------
10/31/99 23625 25000 25000 25000 25000 25000
26067 25273 27264 27155 26523 26826
20559 18825 20165 24082 19918 30731
18024 16029 17221 22570 16909 32540
20548 19829 21064 26044 20426 34136
21380 22457 23029 28091 22350 36024
23183 25437 25440 29991 24299 36433
25623 30860 29516 33477 28270 38323
28743 37151 33954 37219 32386 40386
20728 21603 21459 28494 20696 40509
10/31/09 23592 25583 23862 32174 22725 46094
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 7.77% 0.88% -0.77%
Excluding sales charges 12.77 1.18 -0.77
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
TOTAL RETURN BARCLAYS CAPITAL
MAINSTAY INCOME MSCI WORLD RUSSELL 1000(R) CORE COMPOSITE S&P 500(R) U.S. AGGREGATE
BUILDER FUND INDEX INDEX INDEX INDEX BOND INDEX
--------------- ---------- --------------- -------------- ---------- ----------------
10/31/99 10000 10000 10000 10000 10000 10000
10964 10109 10906 10862 10609 10730
8586 7530 8066 9633 7967 12292
7466 6412 6888 9028 6764 13016
8450 7932 8425 10418 8170 13654
8726 8983 9212 11236 8940 14410
9395 10175 10176 11996 9720 14573
10309 12344 11807 13391 11308 15329
11481 14860 13582 14888 12954 16154
8205 8641 8584 11398 8278 16203
10/31/09 9253 10233 9545 12869 9090 18438
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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.
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--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 11.69% 1.15% -0.79%
Excluding sales charges 12.69 1.15 -0.79
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
TOTAL RETURN BARCLAYS CAPITAL
MAINSTAY INCOME MSCI WORLD RUSSELL 1000(R) CORE COMPOSITE S&P 500(R) U.S. AGGREGATE
BUILDER FUND INDEX INDEX INDEX INDEX BOND INDEX
--------------- ---------- --------------- -------------- ---------- ----------------
10/31/99 10000 10000 10000 10000 10000 10000
10964 10109 10906 10862 10609 10730
8586 7530 8066 9633 7967 12292
7466 6412 6888 9028 6764 13016
8450 7932 8425 10418 8170 13654
8726 8983 9212 11236 8940 14410
9390 10175 10176 11996 9720 14573
10299 12344 11807 13391 11308 15329
11465 14860 13582 14888 12954 16154
8201 8641 8584 11398 8278 16203
10/31/09 9241 10233 9545 12869 9090 18438
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
14.14% 2.53% 0.38%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
TOTAL RETURN BARCLAYS CAPITAL
MAINSTAY INCOME MSCI WORLD RUSSELL 1000(R) CORE COMPOSITE S&P 500(R) U.S. AGGREGATE
BUILDER FUND INDEX INDEX INDEX INDEX BOND INDEX
--------------- ---------- --------------- -------------- ---------- ----------------
10/31/99 10000 10000 10000 10000 10000 10000
11073 10109 10906 10862 10609 10730
8759 7530 8066 9633 7967 12292
7690 6412 6888 9028 6764 13016
8796 7932 8425 10418 8170 13654
9172 8983 9212 11236 8940 14410
10045 10175 10176 11996 9720 14573
11161 12344 11807 13391 11308 15329
12573 14860 13582 14888 12954 16154
9103 8641 8584 11398 8278 16203
10/31/09 10390 10233 9545 12869 9090 18438
</Table>
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the 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 I shares, first offered on January 2, 2004,
include the historical performance of Class B shares through January 1, 2004,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. The MSCI World Index is a free float-adjusted market capitalization weighted
index that is designed to measure the equity market performance of developed
markets. As of June 2009, the MSCI World Index consisted of the following 23
developed market country indices: Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan,
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the United States. Total returns assume
reinvestment of all dividends and capital gains. Effective August 14, 2009,
the Fund selected the MSCI World Index as its primary benchmark index in
replacement of the Russell 1000(R) Index and the S&P 500(R) Index in
connection with a change in subadvisor. The MSCI World Index is the Fund's
broad-based securities market index for comparison purposes. An investment
cannot be made directly in an index.
5. The Russell 1000(R) Index measures the performance of the 1,000 largest
companies in the Russell 3000(R) Index, which represents approximately 92% of
the total market capitalization of the Russell 3000(R) Index. The Russell
3000(R) Index measures the performance of the 3,000 largest U.S. companies
based on total market capitalization, which represents approximately 98% of
the investable U.S. equity market. Total returns assume reinvestment of all
dividends and capital gains. An investment cannot be made directly in an
index. An investment cannot be made directly in an index.
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 Income Builder Fund
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
MSCI World Index(4) 18.42% 2.64% 0.23%
Russell 1000(R) Index(5) 11.20 0.71 -0.46
S&P 500(R) Index(6) 9.80 0.33 -0.95
Total Return Core Composite Index(7) 12.91 2.75 2.55
Barclays Capital U.S. Aggregate Bond Index(8) 13.79 5.05 6.31
Average Lipper mixed-asset target allocation growth fund(9) 15.96 2.05 2.02
</Table>
6. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
Index is widely regarded as the standard index for measuring large-cap U.S.
stock market performance. Results assume reinvestment of all dividends and
capital gains. An investment cannot be made directly in an index.
7. The Total Return Core Composite Index is comprised of the Russell 1000(R)
Index and the Barclays Capital U.S. Aggregate Bond Index weighted 60%/40%,
respectively. The Russell 1000(R) Index measures the performance of the 1,000
largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000(R)
Index. Total returns assume reinvestment of all dividends and capital gains.
An investment cannot be made directly in an index.
8. The Barclays Capital U.S. Aggregate Bond Index consists of the following
other unmanaged Barclays Capital U.S. indices: the Government Bond Index,
Corporate Bond Index, MBS Index, and ABS Index. To qualify for inclusion in
the Barclays Capital U.S. Aggregate Bond Index, securities must be U.S.
dollar denominated and investment grade and have a fixed rate coupon, a
remaining maturity of at least one year, and a par amount outstanding of at
least $250 million. Results assume reinvestment of all dividends and capital
gains. An investment cannot be made directly in an index.
9. The average Lipper mixed-asset target allocation growth fund is
representative of funds that, by portfolio practice, maintain a mix of
between 60%-80% equity securities, with the reminder invested in bonds, cash,
and cash equivalents. This benchmark is a product of Lipper Inc. 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 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 INCOME BUILDER FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,129.90 $ 8.11 $1,017.60 $ 7.68
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,132.40 $ 6.66 $1,019.00 $ 6.31
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,126.30 $12.06 $1,013.90 $11.42
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,125.50 $12.21 $1,013.70 $11.57
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,133.60 $ 5.22 $1,020.30 $ 4.94
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.51% for Investor Class, 1.24% for Class A, 2.25% for Class B, 2.28% for
Class C and 0.97% for Class I) multiplied by the average account value over
the period, divided by 365 and multiplied by 184 (to reflect the one-half
year period). The table above represents the actual expenses incurred during
the one-half year period.
8 MainStay Income Builder Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 58.00
Corporate Bonds 15.00
U.S. Government & Federal Agencies 10.60
Short-Term Investment 5.80
Convertible Bonds 4.30
Yankee Bonds 2.10
Asset-Backed Securities 1.90
Mortgage-Backed Securities 1.40
Convertible Preferred Stocks 0.70
Foreign Government Bonds 0.20
Municipal Bonds 0.20
Loan Assignments & Participations 0.00
Preferred Stock 0.00
Warrants 0.00
Liabilities in Excess of Cash and Other
Assets 0.00
Futures Contracts (0.20)
</Table>
See Portfolio of Investments beginning on page 13 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM
INVESTMENT)
<Table>
1. United States Treasury Notes,
2.25%-4.25%, due 5/31/14-8/15/19
2. Federal National Mortgage Association
(Mortgage Pass-Through Securities),
4.00%-8.00%, due 4/1/10-9/1/39
3. Federal Home Loan Mortgage Corporation
(Mortgage Pass-Through Securities),
3.00%-8.00%, due 8/1/10-9/1/39
4. Diageo PLC, Sponsored ADR
5. Government National Mortgage Association
(Mortgage Pass-Through Securities),
4.00%-8.50%, due 7/15/11-9/15/39
6. Nestle S.A. Registered
7. InBev N.V.
8. Lorillard, Inc.
9. Philip Morris International, Inc.
10. Altria Group, Inc.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY DAN ROBERTS, GARY GOODENOUGH, MICHAEL KIMBLE AND JAMES
RAMSAY OF MACKAY SHIELDS LLC (MACKAY SHIELDS), THE FUND'S CO-SUBADVISOR, AND
WILLIAM W. PRIEST, CFA, ERIC SAPPENFIELD AND MICHAEL A. WELHOELTER, CFA, OF
EPOCH INVESTMENT PARTNERS, INC., (EPOCH) THE FUND'S CO-SUBADVISOR.(1)
HOW DID MAINSTAY INCOME BUILDER FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Income Builder Fund returned 13.57% for
Investor Class shares, 13.82% for Class A shares, 12.77% for Class B shares and
12.69% for Class C shares for the 12 months ended October 31, 2009. Over the
same period, the Fund's Class I shares returned 14.14%. All share classes
underperformed the 15.96% return of the average Lipper(2) mixed-asset target
allocation growth fund and the 18.42% return of the MSCI World Index.(3) All
share classes outperformed the 11.20% return of the Russell 1000(R) Index(4) for
the 12 months ended October 31, 2009. The MSCI World 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 OR
INVESTMENT APPROACH DURING THE REPORTING PERIOD?
In connection with a larger initiative by MacKay Shields to reposition and
rationalize its investment capabilities, the Fund's Board of Trustees approved
the replacement of MacKay Shields with Epoch as the Co-Subadvisor responsible
for the equity portion of the Fund, effective at the opening of the U.S.
financial markets on June 29, 2009. The Board also approved the restructuring of
the MacKay Shields portfolio management team as of that date to add Dan Roberts
and Michael Kimble as portfolio managers responsible for the overall asset
allocation decisions for the Fund.
The Board of Trustees also approved changing the Fund's prospectus disclosure to
reflect Epoch's Global Equity Yield strategy for the Fund's equity investments;
changing the Fund's primary equity benchmark index from the Russell 1000(R)
Index to the MSCI World Index effective August 14, 2009; changing the Fund's
name from MainStay Total Return Fund to MainStay Income Builder Fund, effective
October 16, 2009; and changing the Fund's expense structure, effective August 1,
2009.
WHAT FACTORS AFFECTED THE PERFORMANCE OF THE EQUITY PORTION OF THE FUND DURING
THE REPORTING PERIOD?
During the first eight months of the reporting period, the financial markets
declined and then rose. Leading into the reporting period, many investors were
expecting a depression because of an overexpansion of credit. Global central
banks, most particularly the U.S. Federal Reserve, reacted to this credit crisis
with a flood of liquidity to keep the markets functioning.
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. The principal risk of investing in value stocks is that they
may never reach what the subadvisor believes is their full value or that they
may even go down in value. The values of debt securities fluctuate depending on
various factors, including interest rates, issuer creditworthiness, liquidity,
market conditions and maturities. High-yield debt securities ("junk bonds") are
generally considered speculative because they present a greater risk of loss
than higher-quality debt securities and may be subject to greater price
volatility. 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.
Convertible securities tend to be subordinate to other debt securities issued by
the same company. Also, issuers of convertible securities are often not as
strong as those issuing securities with higher credit ratings and thus may be
more vulnerable to changes in the economy. If an issuer stops making interest
payments and/or principal payments on its convertible securities, these
securities may become worthless and the Fund could lose its entire investment.
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets. The
principal risk of mortgage-related and asset-backed securities is that the
underlying debt may be prepaid ahead of schedule if interest rates fall, thereby
reducing the value of the Fund's investments. If interest rates rise, there may
be fewer prepayments, which would cause the average bond maturity to rise and
increase the potential for the Fund to lose money. The principal risk of
mortgage dollar rolls is that the security the Fund receives at the end of the
transaction may be worth less than the security the Fund sold to the same
counterparty at the beginning of the transaction. The Fund may experience a
portfolio turnover rate of more than 100% and may generate taxable short-term
capital gains.
1. During the reporting period, New York Life Investments delegated day-to-day
portfolio management responsibilities for the equity portion of the Fund to
MacKay Shields from November 1, 2008, to June 29, 2009, and to Epoch
beginning on June 29, 2009. MacKay Shields is an affiliate of New York Life
Investments. "New York Life Investments" is a service mark used by New York
Life Investment Management LLC.
2. See footnote on page 7 for more information about Lipper Inc.
3. See footnote on page 6 for more information on the MSCI World Index.
4. See footnote on page 6 for more information on the Russell 1000(R) Index.
10 MainStay Income Builder Fund
Pricing in the financial markets--and specifically the high-yield
market--reached a low point in mid-December. By then, even expectations of a
feeble recovery would have justified higher prices. Gradually the markets
recovered over the course of the first quarter 2009, as confidence in the
Federal Reserve's ability to counter the credit crunch increased. The high-yield
market began a swift and dramatic recovery in reaction to the levels to which
the market had been reduced. Considering the high levels of investable cash and
the exceedingly low interest rates on that cash, it is understandable why
financial markets have rallied so briskly this year.
During the last four months of the reporting per- iod, the stock market
continued to reward more speculative and higher-beta(5) securities, particularly
companies in the materials sector and cyclical industries that were likely to
benefit from renewed expectations of economic recovery. Indeed, the rally from
the lows in March through the end of October has been the third-largest stock
market rally in 30 years.
IN THE EQUITY PORTION OF THE FUND, WHICH SECTORS WERE STRONG CONTRIBUTORS TO THE
FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS WERE WEAK?
During the first eight months of the reporting period, the strongest equity
sectors relative to the Russell 1000(R) Index were industrials and information
technology. During this portion of the reporting period, the Fund held an
overweight position in information technology stocks, which contributed to
positive relative performance within this sector. The market was attracted to
information technology stocks because they were inexpensive and economically
sensitive.
Over the same portion of the reporting period, the Fund's weakest performers
relative to the Russell 1000(R) Index were financials and consumer staples.
Although consumer staples had performed well during the risk-averse fourth
quarter of 2008, investors began to sell consumer staples holdings when they saw
early signs of an economic recovery. An underweight in the financials sector was
a drag on the Fund's relative performance during the first eight months of the
reporting period.
During the last four months of the reporting period, energy, industrials and
telecommunication services were the strongest sector contributors to the Fund's
equity performance relative to the MSCI World Index. The Fund's weakest sectors
during this portion of the reporting period were financials, health care, con-
sumer staples and information technology.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS WERE STRONG CONTRIBUTORS TO
THE FUND'S EQUITY PERFORMANCE AND WHICH STOCKS WERE WEAK CONTRIBUTORS?
During the first eight months of the reporting period, the Fund benefited from
its equity positions in retailer Kohl's, bank holding company Goldman Sachs
Group and pharmaceutical company Wyeth, which received a takeover offer from
Pfizer. Among the Fund's weak equity contributors during this portion of the
reporting period were financial stocks U.S. Bancorp, Bank of America, JPMorgan
Chase and Citigroup.
During the last four months of the reporting period, chemical company E. I. du
Pont de Nemours was a strong contributor to the Fund's absolute equity
performance. Food giant Nestle advanced on declining pressure from raw materials
and growing exposure to emerging market consumers. Global reinsurer SCOR also
advanced on stable earnings and a strong balance sheet.
Weak contributors to absolute performance in the equity portion of the Fund
included steel products company Nucor, which suffered from declining year-over-
year volumes. Electricity distribution company United Utilities Group suffered
from investor concerns about anticipated regulatory changes. Telekom Austria
declined on concerns about cash flow from Eastern European investments.
DID THE EQUITY PORTION OF THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES
DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, the Fund initiated a
position in diversified manufacturing company Ingersoll-Rand. From the time of
purchase through the end of June, the price of the shares rose sharply.
Beginning in mid-March, these and other industrial stocks advanced as investors
began to sense a potential bottom in the economy as a whole. Other purchases
included insurance company MetLife and clothing retailer American Eagle
Outfitters.
During the first eight months of the reporting period, the Fund sold its
position in biopharmaceutical com- pany Celgene after slowing sales of the
company's largest product put pressure on the company's stock price. The Fund
also sold its position in design and engineering software maker Autodesk after
the
- ----------
5. Beta is a measure of volatility in relation to the market as a whole. A beta
higher than 1 indicates that a security or portfolio will tend to exhibit
higher volatility than the market. A beta lower than 1 indicates that a
security or portfolio will tend to exhibit lower volatility than the market.
mainstayinvestments.com 11
company posted a net loss for its first quarter of fiscal 2009 because of a
sharp revenue drop, goodwill impairment and restructuring charges.
During the last four months of the reporting per- iod, the Fund purchased shares
of beverage giant Anheuser-Busch Inbev NV to take advantage of the company's
strong free cash flow and solid management. The Fund also purchased shares of
media company France Telecom SA, seeking to profit from high-quality sustainable
free cash flow. Sales during the last four months of the reporting period
included financial companies Bank of America and JPMorgan Chase, both of which
lacked the asset quality and cash flow prospects needed to stay in the Fund.
HOW DID THE FUND'S EQUITY SECTOR POSITIONING CHANGE OVER THE REPORTING PERIOD?
During the first eight months of the reporting period, the Fund added cyclical
exposure and increased its weightings in the consumer discretionary and
industrials sectors. The Fund reduced its weightings in consumer staples and
health care, which were considered to be more defensive sectors.
During the last four months of the reporting period, the Fund added to its
weightings in utilities, telecommunication services and consumer staples, and
decreased its weightings in information technology, health care and industrials.
WHAT FACTORS AFFECTED THE FIXED-INCOME PORTION OF THE FUND DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, the bond market found
comfort in early signs of economic recovery, and it gradually gravitated toward
a more cyclical sentiment. The broad-based change in attitude from the latter
stages of 2008 framed a favorable backdrop for the resurgence of higher-risk
assets, especially credit-related product like corporate bonds.
During the last four months of the reporting period, the Fund was repositioned,
as it sought to take better advantage of the economic and market outlook. Should
the rate of economic recovery remain modest, we believe that increased strength
in the capital markets could support corporate fixed-income securities. With
these possibilities in view, the Fund was positioned at the end of the reporting
period for higher-yields and the potential for greater capital gains.
DID THE FIXED-INCOME PORTION OF THE FUND MAKE ANY SIGNIFICANT PURCHASES DURING
THE REPORTING PERIOD?
During the first eight months of the reporting period, the fixed-income portion
of the Fund shifted exposure from mortgage pass-through securities issued by
Fannie Mae to similar-coupon securities issued by Ginnie Mae. We viewed the
pricing relationship of the Ginnie Mae-Fannie Mae swap as oversold. The swap had
become considerably less costly on concerns about weak Ginnie Mae technicals
(such as too much supply and too little foreign demand) and a widening gap
between Ginnie Mae and Fannie Mae prepayment rates.
The Fund's expanded commitment to mortgage pass-through securities aided
performance as pass-through spreads(6) tightened nearly 45 basis points to
comparable-duration Treasurys during the first eight months of the reporting
period. The Ginnie Mae-Fannie Mae spread, however, was slow to normalize, and
the trade modestly detracted from the Fund's performance.
The Fund bought several commercial mortgage-backed securities to bring its
weighting into line with the benchmark. Although declining commercial- property
fundamentals remained a concern, there was some optimism that that government
intervention to enhance liquidity might have been a potent force. Indeed,
spreads in the commercial mortgage-backed securities sector tightened during the
latter stages of the first eight months of the reporting period.
During the last four months of the reporting period, the Fund increased its
high-yield bond allocation from just over 3% of the Fund to 8%. In pursuit of
higher risk, the Fund increased its convertible-bond allocation.
WERE THERE ANY OTHER SIGNIFICANT CHANGES IN THE FUND'S OVERALL ALLOCATIONS
DURING THE REPORTING PERIOD?
From an overall allocation perspective, the Fund increased its cash-market
equity holdings from approximately 48% of total assets to 60%. The Fund also
added an equity futures overlay of nearly 10% of the Fund's net assets to gain
further exposure to the equity markets.
- ----------
6. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
The opinions expressed are those of the responders 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.
12 MainStay Income Builder Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 35.7%+
ASSET-BACKED SECURITIES 1.9%
- ----------------------------------------------------------------
AIRLINES 0.4%
Continental Airlines, Inc.
Series A
7.25%, due 11/10/19 $ 2,230,000 $ 2,255,087
Series 1992-2, Class A1
7.256%, due 3/15/20 27,831 26,718
-------------
2,281,805
-------------
AUTOMOBILE 0.1%
Harley-Davidson Motorcycle
Trust
Series 2007-3, Class B
6.04%, due 8/15/14 500,000 510,610
Superior Wholesale Inventory
Financing Trust
Series 2007-AE1, Class A
0.345%, due 1/15/12 (a) 340,000 339,928
-------------
850,538
-------------
CREDIT CARDS 0.6%
Chase Issuance Trust
Series 2006-C4, Class C4
0.535%, due 1/15/14 (a) 1,315,000 1,256,306
Series 2005, Class A-10
4.65%, due 12/17/12 750,000 777,872
Citibank Credit Card
Issuance Trust
Series 2006-C4, Class C4
0.464%, due 1/9/12 (a) 1,400,000 1,394,435
Murcie Lago International,
Ltd.
Series 2006-1X, Class A
0.474%, due 3/27/11
(a)(b)(c) 575,456 567,175
-------------
3,995,788
-------------
DIVERSIFIED FINANCIAL SERVICES 0.0%++
USXL Funding LLC
Series 2006-1A, Class A
5.379%, due 4/15/14 (c)(d) 123,998 124,002
-------------
HOME EQUITY 0.8%
Ameriquest Mortgage
Securities, Inc.
Series 2003-8, Class AF5
4.64%, due 10/25/33 416,315 398,546
Chase Funding Mortgage Loan
Asset-Backed Certificates
Series 2002-2, Class 1A5
5.833%, due 4/25/32 251,078 189,399
CIT Group Home Equity Loan
Trust
Series 2003-1, Class A4
3.93%, due 3/20/32 63,708 57,065
Citicorp Residential
Mortgage Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (e) 484,790 474,620
Series 2006-1, Class A3
5.706%, due 7/25/36 (e) 1,355,000 1,294,348
Citifinancial Mortgage
Securities, Inc.
Series 2003-3, Class AF5
4.553%, due 8/25/33 469,778 418,994
Countrywide Asset-Backed
Certificates
Series 2003-5, Class AF5
5.739%, due 2/25/34 565,545 399,087
Equity One ABS, Inc.
Series 2003-4, Class AF6
4.833%, due 10/25/34 500,000 473,683
Series 2003-3, Class AF4
4.995%, due 12/25/33 496,169 417,331
Residential Asset Mortgage
Products, Inc.
Series 2003-RZ5, Class A7
4.97%, due 9/25/33 374,580 309,113
Series 2003-RS7, Class
AI6
5.34%, due 8/25/33 372,091 339,948
Residential Asset Securities
Corp.
Series 2002-KS2, Class AI6
6.228%, due 4/25/32 280,995 230,483
Saxon Asset Securities Trust
Series 2003-1, Class AF5
5.455%, due 6/25/33 (a) 96,707 78,424
Terwin Mortgage Trust
Series 2005-14HE, Class
AF2
4.849%, due 8/25/36 282,736 216,354
-------------
5,297,395
-------------
Total Asset-Backed
Securities
(Cost $13,219,865) 12,549,528
-------------
CONVERTIBLE BONDS 4.3%
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 0.1%
L-3 Communications Corp.
3.00%, due 8/1/35 340,000 345,525
Triumph Group, Inc.
2.625%, due 10/1/26 311,000 335,491
-------------
681,016
-------------
AUTO PARTS & EQUIPMENT 0.2%
BorgWarner, Inc.
3.50%, due 4/15/12 1,109,000 1,341,890
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings or issuers held as of October 31, 2009,
excluding short-term investment. 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
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
BIOTECHNOLOGY 0.1%
Enzon Pharmaceuticals, Inc.
4.00%, due 6/1/13 $ 269,000 $ 285,140
Gilead Sciences, Inc.
0.625%, due 5/1/13 100,000 122,625
-------------
407,765
-------------
COAL 0.0%++
Peabody Energy Corp.
4.75%, due 12/15/66 268,000 248,235
-------------
COMMERCIAL SERVICES 0.1%
Alliance Data Systems Corp.
1.75%, due 8/1/13 278,000 264,100
Coinstar, Inc.
4.00%, due 9/1/14 39,000 41,389
-------------
305,489
-------------
COMPUTERS 0.3%
EMC Corp.
1.75%, due 12/1/11 1,531,000 1,808,494
-------------
DISTRIBUTION & WHOLESALE 0.0%++
WESCO International, Inc.
6.00%, due 9/15/29 234,000 281,385
-------------
DIVERSIFIED FINANCIAL SERVICES 0.0%++
Janus Capital Group, Inc.
3.25%, due 7/15/14 119,000 142,056
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.0%++
General Cable Corp.
0.875%, due 11/15/13 239,000 214,801
-------------
ELECTRONICS 0.2%
Fisher Scientific
International, Inc.
3.25%, due 3/1/24 743,000 942,681
TTM Technologies, Inc.
3.25%, due 5/15/15 234,000 219,083
-------------
1,161,764
-------------
ENERGY--ALTERNATE SOURCES 0.1%
Covanta Holding Corp.
1.00%, due 2/1/27 740,000 672,475
-------------
ENVIRONMENTAL CONTROLS 0.0%++
Waste Connections, Inc.
3.75%, due 4/1/26 268,000 281,735
-------------
HOUSEWARES 0.2%
Newell Rubbermaid, Inc.
5.50%, due 3/15/14 722,000 1,342,018
-------------
IRON & STEEL 0.3%
Allegheny Technologies
4.25%, due 6/1/14 1,165,000 1,294,606
ArcelorMittal
5.00%, due 5/15/14 378,000 515,970
Steel Dynamics, Inc.
5.125%, due 6/15/14 192,000 208,560
United States Steel Corp.
4.00%, due 5/15/14 161,000 214,130
-------------
2,233,266
-------------
LEISURE TIME 0.2%
Carnival Corp.
2.00%, due 4/15/21 1,342,000 1,402,390
-------------
MINING 0.3%
Alcoa, Inc.
5.25%, due 3/15/14 397,000 832,707
Newmont Mining Corp.
1.25%, due 7/15/14 1,136,000 1,357,520
-------------
2,190,227
-------------
MISCELLANEOUS--MANUFACTURING 0.4%
Danaher Corp.
(zero coupon), due 1/22/21 1,377,000 1,390,770
Ingersoll-Rand Co.
4.50%, due 4/15/12 110,000 204,737
Textron, Inc.
4.50%, due 5/1/13 838,000 1,305,185
-------------
2,900,692
-------------
OIL & GAS 0.2%
Chesapeake Energy Corp.
2.50%, due 5/15/37 588,000 521,115
St. Mary Land & Exploration
Co.
3.50%, due 4/1/27 367,000 360,577
Transocean, Inc.
Series A
1.625%, due 12/15/37 640,000 629,600
-------------
1,511,292
-------------
OIL & GAS SERVICES 0.7%
Cameron International Corp.
2.50%, due 6/15/26 1,425,000 1,786,594
Core Laboratories, L.P.
0.25%, due 10/31/11 631,000 759,566
</Table>
14 MainStay Income Builder Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
OIL & GAS SERVICES (CONTINUED)
Schlumberger, Ltd.
Series B
2.125%, due 6/1/23 $ 1,433,000 $ 2,291,009
-------------
4,837,169
-------------
PHARMACEUTICALS 0.4%
ALZA Corp.
(zero coupon), due 7/28/20 1,205,000 1,040,819
Teva Pharmaceutical Finance
Co. B.V.
Series D
1.75%, due 2/1/26 1,260,000 1,475,775
-------------
2,516,594
-------------
RETAIL 0.1%
Costco Wholesale Corp.
(zero coupon), due 8/19/17 262,000 338,308
-------------
SEMICONDUCTORS 0.2%
Intel Corp.
3.25%, due 8/1/39 (d) 643,000 696,048
ON Semiconductor Corp.
2.625%, due 12/15/26 174,000 165,735
Teradyne, Inc.
4.50%, due 3/15/14 68,000 116,960
-------------
978,743
-------------
SOFTWARE 0.2%
Sybase, Inc.
3.50%, due 8/15/29 (d) 806,000 900,705
SYNNEX Corp.
4.00%, due 5/15/18 (d) 108,000 120,420
-------------
1,021,125
-------------
Total Convertible Bonds
(Cost $29,395,670) 28,818,929
-------------
CORPORATE BONDS 15.0%
- ----------------------------------------------------------------
ADVERTISING 0.1%
Jostens Intermediate Holding
Corp.
7.625%, due 10/1/12 245,000 246,531
Lamar Media Corp.
Series C
6.625%, due 8/15/15 300,000 283,500
-------------
530,031
-------------
AEROSPACE & DEFENSE 0.2%
L-3 Communications Corp.
5.20%, due 10/15/19 (d) 900,000 908,885
Northrop Grumman Corp.
7.125%, due 2/15/11 100,000 106,903
Spirit Aerosystems, Inc.
7.50%, due 10/1/17 (d) 145,000 143,912
TransDigm, Inc.
7.75%, due 7/15/14 200,000 201,000
-------------
1,360,700
-------------
AGRICULTURE 0.1%
Cargill, Inc.
4.375%, due 6/1/13 (d) 200,000 208,096
Lorillard Tobacco Co.
8.125%, due 6/23/19 255,000 283,526
-------------
491,622
-------------
AIRLINES 0.3%
Continental Airlines, Inc.
7.875%, due 1/2/20 2,071,458 1,688,239
-------------
AUTO MANUFACTURERS 0.2%
Ford Motor Co.
6.625%, due 10/1/28 1,500,000 1,095,000
7.45%, due 7/16/31 215,000 176,300
Harley-Davidson Funding
Corp.
6.80%, due 6/15/18 (d) 270,000 268,379
-------------
1,539,679
-------------
AUTO PARTS & EQUIPMENT 0.1%
Goodyear Tire & Rubber Co.
(The)
10.50%, due 5/15/16 120,000 129,900
Tenneco Automotive, Inc.
8.625%, due 11/15/14 270,000 254,475
TRW Automotive, Inc.
7.00%, due 3/15/14 (d) 300,000 279,000
-------------
663,375
-------------
BANKS 1.1%
Agribank FCB
9.125%, due 7/15/19 900,000 967,723
BAC Capital Trust VI
5.625%, due 3/8/35 1,200,000 936,220
Bank of America Corp.
5.65%, due 5/1/18 150,000 151,610
6.50%, due 8/1/16 735,000 786,355
8.00%, due 12/29/49 (a) 1,500,000 1,348,920
GMAC LLC
6.875%, due 9/15/11 (d) 305,000 292,800
8.00%, due 11/1/31 (d) 1,411,000 1,206,405
KeyBank N.A.
5.80%, due 7/1/14 175,000 172,234
Mercantile-Safe Deposit &
Trust Co.
5.70%, due 11/15/11 100,000 103,695
SunTrust Banks, Inc.
5.45%, due 12/1/17 50,000 47,510
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
BANKS (CONTINUED)
USB Capital IX
6.189%, due 10/29/49 $ 200,000 $ 153,500
Wells Fargo & Co.
7.98%, due 3/29/49 1,200,000 1,123,500
Wells Fargo Bank N.A.
6.45%, due 2/1/11 250,000 263,624
-------------
7,554,096
-------------
BEVERAGES 0.3%
Anheuser-Busch Cos., Inc.
5.75%, due 4/1/10 100,000 102,083
Anheuser-Busch InBev
Worldwide, Inc.
5.375%, due 1/15/20 (d) 1,800,000 1,829,890
Coca-Cola Enterprises, Inc.
7.00%, due 5/15/98 100,000 117,546
-------------
2,049,519
-------------
BUILDING MATERIALS 0.3%
U.S. Concrete, Inc.
8.375%, due 4/1/14 1,900,000 1,334,750
USG Corp.
6.30%, due 11/15/16 705,000 606,300
-------------
1,941,050
-------------
CHEMICALS 0.6%
Ashland, Inc.
9.125%, due 6/1/17 (d) 100,000 108,000
Chevron Phillips Chemica
7.00%, due 6/15/14 (d) 1,670,000 1,846,470
Dow Chemical Co. (The)
5.90%, due 2/15/15 730,000 755,183
8.55%, due 5/15/19 375,000 428,109
Huntsman International LLC
5.50%, due 6/30/16 (d) 105,000 90,825
Innophos, Inc.
8.875%, due 8/15/14 325,000 328,250
Rockwood Specialties Group,
Inc.
7.50%, due 11/15/14 400,000 400,000
Solutia, Inc.
8.75%, due 11/1/17 105,000 108,675
-------------
4,065,512
-------------
COAL 0.0%++
Arch Coal, Inc.
8.75%, due 8/1/16 (d) 45,000 46,125
Arch Western Finance LLC
6.75%, due 7/1/13 250,000 241,250
-------------
287,375
-------------
COMMERCIAL SERVICES 0.4%
Cardtronics, Inc.
9.25%, due 8/15/13 260,000 263,900
Geo Group, Inc. (The)
7.75%, due 10/15/17 (d) 265,000 268,975
Iron Mountain, Inc.
8.75%, due 7/15/18 400,000 417,000
Lender Processing Services,
Inc.
8.125%, due 7/1/16 270,000 284,175
McKesson Corp.
5.25%, due 3/1/13 125,000 133,393
Quebecor World, Inc.
(Litigation Recovery
Trust-Escrow Shares)
9.75%, due 1/15/49
(b)(c)(d)(l) 110,000 5,720
ServiceMaster Co. (The)
10.75%, due 7/15/15 (d)(f) 240,000 238,800
United Rentals North
America, Inc.
7.75%, due 11/15/13 1,200,000 1,098,000
-------------
2,709,963
-------------
COMPUTERS 0.2%
Activant Solutions, Inc.
9.50%, due 5/1/16 243,000 221,130
Hewlett-Packard Co.
6.125%, due 3/1/14 100,000 112,280
SunGard Data Systems, Inc.
9.125%, due 8/15/13 400,000 407,000
Unisys Corp.
14.25%, due 9/15/15 (d) 425,000 456,875
-------------
1,197,285
-------------
DISTRIBUTION & WHOLESALE 0.0%++
Nebraska Book Co., Inc.
10.00%, due 12/1/11 (d) 240,000 241,800
-------------
DIVERSIFIED FINANCIAL SERVICES 1.4%
Ameriprise Financial, Inc.
5.35%, due 11/15/10 2,000 2,052
Cantor Fitzgerald, L.P.
7.875%, due 10/15/19 (d) 1,200,000 1,208,340
Capital One Bank
5.125%, due 2/15/14 100,000 105,449
Caterpillar Financial
Services Corp.
4.30%, due 6/1/10 50,000 51,053
Citigroup, Inc.
5.875%, due 2/22/33 250,000 214,407
8.50%, due 5/22/19 390,000 455,873
Ford Motor Credit Co.
9.875%, due 8/10/11 200,000 204,575
General Electric Capital
Corp.
6.375%, due 11/15/67 1,825,000 1,583,187
6.875%, due 1/10/39 400,000 431,048
</Table>
16 MainStay Income Builder Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Global Cash
Acceptance/Global Cash
Finance Corp.
8.75%, due 3/15/12 $ 300,000 $ 298,500
Goldman Sachs Group, Inc.
(The)
5.35%, due 1/15/16 150,000 157,370
5.70%, due 9/1/12 75,000 81,387
JPMorgan Chase & Co.
5.15%, due 10/1/15 100,000 105,595
5.75%, due 1/2/13 250,000 269,140
7.90%, due 4/29/49 (a) 2,000,000 2,011,060
MBNA Corp.
6.125%, due 3/1/13 100,000 106,375
Merrill Lynch & Co., Inc.
(MTN)
5.00%, due 2/3/14 580,000 589,883
Morgan Stanley
Series E
5.45%, due 1/9/17 350,000 352,880
6.75%, due 10/15/13 125,000 137,647
Pinnacle Foods Finance
LLC/Pinnacle Foods Finance
Corp.
9.25%, due 4/1/15 350,000 353,500
Pricoa Global Funding I
4.625%, due 6/25/12 (d) 200,000 198,048
-------------
8,917,369
-------------
ELECTRIC 1.1%
AES Corp. (The)
8.75%, due 5/15/13 (d) 200,000 204,500
Arizona Public Service Co.
5.50%, due 9/1/35 325,000 288,770
Consumers Energy Co.
Series B
5.375%, due 4/15/13 100,000 107,589
Dominion Resources, Inc.
Series B
6.25%, due 6/30/12 60,000 65,566
Edison Mission Energy
7.00%, due 5/15/17 600,000 484,500
Energy Future Holdings Corp.
11.25%, due 11/1/17 (f) 1,500,000 975,000
Entergy Gulf States
Louisiana LLC
5.59%, due 10/1/24 1,575,000 1,582,837
Entergy Mississippi, Inc.
5.15%, due 2/1/13 250,000 257,575
FirstEnergy Corp.
Series B
6.45%, due 11/15/11 6,000 6,485
IES Utilities, Inc.
Series B
6.75%, due 3/15/11 100,000 106,006
Ipalco Enterprises, Inc.
7.25%, due 4/1/16 (d) 260,000 261,950
Mirant North America LLC
7.375%, due 12/31/13 400,000 394,000
Nevada Power Co.
6.50%, due 4/15/12 900,000 974,660
NRG Energy, Inc.
7.375%, due 2/1/16 600,000 596,250
Pepco Holdings, Inc.
6.45%, due 8/15/12 239,000 256,788
7.45%, due 8/15/32 50,000 52,325
PSE&G Power LLC
7.75%, due 4/15/11 100,000 107,934
San Diego Gas & Electric Co.
5.35%, due 5/15/35 50,000 51,152
Texas Competitive Electric
Holdings Co. LLC
10.25%, due 11/1/15 430,000 305,300
Union Electric Co.
5.40%, due 2/1/16 50,000 51,620
-------------
7,130,807
-------------
ENGINEERING & CONSTRUCTION 0.0%++
Esco Corp.
8.625%, due 12/15/13 (d) 250,000 246,875
-------------
ENTERTAINMENT 0.4%
Cinemark USA, Inc.
8.625%, due 6/15/19 (d) 140,000 144,900
Isle of Capri Casinos, Inc.
7.00%, due 3/1/14 240,000 214,200
Mohegan Tribal Gaming
Authority
6.125%, due 2/15/13 1,370,000 1,089,150
Pinnacle Entertainment, Inc.
8.625%, due 8/1/17 (d) 120,000 119,400
Pokagon Gaming Authority
10.375%, due 6/15/14 (d) 373,000 386,055
Shingle Springs Tribal
Gaming Authority
9.375%, due 6/15/15 (d) 400,000 284,000
Tunica-Biloxi Gaming
Authority
9.00%, due 11/15/15 (d) 123,000 110,700
Warner Music Group
7.375%, due 4/15/14 100,000 95,000
WMG Acquisition Corp.
9.50%, due 6/15/16 (d) 115,000 122,762
-------------
2,566,167
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
ENVIRONMENTAL CONTROLS 0.2%
Allied Waste North America,
Inc.
7.375%, due 4/15/14 $ 830,000 $ 858,617
Clean Harbors, Inc.
7.625%, due 8/15/16 (d) 200,000 205,000
Republic Services, Inc.
6.75%, due 8/15/11 25,000 26,297
Waste Services, Inc.
9.50%, due 4/15/14 150,000 150,750
9.50%, due 4/15/14 (d) 105,000 105,525
WCA Waste Corp.
9.25%, due 6/15/14 160,000 158,400
-------------
1,504,589
-------------
FOOD 0.4%
Del Monte Corp.
6.75%, due 2/15/15 300,000 299,250
7.50%, due 10/15/19 (d) 265,000 268,975
Dole Food Co., Inc.
8.00%, due 10/1/16 (d) 210,000 212,625
Kellogg Co.
Series B
7.45%, due 4/1/31 100,000 126,419
Kroger Co. (The)
4.95%, due 1/15/15 100,000 105,403
Safeway, Inc.
6.35%, due 8/15/17 200,000 220,324
Smithfield Foods, Inc.
7.75%, due 7/1/17 1,500,000 1,222,500
-------------
2,455,496
-------------
FOREST PRODUCTS & PAPER 0.6%
Boise Cascade LLC
7.125%, due 10/15/14 1,255,000 1,041,650
Buckeye Technologies, Inc.
8.50%, due 10/1/13 400,000 408,000
Cellu Tissue Holdings, Inc.
11.50%, due 6/1/14 70,000 76,650
Clearwater Paper Corp.
10.625%, due 6/15/16 (d) 155,000 168,950
Georgia-Pacific Corp.
7.00%, due 1/15/15 (d) 165,000 166,650
International Paper Co.
9.375%, due 5/15/19 1,550,000 1,876,412
NewPage Corp.
11.375%, due 12/31/14 (d) 300,000 299,250
Weyerhaeuser Co.
6.75%, due 3/15/12 100,000 104,793
-------------
4,142,355
-------------
HAND & MACHINE TOOLS 0.1%
Baldor Electric Co.
8.625%, due 2/15/17 400,000 412,000
-------------
HEALTH CARE--SERVICES 0.4%
Aetna, Inc.
7.875%, due 3/1/11 50,000 52,990
CIGNA Corp.
8.50%, due 5/1/19 670,000 757,973
Community Health Systems,
Inc.
8.875%, due 7/15/15 300,000 309,000
DaVita, Inc.
7.25%, due 3/15/15 400,000 395,000
HCA, Inc.
7.875%, due 2/15/20 (d) 198,000 203,940
8.50%, due 4/15/19 (d) 102,000 108,120
9.25%, due 11/15/16 300,000 313,500
Tenet Healthcare Corp.
10.00%, due 5/1/18 (d) 200,000 220,500
-------------
2,361,023
-------------
HOME BUILDERS 0.1%
Centex Corp.
5.70%, due 5/15/14 280,000 282,100
Meritage Homes Corp.
6.25%, due 3/15/15 300,000 276,750
-------------
558,850
-------------
HOME FURNISHING 0.0%++
ALH Finance LLC/ALH Finance
Corp.
8.50%, due 1/15/13 200,000 195,000
-------------
HOUSEHOLD PRODUCTS & WARES 0.1%
American Greetings Corp.
7.375%, due 6/1/16 250,000 242,500
JohnsonDiversey, Inc.
Series B
9.625%, due 5/15/12 400,000 406,000
Yankee Acquisition Corp.
8.50%, due 2/15/15 300,000 286,500
-------------
935,000
-------------
INSURANCE 1.6%
Allstate Corp. (The)
6.50%, due 5/15/57 1,450,000 1,239,750
7.20%, due 12/1/09 100,000 100,408
American General Finance
Corp.
5.20%, due 12/15/11 400,000 322,806
6.90%, due 12/15/17 1,965,000 1,367,538
American International
Group, Inc.
4.70%, due 10/1/10 100,000 97,846
</Table>
18 MainStay Income Builder 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)
INSURANCE (CONTINUED)
Berkshire Hathaway Finance
Corp.
4.625%, due 10/15/13 $ 100,000 $ 107,559
CIGNA Corp.
7.00%, due 1/15/11 100,000 105,169
Everest Reinsurance
Holdings, Inc.
8.75%, due 3/15/10 500,000 511,260
Hartford Financial Services
Group, Inc.
5.375%, due 3/15/17 1,575,000 1,479,927
Hartford Life, Inc.
7.65%, due 6/15/27 355,000 335,036
Liberty Mutual Group, Inc.
7.80%, due 3/15/37 (d) 1,760,000 1,478,400
Nationwide Financial
Services, Inc.
5.10%, due 10/1/15 25,000 22,789
Principal Life Income
Funding Trust
5.20%, due 11/15/10 25,000 25,104
Progressive Corp. (The)
6.70%, due 6/15/37 3,700,000 3,241,004
-------------
10,434,596
-------------
LEISURE TIME 0.1%
Leslie's Poolmart, Inc.
7.75%, due 2/1/13 200,000 200,000
Travelport LLC
9.875%, due 9/1/14 400,000 394,000
-------------
594,000
-------------
LODGING 0.3%
Ameristar Casinos, Inc.
9.25%, due 6/1/14 (d) 250,000 260,000
Harrah's Operating Co., Inc.
10.00%, due 12/15/18 (d) 1,800,000 1,368,000
Harrah's Operating Escrow
LLC/Harrah's Escrow Corp.
11.25%, due 6/1/17 (d) 240,000 244,800
MGM Mirage, Inc.
10.375%, due 5/15/14 (d) 40,000 42,600
11.125%, due 11/15/17 (d) 80,000 88,000
Wynn Las Vegas LLC / Wynn
Las Vegas Capital Corp.
7.875%, due 11/1/17 (d) 240,000 235,800
-------------
2,239,200
-------------
MACHINERY--CONSTRUCTION & MINING 0.0%++
Terex Corp.
8.00%, due 11/15/17 300,000 276,750
-------------
MACHINERY--DIVERSIFIED 0.1%
Columbus McKinnon Corp.
8.875%, due 11/1/13 200,000 204,000
CPM Holdings, Inc.
10.625%, due 9/1/14 (d) 170,000 177,650
Manitowoc Co., Inc. (The)
7.125%, due 11/1/13 240,000 215,400
-------------
597,050
-------------
MEDIA 0.9%
Allbritton Communications
Co.
7.75%, due 12/15/12 300,000 283,500
Charter Communications
Operating LLC
10.00%, due 4/30/12
(d)(g1) 200,000 203,000
Comcast Cable Communications
Holdings, Inc.
8.375%, due 3/15/13 55,000 63,931
Comcast Corp.
6.50%, due 1/15/15 100,000 110,685
CSC Holdings, Inc.
7.625%, due 7/15/18 200,000 205,000
Dex Media, Inc.
8.00%, due 11/15/13 (g) 250,000 45,000
Echostar DBS Corp.
6.375%, due 10/1/11 300,000 306,750
ION Media Networks, Inc.
9.041%, due 1/15/13
(d)(f)(g) 38,185 621
Mediacom Broadband LLC
8.50%, due 10/15/15 300,000 303,000
Morris Publishing Group LLC
7.00%, due 8/1/13 (g) 74,000 20,720
News America Holdings, Inc.
9.25%, due 2/1/13 100,000 117,310
Nielsen Finance LLC/Nielsen
Finance Co.
10.00%, due 8/1/14 120,000 123,600
11.50%, due 5/1/16 215,000 228,438
Rainbow National Services
LLC
10.375%, due 9/1/14 (d) 130,000 136,500
Salem Communciations Corp.
7.75%, due 12/15/10 300,000 240,000
Time Warner Cable, Inc.
5.85%, due 5/1/17 540,000 567,629
8.25%, due 2/14/14 1,040,000 1,219,742
9.25%, due 2/15/14 400,000 412,000
Time Warner, Inc.
7.70%, due 5/1/32 750,000 847,315
Univision Communications,
Inc.
12.00%, due 7/1/14 (d) 145,000 156,781
Ziff Davis Media, Inc.
8.875%, due 7/15/11 (b)(c) 20,336 4,881
-------------
5,596,403
-------------
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
MINING 0.2%
Century Aluminum Co.
7.50%, due 8/15/14 $ 1,300,000 $ 1,176,500
Freeport-McMoRan Copper &
Gold, Inc.
8.375%, due 4/1/17 400,000 430,000
-------------
1,606,500
-------------
MISCELLANEOUS--MANUFACTURING 0.4%
Actuant Corp.
6.875%, due 6/15/17 200,000 188,500
General Electric Co.
5.25%, due 12/6/17 250,000 260,086
Parker Hannifin Corp.
7.30%, due 5/15/11 500,000 541,607
RBS Global, Inc./Rexnord
Corp.
9.50%, due 8/1/14 1,625,000 1,608,750
Textron, Inc.
5.60%, due 12/1/17 175,000 164,805
-------------
2,763,748
-------------
OFFICE FURNISHINGS 0.0%++
Interface, Inc.
11.375%, due 11/1/13 (d) 120,000 129,600
-------------
OIL & GAS 0.3%
Chesapeake Energy Corp.
6.625%, due 1/15/16 500,000 480,625
Concho Resources,
Inc./Midland TX
8.625%, due 10/1/17 160,000 164,800
Connacher Oil & Gas
10.25%, due 12/15/15 (d) 200,000 172,000
11.75%, due 7/15/14 (d) 105,000 114,450
Devon Financing Corp. LLC
6.875%, due 9/30/11 125,000 136,331
Encore Acquisition Co.
9.50%, due 5/1/16 300,000 320,250
Frontier Oil Corp.
8.50%, due 9/15/16 200,000 204,000
Motiva Enterprises LLC
5.20%, due 9/15/12 (d) 200,000 206,773
Newfield Exploration Co.
7.125%, due 5/15/18 340,000 341,275
Pemex Project Funding Master
Trust
6.625%, due 6/15/35 110,000 107,461
-------------
2,247,965
-------------
OIL & GAS SERVICES 0.3%
Basic Energy Services, Inc.
7.125%, due 4/15/16 1,500,000 1,245,000
Complete Production
Services, Inc.
8.00%, due 12/15/16 200,000 189,500
SESI LLC
6.875%, due 6/1/14 200,000 195,000
-------------
1,629,500
-------------
PACKAGING & CONTAINERS 0.3%
Berry Plastics Corp.
8.875%, due 9/15/14 400,000 371,000
Graham Packaging Co., Inc.
8.50%, due 10/15/12 250,000 251,875
Graphic Packaging
International, Inc.
9.50%, due 8/15/13 200,000 205,250
Owens-Illinois, Inc.
7.80%, due 5/15/18 400,000 404,000
Pregis Corp.
12.375%, due 10/15/13 245,000 236,425
Rock-Tenn Co.
9.25%, due 3/15/16 250,000 267,500
Solo Cup Co.
10.50%, due 11/1/13 (d) 165,000 174,900
-------------
1,910,950
-------------
PHARMACEUTICALS 0.1%
Pfizer, Inc.
6.20%, due 3/15/19 535,000 609,103
Schering-Plough Corp.
5.55%, due 12/1/13 100,000 109,956
-------------
719,059
-------------
PIPELINES 0.6%
Copano Energy LLC/Copano
Energy Finance Corp.
7.75%, due 6/1/18 250,000 240,625
Dynegy Holdings, Inc.
7.75%, due 6/1/19 460,000 387,550
El Paso Corp.
7.00%, due 6/15/17 510,000 510,184
Kinder Morgan Finance Co.
ULC
5.70%, due 1/5/16 370,000 351,962
MarkWest Energy Partners,
L.P./
MarkWest Energy Finance
Corp.
Series B
6.875%, due 11/1/14 150,000 142,500
8.75%, due 4/15/18 140,000 143,150
NGPL Pipeco LLC
7.119%, due 12/15/17 (d) 1,070,000 1,182,665
ONEOK Partners, L.P.
8.625%, due 3/1/19 250,000 299,446
ONEOK, Inc.
6.00%, due 6/15/35 950,000 915,555
-------------
4,173,637
-------------
</Table>
20 MainStay Income Builder 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)
REAL ESTATE 0.0%++
ERP Operating, L.P.
7.125%, due 10/15/17 $ 100,000 $ 104,603
-------------
REAL ESTATE INVESTMENT TRUSTS 0.3%
AvalonBay Communities, Inc.
6.125%, due 11/1/12 132,000 141,085
HCP, Inc.
5.65%, due 12/15/13 565,000 570,629
Health Care Property
Investors, Inc.
6.00%, due 1/30/17 450,000 434,699
Liberty Property, L.P.
8.50%, due 8/1/10 125,000 128,913
ProLogis
7.375%, due 10/30/19 295,000 295,926
Regency Centers, L.P.
6.75%, due 1/15/12 200,000 205,597
-------------
1,776,849
-------------
RETAIL 0.2%
CVS Caremark Corp.
5.789%, due 1/10/26 (b)(d) 290,510 280,885
Ferrellgas Escrow
LLC/Ferrellgas Finance
Escrow Corp.
6.75%, due 5/1/14 300,000 286,500
Neiman Marcus Group, Inc.
(The)
9.00%, due 10/15/15 (f) 429,967 380,521
QVC, Inc.
7.50%, due 10/1/19 (d) 260,000 257,400
-------------
1,205,306
-------------
SAVINGS & LOANS 0.1%
Nalco Finance Holdings, Inc.
9.00%, due 2/1/14 72,000 74,160
Pipeline Funding Co. LLC
7.50%, due 1/15/30 (d) 305,000 298,812
-------------
372,972
-------------
SEMICONDUCTORS 0.1%
Amkor Technology, Inc.
9.25%, due 6/1/16 400,000 418,000
-------------
SOFTWARE 0.0%++
Vangent, Inc.
9.625%, due 2/15/15 (d) 300,000 285,750
-------------
STORAGE & WAREHOUSING 0.0%++
Mobile Mini, Inc.
6.875%, due 5/1/15 300,000 280,500
-------------
TELECOMMUNICATIONS 0.3%
BellSouth Corp.
6.00%, due 10/15/11 250,000 270,748
Cincinnati Bell, Inc.
8.375%, due 1/15/14 200,000 199,000
Cricket Communications, Inc.
9.375%, due 11/1/14 300,000 291,000
Embarq Corp.
7.995%, due 6/1/36 50,000 51,734
GCI, Inc.
7.25%, due 2/15/14 250,000 241,875
MetroPCS Wireless, Inc.
9.25%, due 11/1/14 400,000 403,000
New Cingular Wireless
Services, Inc.
7.875%, due 3/1/11 100,000 108,328
Qwest Capital Funding
6.875%, due 7/15/28 300,000 231,750
Qwest Communications
International, Inc.
Series B
7.50%, due 2/15/14 200,000 196,000
-------------
1,993,435
-------------
TRANSPORTATION 0.1%
Burlington Northern Santa Fe
Corp.
7.125%, due 12/15/10 100,000 106,085
Norfolk Southern Corp.
6.75%, due 2/15/11 100,000 106,370
Union Pacific Corp.
6.65%, due 1/15/11 100,000 105,542
-------------
317,997
-------------
TRUCKING & LEASING 0.0%++
TTX Co.
5.00%, due 4/1/12 (d) 100,000 98,746
-------------
Total Corporate Bonds
(Cost $96,172,445) 99,518,893
-------------
FOREIGN GOVERNMENT BONDS 0.2%
- ----------------------------------------------------------------
FOREIGN SOVEREIGN 0.2%
Republic of Panama
9.375%, due 4/1/29 860,000 1,169,600
Republic of Venezuela
6.00%, due 12/9/20 309,000 177,675
-------------
Total Foreign Government
Bonds
(Cost $1,194,051) 1,347,275
-------------
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENT & PARTICIPATION 0.0%++ (H)
- ----------------------------------------------------------------
MACHINERY 0.0%++
BHM Technologies LLC
Exit Term Loan B
(zero coupon), due
11/26/13 (b)(c) $ 66,326 $ 19,566
-------------
Total Loan Assignment &
Participation
(Cost $159,872) 19,566
-------------
MORTGAGE-BACKED SECURITIES 1.4%
- ----------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 1.4%
Banc of America Commercial
Mortgage, Inc.
Series 2007-2, Class A4
5.867%, due 4/10/49 (a) 400,000 352,576
Bayview Commercial Asset
Trust
Series 2006-4A, Class A1
0.474%, due 12/25/36
(a)(c)(d) 371,093 228,007
Bear Stearns Commercial
Mortgage Securities
Series 2006-PW12, Class
AAB
5.878%, due 9/11/38 (a) 250,000 262,897
Series 2007-PW16, Class
A4
5.909%, due 6/11/40 (a) 400,000 380,768
Citigroup Commercial
Mortgage Trust
Series 2008-C7, Class A4
6.298%, due 12/10/49 (a) 200,000 186,627
Citigroup/Deutsche Bank
Commercial Mortgage Trust
Series 2005-CD1, Class AM
5.225%, due 7/15/44 (a) 1,000,000 859,153
Commercial Mortgage Pass-
Through Certificates
Series 2006-C8, Class AAB
5.291%, due 12/10/46 500,000 490,256
Four Times Square Trust
Series 2006-4TS, Class A
5.401%, due 12/13/28 (d) 860,000 732,444
JP Morgan Chase Commercial
Mortgage Securities Corp.
Series 2004-C3, Class A5
4.878%, due 1/15/42 510,000 500,038
Series 2007-CB20, Class
A3
5.819%, due 2/12/51 500,000 466,034
Series 2007-LD12, Class
A3
6.188%, due 2/15/51 (a) 500,000 485,064
LB-UBS Commercial Mortgage
Trust
Series 2006-C7, Class A3
5.347%, due 11/15/38 500,000 479,878
Series 2007-C6, Class AAB
5.855%, due 7/15/40 500,000 481,988
Series 2007-C6, Class A3
5.933%, due 7/15/40 500,000 457,888
Merrill Lynch/Countrywide
Commercial Mortgage Trust
Series 2007-8, Class A2
6.118%, due 8/12/49 (a) 500,000 508,029
Morgan Stanley Capital I
Series 2007-IQ14, Class
AAB
5.654%, due 4/15/49 500,000 466,426
Series 2006-HQ9, Class AM
5.773%, due 7/12/44 500,000 402,755
Mortgage Equity Conversion
Asset Trust
Series 2007-FF2, Class A
0.87%, due 2/25/42
(a)(b)(c)(d) 766,254 716,447
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36 (d) 280,000 257,600
Wachovia Bank Commercial
Mortgage Trust
Series 2006-C29, Class AM
5.339%, due 11/15/48 500,000 396,485
-------------
Total Mortgage-Backed
Securities
(Cost $9,791,677) 9,111,360
-------------
MUNICIPAL BONDS 0.2%
- ----------------------------------------------------------------
TEXAS 0.1%
Harris County Texas
Industrial Development
Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 660,000 660,422
-------------
WEST VIRGINIA 0.1%
Tobacco Settlement Finance
Authority of West Virginia
7.467%, due 6/1/47 655,000 521,315
-------------
Total Municipal Bonds
(Cost $1,315,000) 1,181,737
-------------
</Table>
22 MainStay Income Builder Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES 10.6%
- ----------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATIONS) 0.1%
Series 2006-B1, Class AB
6.00%, due 6/25/16 $ 436,245 $ 453,932
-------------
FEDERAL HOME LOAN BANK 0.3%
4.625%, due 10/10/12 2,000,000 2,177,354
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION 0.2%
5.125%, due 10/18/16 950,000 1,053,551
-------------
V FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) 2.0%
3.00%, due 8/1/10 264,582 266,242
4.316%, due 3/1/35 (a) 759,938 788,469
4.50%, due 8/1/33 286,965 292,395
4.50%, due 8/1/35 351,789 357,017
4.50%, due 8/1/39 1,996,196 2,020,245
4.50%, due 9/1/39 499,105 505,118
5.00%, due 1/1/23 397,950 421,021
5.00%, due 8/1/33 1,126,899 1,172,655
5.00%, due 11/1/35 TBA (i) 1,500,000 1,554,375
5.00%, due 6/1/37 1,013,793 1,052,264
5.00%, due 6/1/38 401,763 416,986
5.00%, due 2/1/39 450,988 468,076
5.04%, due 6/1/35 (a) 970,268 1,015,242
5.50%, due 2/1/18 221,441 238,255
5.50%, due 2/1/21 182,702 194,861
5.50%, due 10/1/21 253,140 269,987
6.00%, due 8/1/21 204,154 219,017
6.00%, due 10/1/38 1,332,932 1,418,112
6.50%, due 11/1/16 46,617 50,334
6.50%, due 2/1/27 576 620
6.50%, due 5/1/29 40,302 43,721
6.50%, due 6/1/29 73,568 79,811
6.50%, due 7/1/29 113,743 123,394
6.50%, due 8/1/29 42,253 45,840
6.50%, due 9/1/29 5,127 5,562
6.50%, due 10/1/29 609 661
6.50%, due 6/1/32 32,400 35,119
6.50%, due 1/1/37 28,766 30,893
7.00%, due 3/1/26 432 477
7.00%, due 9/1/26 14,465 15,979
7.00%, due 10/1/26 24 26
7.00%, due 7/1/30 2,101 2,317
7.00%, due 7/1/32 64,399 71,018
7.50%, due 1/1/16 7,576 8,223
7.50%, due 5/1/32 46,151 52,038
8.00%, due 11/1/12 2,724 2,801
-------------
13,239,171
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.6%
1.875%, due 4/20/12 1,000,000 1,013,206
2.75%, due 3/13/14 1,900,000 1,928,173
4.875%, due 12/15/16 950,000 1,040,020
-------------
3,981,399
-------------
V FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 2.7%
4.00%, due 12/1/20 414,658 423,666
4.50%, due 4/1/18 721,502 764,684
4.50%, due 7/1/20 38,360 40,320
4.50%, due 12/1/20 498,762 524,248
4.50%, due 3/1/21 55,535 58,373
4.50%, due 6/1/23 2,919,372 3,039,356
5.00%, due 8/1/22 542,990 573,273
5.00%, due 5/1/35 TBA (i) 600,000 621,937
5.00%, due 5/1/37 264,050 274,152
5.50%, due 4/1/21 2,439,927 2,608,408
5.50%, due 3/1/38 821,023 865,551
5.50%, due 9/1/39 2,497,457 2,632,126
6.00%, due 4/1/19 6,384 6,771
6.00%, due 9/1/35 3,060,367 3,275,072
6.00%, due 10/1/35 1,960,408 2,091,616
6.50%, due 10/1/31 191,649 207,792
7.00%, due 10/1/37 13,827 15,110
7.00%, due 11/1/37 58,244 63,648
7.50%, due 8/1/11 266 267
7.50%, due 10/1/11 898 939
7.50%, due 10/1/15 43,105 47,045
8.00%, due 4/1/10 949 974
8.00%, due 8/1/11 333 351
8.00%, due 10/1/11 3,794 3,992
8.00%, due 11/1/11 828 871
-------------
18,140,542
-------------
FREDDIE MAC (COLLATERALIZED MORTGAGE OBLIGATION) 0.1%
Series 2632, Class NH
3.50%, due 6/15/13 549,447 560,250
-------------
V GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 1.2%
4.00%, due 9/15/39 998,292 985,760
5.00%, due 12/15/37 58,519 60,943
5.00%, due 1/1/38 TBA (i) 1,200,000 1,241,250
5.00%, due 5/15/38 251,175 261,541
5.00%, due 3/15/39 589,249 613,569
5.50%, due 9/15/35 99,125 105,086
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (CONTINUED)
5.50%, due 7/15/36 $ 324,914 $ 343,998
5.50%, due 2/15/38 470,738 497,577
6.00%, due 4/15/29 831,746 893,002
6.00%, due 8/15/32 1,187,131 1,274,684
6.00%, due 1/15/33 129,166 138,637
6.00%, due 11/15/33 115,127 123,459
6.00%, due 11/15/36 295,980 315,087
6.00%, due 9/15/38 291,592 310,144
6.50%, due 4/15/29 230 249
6.50%, due 5/15/29 494 535
6.50%, due 8/15/29 39 42
6.50%, due 7/15/31 138,855 149,994
6.50%, due 10/15/31 12,339 13,346
7.00%, due 7/15/11 232 239
7.00%, due 10/15/11 12,326 12,699
7.00%, due 9/15/23 4,261 4,688
7.00%, due 7/15/25 2,350 2,590
7.00%, due 12/15/25 4,980 5,489
7.00%, due 5/15/26 10,331 11,395
7.00%, due 11/15/27 16,313 18,004
7.00%, due 12/15/27 84,786 93,576
7.00%, due 6/15/28 5,123 5,662
7.50%, due 3/15/26 10,310 11,682
7.50%, due 6/15/26 577 654
7.50%, due 10/15/30 31,314 35,569
8.00%, due 8/15/26 2,153 2,467
8.00%, due 9/15/26 170 194
8.00%, due 10/15/26 21,898 25,086
8.50%, due 11/15/26 25,324 29,078
-------------
7,587,975
-------------
UNITED STATES TREASURY BONDS 0.5%
4.25%, due 5/15/39 2,140,000 2,145,016
4.50%, due 8/15/39 1,080,000 1,128,263
-------------
3,273,279
-------------
V UNITED STATES TREASURY NOTES 2.9%
2.25%, due 5/31/14 1,500,000 1,506,446
2.375%, due 8/31/14 3,600,000 3,618,281
2.375%, due 9/30/14 1,975,000 1,982,860
2.375%, due 10/31/14 250,000 250,645
2.625%, due 6/30/14 75,000 76,436
2.75%, due 2/15/19 1,735,000 1,648,791
3.00%, due 8/31/16 2,000,000 2,008,750
3.125%, due 5/15/19 1,650,000 1,614,680
3.625%, due 8/15/19 5,445,000 5,549,647
4.00%, due 8/15/18 875,000 920,186
4.25%, due 8/15/14 275,000 300,545
-------------
19,477,267
-------------
Total U.S. Government & Federal Agencies
(Cost $67,999,985) 69,944,720
-------------
YANKEE BONDS 2.1% (J)
- ----------------------------------------------------------------
BANKS 0.1%
Nordea Bank Sweden AB
5.25%, due 11/30/12 (d) 200,000 205,639
Royal Bank of Scotland PLC
(The)
4.875%, due 8/25/14 (d) 475,000 483,437
-------------
689,076
-------------
BEVERAGES 0.1%
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 430,000 460,696
-------------
BIOTECHNOLOGY 0.1%
FMC Finance III S.A.
6.875%, due 7/15/17 400,000 393,000
-------------
BUILDING MATERIALS 0.0%++
Asia Aluminum Holdings, Ltd.
8.00%, due 12/23/11 (d)(g) 645,000 101,588
-------------
CHEMICALS 0.0%++
Ineos Group Holdings PLC
8.50%, due 2/15/16 (d) 400,000 224,000
-------------
COAL 0.0%++
Raspadskaya Securities, Ltd.
7.50%, due 5/22/12 180,000 179,325
-------------
ENTERTAINMENT 0.1%
Great Canadian Gaming Corp.
7.25%, due 2/15/15 (d) 400,000 382,000
-------------
HOLDING COMPANY--DIVERSIFIED 0.1%
Hutchison Whampoa
International, Ltd.
7.625%, due 4/9/19 (d) 315,000 355,264
-------------
INSURANCE 0.1%
Nippon Life Insurance Co.
4.875%, due 8/9/10 (d) 340,000 341,457
-------------
</Table>
24 MainStay Income Builder Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
IRON & STEEL 0.0%++
Russel Metals, Inc.
6.375%, due 3/1/14 $ 200,000 $ 189,750
-------------
MEDIA 0.3%
British Sky Broadcasting
Group PLC
9.50%, due 11/15/18 (d) 665,000 847,287
BSKYB Finance UK PLC
6.50%, due 10/15/35 (d) 1,130,000 1,153,398
UPC Holding B.V.
9.875%, due 4/15/18 (d) 240,000 253,800
-------------
2,254,485
-------------
MINING 0.3%
Anglo American Capital PLC
9.375%, due 4/8/19 (d) 500,000 606,342
Novelis, Inc.
7.25%, due 2/15/15 1,500,000 1,346,250
Teck Resources, Ltd.
9.75%, due 5/15/14 112,000 125,720
10.25%, due 5/15/16 112,000 129,080
10.75%, due 5/15/19 112,000 130,480
-------------
2,337,872
-------------
MISCELLANEOUS--MANUFACTURING 0.3%
Siemens
Financieringsmaatschappij
N.V.
5.75%, due 10/17/16 (d) 1,000,000 1,086,822
6.125%, due 8/17/26 (d) 700,000 764,758
-------------
1,851,580
-------------
OIL & GAS 0.4%
Citic Resources Finance,
Ltd.
6.75%, due 5/15/14 (d) 200,000 191,500
EnCana Corp.
6.30%, due 11/1/11 100,000 108,353
Gazprom International S.A.
7.201%, due 2/1/20 (d) 504,890 515,643
OPTI Canada, Inc.
8.25%, due 12/15/14 265,000 208,025
Petronas Capital, Ltd.
5.25%, due 8/12/19 (d) 605,000 610,846
Petroplus Finance, Ltd.
6.75%, due 5/1/14 (d) 400,000 374,000
TNK-BP Finance S.A.
7.50%, due 7/18/16 (d) 470,000 473,525
-------------
2,481,892
-------------
PIPELINES 0.1%
TransCanada Pipelines, Ltd.
4.00%, due 6/15/13 250,000 254,976
5.85%, due 3/15/36 100,000 104,036
-------------
359,012
-------------
SEMICONDUCTORS 0.0%++
Sensata Technologies B.V.
8.00%, due 5/1/14 200,000 186,000
-------------
TELECOMMUNICATIONS 0.1%
Inmarsat Finance PLC
10.375%, due 11/15/12 300,000 309,750
Intelsat Subsidiary Holding
Co., Ltd.
8.50%, due 1/15/13 400,000 401,500
Telecom Italia Capital S.A.
6.375%, due 11/15/33 100,000 99,256
Telefonica Europe B.V.
7.75%, due 9/15/10 100,000 105,609
-------------
916,115
-------------
TRANSPORTATION 0.0%++
Canadian National Railway
Co.
7.625%, due 5/15/23 50,000 60,496
-------------
Total Yankee Bonds
(Cost $13,675,910) 13,763,608
-------------
Total Long-Term Bonds
(Cost $232,924,475) 236,255,616
-------------
<Caption>
SHARES
COMMON STOCKS 58.0%
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 0.9%
BAE Systems PLC 725,500 3,744,834
Meggitt PLC 555,450 2,233,498
-------------
5,978,332
-------------
AGRICULTURE 5.3%
V Altria Group, Inc. 399,598 7,236,720
British American Tobacco PLC 130,997 4,177,425
Imperial Tobacco Group PLC 222,350 6,568,771
V Lorillard, Inc. 96,140 7,472,001
V Philip Morris
International, Inc. 156,113 7,393,512
Reynolds American, Inc. 50,785 2,462,057
-------------
35,310,486
-------------
APPAREL 0.5%
VF Corp. 42,750 3,036,960
-------------
</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
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
BANKS 0.7%
Banco Santander S.A. 120,758 $ 1,953,961
Westpac Banking Corp. 109,256 2,593,405
-------------
4,547,366
-------------
BEVERAGES 2.7%
Coca-Cola Co. (The) 40,910 2,180,912
V Diageo PLC, Sponsored ADR
(k) 125,850 8,182,767
V InBev N.V. 158,647 7,472,303
-------------
17,835,982
-------------
CHEMICALS 1.7%
Air Liquide S.A. 46,300 5,001,288
BASF A.G. 67,744 3,638,886
E.I. du Pont de Nemours &
Co. 90,966 2,894,538
-------------
11,534,712
-------------
COMMERCIAL SERVICES 0.3%
Automatic Data Processing,
Inc. 53,650 2,135,270
-------------
DISTRIBUTION & WHOLESALE 0.6%
Genuine Parts Co. 113,500 3,971,365
-------------
DIVERSIFIED FINANCIAL SERVICES 0.6%
BGP Holdings PLC (b)(c) 20,068 3
Federated Investors, Inc.
Class B 76,939 2,019,649
NYSE Euronext 33,800 873,730
Redecard S.A. 67,500 1,002,001
-------------
3,895,383
-------------
ELECTRIC 7.0%
Duke Energy Corp. 377,122 5,966,070
Enel S.p.A. 738,134 4,404,847
National Grid PLC 453,550 4,514,717
NSTAR 67,200 2,079,840
OGE Energy Corp. 136,500 4,534,530
Progress Energy, Inc. 55,834 2,095,450
RWE A.G 44,961 3,950,164
SCANA Corp. 56,908 1,925,767
Scottish & Southern Energy
PLC 196,050 3,471,865
Southern Co. (The) 130,600 4,073,414
TECO Energy, Inc. 203,850 2,923,209
Terna S.p.A. 853,350 3,387,610
Westar Energy, Inc. 150,762 2,887,092
-------------
46,214,575
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.7%
Emerson Electric Co. 117,773 4,445,931
-------------
ENGINEERING & CONSTRUCTION 0.7%
Vinci S.A. 93,695 4,912,890
-------------
ENVIRONMENTAL CONTROLS 0.5%
Waste Management, Inc. 98,850 2,953,638
-------------
FOOD 2.7%
H.J. Heinz Co. 76,550 3,080,372
Kellogg Co. 41,700 2,149,218
Kraft Foods, Inc. Class A 78,689 2,165,521
V Nestle S.A. Registered 162,355 7,567,810
SUPERVALU, Inc. 178,850 2,838,350
-------------
17,801,271
-------------
FOOD SERVICES 0.5%
Compass Group PLC 462,950 2,948,087
-------------
GAS 1.6%
Nicor, Inc. 80,750 2,994,210
NiSource, Inc. 237,841 3,072,906
Vectren Corp. 87,650 1,975,631
WGL Holdings, Inc. 86,400 2,856,384
-------------
10,899,131
-------------
HEALTH CARE--PRODUCTS 1.0%
Johnson & Johnson 114,417 6,756,324
-------------
HOUSEHOLD PRODUCTS & WARES 1.2%
Kimberly-Clark Corp. 71,595 4,378,750
Tupperware Brands Corp. 79,400 3,574,588
-------------
7,953,338
-------------
INSURANCE 1.3%
Arthur J. Gallagher & Co. 127,600 2,846,756
MetLife, Inc. 58,800 2,000,964
SCOR SE 157,100 4,005,477
-------------
8,853,197
-------------
IRON & STEEL 0.3%
Nucor Corp. 46,450 1,851,032
-------------
MACHINERY 0.0%++
BHM Technologies Holdings,
Inc.(b)(c) 4,340 43
-------------
MEDIA 1.9%
Pearson PLC 366,850 5,012,418
Shaw Communications, Inc. 213,500 3,798,230
Vivendi S.A. 133,479 3,715,559
-------------
12,526,207
-------------
</Table>
26 MainStay Income Builder 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)
METAL FABRICATE & HARDWARE 0.5%
Assa Abloy AB 184,800 $ 3,290,950
-------------
MINING 0.3%
BHP Billiton, Ltd.,
Sponsored ADR (k) 31,900 2,092,002
-------------
MISCELLANEOUS--MANUFACTURING 0.7%
Honeywell International,
Inc. 136,850 4,911,546
-------------
OFFICE EQUIPMENT/SUPPLIES 0.3%
Pitney Bowes, Inc. 83,827 2,053,761
-------------
OIL & GAS 5.2%
BP PLC, Sponsored ADR (k) 80,930 4,582,257
Canadian Oil Sands Trust 70,800 1,909,287
Chevron Corp. 40,874 3,128,496
ConocoPhillips 55,575 2,788,753
Diamond Offshore Drilling,
Inc. 33,000 3,143,250
ENI S.p.A., Sponsored ADR
(k) 42,000 2,082,360
ExxonMobil Corp. 46,755 3,350,931
Royal Dutch Shell PLC Class
A, ADR (k) 72,550 4,310,195
StatoilHydro A.S.A.,
Sponsored ADR (k) 223,800 5,295,108
Total S.A. 66,518 3,977,812
-------------
34,568,449
-------------
PACKAGING & CONTAINERS 0.5%
Ball Corp. 17,800 878,074
Bemis Co., Inc. 80,650 2,083,189
-------------
2,961,263
-------------
PHARMACEUTICALS 2.5%
AstraZeneca PLC, Sponsored
ADR (k) 109,550 4,919,891
Bristol-Myers Squibb Co. 230,435 5,023,483
Merck & Co., Inc. 146,909 4,543,895
Roche Holding A.G.,
Genusscheine 12,600 2,022,829
-------------
16,510,098
-------------
PIPELINES 1.1%
Kinder Morgan Energy
Partners, L.P. 75,000 4,050,000
ONEOK, Inc. 95,800 3,468,918
-------------
7,518,918
-------------
REAL ESTATE INVESTMENT TRUSTS 0.2%
Ventas, Inc. 29,750 1,193,868
-------------
RETAIL 1.6%
McDonald's Corp. 72,042 4,222,381
Next PLC 110,800 3,264,215
Wal-Mart Stores, Inc. 64,700 3,214,296
-------------
10,700,892
-------------
SAVINGS & LOANS 0.3%
First Niagara Financial
Group, Inc. 160,550 2,061,462
-------------
SEMICONDUCTORS 0.4%
Taiwan Semiconductor
Manufacturing Co, Ltd.,
Sponsored ADR (k) 250,800 2,392,632
-------------
SOFTWARE 1.4%
Microsoft Corp. 227,773 6,316,145
Oracle Corp. 134,603 2,840,124
-------------
9,156,269
-------------
TELECOMMUNICATIONS 9.5%
AT&T, Inc. 239,427 6,146,091
BCE, Inc. 118,550 2,836,523
Belgacom S.A. 83,370 3,128,634
CenturyTel, Inc. 158,301 5,138,450
Chunghwa Telecom Co, Ltd.,
ADR (k) 120,600 2,096,028
France Telecom S.A. 239,740 5,948,437
Frontier Communications
Corp. 277,909 1,992,608
Mobistar S.A. 44,200 3,042,572
Philippine Long Distance
Telephone Co., Sponsored
ADR (k) 79,600 4,242,680
Swisscom A.G. 16,950 6,133,821
Telefonica S.A. 234,875 6,577,795
Telekom Austria A.G 118,450 1,943,635
Verizon Communications,
Inc. 219,874 6,506,072
Vodafone Group PLC 1,889,277 4,172,092
Windstream Corp. 301,826 2,909,603
-------------
62,815,041
-------------
TRANSPORTATION 0.2%
Toll Holdings, Ltd. 201,100 1,551,343
-------------
WATER 0.6%
United Utilities Group PLC 580,550 4,197,204
-------------
Total Common Stocks
(Cost $382,050,724) 384,337,218
-------------
CONVERTIBLE PREFERRED STOCKS 0.7%
- ----------------------------------------------------------------
BANKS 0.0%++
GMAC, Inc.
7.00% 40 23,898
-------------
CHEMICALS 0.0%++
Celanese Corp.
4.25% 8,300 291,745
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
27
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 0.1%
Affiliated Managers Group,
Inc.
5.10% 9,600 $ 354,000
-------------
INSURANCE 0.1%
MetLife, Inc.
6.50% 30,550 663,851
-------------
LEISURE TIME 0.0%++
Callaway Golf Co.
7.50% (d) 900 104,400
-------------
MINING 0.1%
Freeport-McMoRan Copper &
Gold, Inc.
6.75% 2,900 310,300
Vale Capital II
6.70% 3,500 264,425
Vale Capital, Ltd.
5.50% 7,100 348,255
-------------
922,980
-------------
OIL & GAS 0.0%++
Whiting Petroleum Corp.
6.20% 700 106,589
-------------
PHARMACEUTICALS 0.3%
Merck & Co., Inc.
6.00% 8,500 2,050,625
-------------
TELECOMMUNICATIONS 0.1%
Crown Castle International
Corp.
6.25% 6,700 355,100
-------------
Total Convertible Preferred
Stocks
(Cost $4,800,882) 4,873,188
-------------
PREFERRED STOCK 0.0%++
- ----------------------------------------------------------------
MACHINERY 0.0%++
BHM Technologies Holdings,
Inc.
10.00% (b)(c) 52 1
-------------
Total Preferred Stock
(Cost $0) 1
-------------
<Caption>
NUMBER OF
WARRANTS VALUE
WARRANTS 0.0%++
- ----------------------------------------------------------------
AIRLINES 0.0%++
Mediobanca S.p.A
Strike Price E 9.00
Expires 3/11/18 (b)(c)(l) 55 $ 13
Ryanair Holdings PLC Class A
Strike Price E 0.000001
Expires 4/3/18 (d)(l) 36,112 156,510
-------------
Total Warrants
(Cost $139,518) 156,523
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 5.8%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 5.8%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$38,641,935
(Collateralized by United
States Treasury Bills with
a zero coupon rate and a
rate of 0.066% and
maturity dates of 12/10/09
and 2/18/10, with a
Principal Amount of
$39,425,000 and a Market
Value of $39,421,943) $38,641,903 38,641,903
-------------
Total Short-Term Investment
(Cost $38,641,903) 38,641,903
-------------
Total Investments
(Cost $658,557,502) (o) 100.2% 664,264,449
Liabilities in Excess of
Cash and Other Assets (0.2) (1,094,848)
------ ------------
Net Assets 100.0% $ 663,169,601
===== ============
</Table>
28 MainStay Income Builder Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
UNREALIZED
CONTRACTS APPRECIATION
LONG (DEPRECIATION) (M)
FUTURES CONTRACTS (0.2%) (N)
- ---------------------------------------------------------
United States Treasury
Note December 2009 (5
Year) 70 $ 206,509
Note December 2009 (10
Year) 99 322,961
Standard & Poor's 500
Index
Mini December 2009 1,260 (1,786,613)
-----------
Total Futures Contracts
Long
(Settlement Value
$84,973,047) $(1,257,143)
-----------
<Caption>
CONTRACTS
SHORT
United States Treasury
Note December 2009 (2
Year) (59) (108,037)
-----------
Total Futures Contracts
Short
(Settlement Value
$12,838,953) (108,037)
-----------
Total Futures Contracts
(Settlement Value
$72,134,094) $(1,365,180)
===========
</Table>
<Table>
++ Less than one-tenth of a percent.
+++ On a daily basis New York Life
Investments 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) Floating rate. Rate shown is the rate in
effect at October 31, 2009.
(b) Fair valued security. The total market
value of these securities at October 31,
2009 is $1,594,734, which represents 0.2%
of the Fund's net assets.
(c) Illiquid security. The total market value
of these securities at October 31, 2009
is $1,665,858, which represents 0.3% of
the Fund's net assets.
(d) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(e) Subprime mortgage investment and other
asset-backed securities. The total market
value of the securities at October 31,
2009 is $1,768,968, which represents 0.3%
of the Fund's net assets.
(f) PIK ("Payment in Kind")--interest or
dividend payment is made with additional
securities.
(g) Issue in default.
(g1) As of November 30, 2009 Charter
Communication Operating LLC emerged from
Chapter 11 bankruptcy under a plan of
reorganization.
(h) Floating Rate Loan--generally pays
interest at rates which are periodically
re-determined at a margin above the
London Inter-Bank Offered Rate ("LIBOR")
or other short-term rates. The rate shown
is the rate(s) in effect at October 31,
2009. Floating Rate Loans are generally
considered restrictive in that the Fund
is ordinarily contractually obligated to
receive consent from the Agent Bank
and/or borrower prior to disposition of a
Floating Rate Loan.
(i) TBA: Securities purchased on a forward
commitment basis with an approximate
principal amount and maturity date. The
actual principal amount and maturity date
will be determined upon settlement. The
market value of these securities at
October 31, 2009 is $3,417,562, which
represents 0.5% of the Fund's net assets.
All or a portion of these securities were
acquired under a mortgage dollar roll
agreement.
(j) Yankee Bond--dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(k) ADR--American Depositary Receipt.
(l) Non-income producing security.
(m) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2009.
(n) At October 31, 2009, cash in the amount
of $5,880,440 is segregated as collateral
for futures contracts with the broker.
(o) At October 31, 2009, cost is $659,862,898
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 18,936,577
Gross unrealized depreciation (14,536,026)
------------
Net unrealized appreciation $ 4,401,551
============
</Table>
The following abbreviation is used in the above portfolio:
E -- Euro
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
29
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets and liabilities.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES
IN ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Long-Term Bonds
Asset-Backed Securities (a) $ -- $ 11,982,353 $ 567,175 $ 12,549,528
Convertible Bonds -- 28,818,929 -- 28,818,929
Corporate Bonds (b) -- 99,227,407 291,486 99,518,893
Foreign Government Bonds -- 1,347,275 -- 1,347,275
Loan Assignments & Participations (c) -- -- 19,566 19,566
Mortgage-Backed Securities (d) -- 8,394,913 716,447 9,111,360
Municipal Bonds -- 1,181,737 -- 1,181,737
U.S. Government & Federal Agencies -- 69,944,720 -- 69,944,720
Yankee Bonds -- 13,763,608 -- 13,763,608
------------ ------------ ---------- ------------
Total Long-Term Bonds -- 234,660,942 1,594,674 236,255,616
------------ ------------ ---------- ------------
Common Stocks (e) 384,337,172 -- 46 384,337,218
Convertible Preferred Stocks 4,768,788 104,400 -- 4,873,188
Preferred Stock (f) -- -- 1 1
Warrant (g) -- 156,510 13 156,523
Short-Term Investment
Repurchase Agreement -- 38,641,903 -- 38,641,903
------------ ------------ ---------- ------------
Total Investments in Securities 389,105,960 273,563,755 1,594,734 664,264,449
------------ ------------ ---------- ------------
Other Financial Instruments
Futures Contracts Long (h) (1,257,143) -- -- (1,257,143)
------------ ------------ ---------- ------------
Total Investments in Securities and Other
Financial Instruments $387,848,817 $273,563,755 $1,594,734 $663,007,306
============ ============ ========== ============
</Table>
(a) The level 3 security valued at $567,175 is held in Credit Cards within the
Asset-Backed Securities section of the Portfolio of Investments.
(b) The level 3 securities valued at $5,720, $4,881 and $280,885 are held in
Commercial Services, Media and Retail, respectively, within the Corporate
Bonds section of the Portfolio of Investments.
(c) The level 3 security valued at $19,566 is held in Machinery within the Loan
Assignments & Participations section of the Portfolio of Investments.
(d) The level 3 security valued at $716,447 is held in Commercial Mortgage Loans
(Collateralized Mortgage Obligations) within the Mortgage-Backed Securities
section of the Portfolio of Investments.
(e) The level 3 securities valued at $3 and $43 are held in Diversified
Financial Services and Machinery respectively, within the Common Stocks
section of the Portfolio of Investments.
(f) The level 3 security valued at $1 is held in Machinery within the Preferred
Stock section of the Portfolio of Investments.
(g) The level 3 security valued at $13 is held in Airlines within the Warrants
section of the Portfolio of Investments.
(h) The value listed for these securities reflects unrealized depreciation as
shown on the Portfolio of Investments.
LIABILITY VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Other Financial Instruments
Futures Contracts Short (a) $(108,037) $ -- $ -- $(108,037)
--------- -------- -------- ---------
Total Other Financial Instruments $(108,037) $-- $-- $(108,037)
========= ======== ======== =========
</Table>
(a) The value listed for these securities reflects unrealized depreciation as
shown on the Portfolio of Investments.
30 MainStay Income Builder Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
The following is a reconciliation of investments in which significant
unobservable inputs (Level 3) were used in determining value:
ASSET VALUATION INPUTS
<Table>
<Caption>
BALANCE CHANGE IN
AS OF ACCRUED REALIZED UNREALIZED
INVESTMENTS OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET
IN SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES
Long-Term Bonds
Asset-Backed Securities
Credit Cards $ 634,851 $ (381) $ (96) $ 57,345 $ --
Corporate Bonds
Commercial Services -- -- -- 5,720 --
Diversified Financial
Services 242,452 18 (45,281) 106,142 --
Media 20,272 -- 1,967 (14,845) 1,954
Retail -- -- -- (16,036) --
Loan Assignments &
Participations
Machinery -- -- -- (144,656) 164,222
Mortgage-Backed Securities
Commercial Mortgage
Loans (Collateralized
Mortgage Obligations) 1,031,399 -- -- (8,994) --
Common Stocks
Aerospace & Defense 4,103 -- (368) 54 --
Diversified Financial
Services -- -- -- -- 3
Machinery -- -- -- 43 --
Media 1 -- -- (1) --
Preferred Stocks
Machinery -- -- -- 1 --
Real Estate Investment 95,250 -- (56,000) 51,750 147,000
Warrants
Airlines -- -- -- 13 --
---------- ------ --------- --------- --------
Total $2,028,328 ($363) ($99,778) $ 36,536 $313,179
========== ====== ========= ========= ========
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
NET NET BALANCE INVESTMENTS
TRANSFERS TRANSFERS AS OF STILL HELD AT
INVESTMENTS NET IN TO OUT OF OCTOBER 31, OCTOBER 31,
IN SECURITIES SALES LEVEL 3 LEVEL 3 2009 2009(A)
Long-Term Bonds
Asset-Backed Securities
Credit Cards $ (124,544) $ -- $ -- $ 567,175 $ 45,658
Corporate Bonds
Commercial Services -- -- -- 5,720 5,720
Diversified Financial
Services (303,331) -- -- -- --
Media (4,467) -- -- 4,881 (12,119)
Retail -- 296,921 -- 280,885 (16,036)
Loan Assignments &
Participations
Machinery -- -- -- 19,566 (144,656)
Mortgage-Backed Securities
Commercial Mortgage
Loans (Collateralized
Mortgage Obligations) (48,358) -- (257,600) 716,447 (11,170)
Common Stocks
Aerospace & Defense (3,789) -- -- -- --
Diversified Financial
Services -- -- -- 3 --
Machinery -- -- -- 43 43
Media -- -- -- -- --
Preferred Stocks
Machinery -- -- -- 1 1
Real Estate Investment (238,000) -- -- -- --
Warrants
Airlines -- -- -- 13 13
---------- -------- ---------- ---------- ---------
Total ($722,489) $296,921 ($257,600) $1,594,734 $(132,546)
========== ======== ========== ========== =========
</Table>
(a) Includes "Net change in unrealized appreciation (depreciation) on
investments" in the Statement of Operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
31
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $658,557,502) $ 664,264,449
Cash collateral on deposit at
broker 5,880,440
Cash denominated in foreign
currencies
(identified cost $316,770) 314,181
Cash 126,237
Receivables:
Dividends and interest 4,189,903
Investment securities sold 3,502,142
Fund shares sold 121,625
Other assets 18,999
-------------
Total assets 678,417,976
-------------
LIABILITIES:
Payables:
Investment securities purchased 12,169,649
Variation margin on futures
contracts 1,544,666
Manager (See Note 3) 381,366
Transfer agent (See Note 3) 374,641
Fund shares redeemed 256,583
NYLIFE Distributors (See Note 3) 160,203
Shareholder communication 146,414
Professional fees 135,647
Custodian 43,521
Trustees 2,111
Accrued expenses 33,574
-------------
Total liabilities 15,248,375
-------------
Net assets $ 663,169,601
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 476,617
Additional paid-in capital 788,183,352
-------------
788,659,969
Accumulated undistributed net
investment income 41,861
Accumulated net realized loss on
investments, futures transactions
and foreign currency transactions (129,831,380)
Net unrealized appreciation on
investments and futures contracts 4,291,819
Net unrealized appreciation on
translation of other assets and
liabilities in foreign currencies 7,332
-------------
Net assets $ 663,169,601
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 161,823,565
=============
Shares of beneficial interest
outstanding 11,654,070
=============
Net asset value per share
outstanding $ 13.89
Maximum sales charge (5.50% of
offering price) 0.81
-------------
Maximum offering price per share
outstanding $ 14.70
=============
CLASS A
Net assets applicable to
outstanding shares $ 222,648,303
=============
Shares of beneficial interest
outstanding 16,036,434
=============
Net asset value per share
outstanding $ 13.88
Maximum sales charge (5.50% of
offering price) 0.81
-------------
Maximum offering price per share
outstanding $ 14.69
=============
CLASS B
Net assets applicable to
outstanding shares $ 79,742,262
=============
Shares of beneficial interest
outstanding 5,722,535
=============
Net asset value and offering price
per share outstanding $ 13.93
=============
CLASS C
Net assets applicable to
outstanding shares $ 9,621,980
=============
Shares of beneficial interest
outstanding 691,421
=============
Net asset value and offering price
per share outstanding $ 13.92
=============
CLASS I
Net assets applicable to
outstanding shares $ 189,333,491
=============
Shares of beneficial interest
outstanding 13,557,265
=============
Net asset value and offering price
per share outstanding $ 13.97
=============
</Table>
32 MainStay Income Builder 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, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 9,425,688
Dividends (a) 5,081,756
------------
Total income 14,507,444
------------
EXPENSES:
Manager (See Note 3) 2,504,941
Transfer agent--Investor Class
(See Note 3) 854,600
Transfer agent--Class A (See Note
3) 254,240
Transfer agent--Classes B and C
(See Note 3) 423,853
Transfer agent--Classes I, R1, R2
and R3 (See Note 3) 504
Distribution/Service--Investor
Class (See Note 3) 340,982
Distribution/Service--Class A
(See Note 3) 440,287
Service--Class B (See Note 3) 163,918
Service--Class C (See Note 3) 4,162
Distribution--Class B (See Note
3) 491,755
Distribution--Class C (See Note
3) 12,486
Shareholder communication 241,767
Professional fees 240,759
Custodian 96,189
Registration 68,234
Trustees 17,492
Miscellaneous 30,344
------------
Total expenses before waiver 6,186,513
Expense waiver from Manager (See
Note 3) (702,446)
------------
Net expenses 5,484,067
------------
Net investment income 9,023,377
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $(48,297,831)
Futures transactions (470,017)
Foreign currency transactions 464,050
------------
Net realized loss on investments,
futures transactions and foreign
currency transactions (48,303,798)
------------
Net change in unrealized
appreciation (depreciation) on:
Investments 87,197,328
Futures contracts (1,365,180)
Translation of other assets and
liabilities in foreign
currencies (365,583)
------------
Net change in unrealized
depreciation on investments,
futures contracts and foreign
currency transactions 85,466,565
------------
Net realized and unrealized gain on
investments, futures transactions
and foreign currency transactions 37,162,767
------------
Net increase in net assets
resulting from operations $ 46,186,144
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$139,439.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
33
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 9,023,377 $ 9,755,644
Net realized loss on
investments, futures
transactions, written
option transactions and
foreign currency
transactions (48,303,798) (26,328,632)
Net change in unrealized
appreciation (depreciation)
on investments, futures
contracts and foreign
currency transactions 85,466,565 (152,262,837)
----------------------------
Net increase (decrease) in
net assets resulting from
operations 46,186,144 (168,835,825)
----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (3,762,283) (1,536,882)
Class A (5,225,038) (7,027,962)
Class B (1,232,591) (1,284,558)
Class C (31,920) (25,910)
Class I (1,543) (851)
----------------------------
(10,253,375) (9,876,163)
----------------------------
From net realized gain on
investments:
Class A -- (57,593,593)
Class B -- (17,387,304)
Class C -- (334,023)
Class I -- (3,286)
----------------------------
-- (75,318,206)
----------------------------
Total dividends and
distributions to
shareholders (10,253,375) (85,194,369)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares $ 14,666,352 $ 35,056,171
Net asset value of shares
issued in connection with
the acquisition of MainStay
Income Manager Fund 266,679,188 --
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 9,981,914 83,343,876
Cost of shares redeemed (64,466,172) (141,896,100)
----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 226,861,282 (23,496,053)
----------------------------
Net increase (decrease)
in net assets 262,794,051 (277,526,247)
NET ASSETS:
Beginning of year 400,375,550 677,901,797
----------------------------
End of year $663,169,601 $ 400,375,550
============================
Accumulated undistributed net
investment income at end of
year $ 41,861 $ 921,580
============================
</Table>
34 MainStay Income Builder 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 35
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
--------------------------
2009 2008
Net asset value at beginning
of period $ 12.58 $ 16.50
-------- --------
Net investment income 0.30 (a) 0.19 (a)
Net realized and unrealized
gain (loss) on investments 1.36 (3.89)
Net realized and unrealized
gain on foreign currency
transactions 0.00 ++ 0.01
-------- --------
Total from investment
operations 1.66 (3.69)
-------- --------
Less dividends and
distributions:
From net investment income (0.35) (0.23)
From net realized gain on
investments -- --
-------- --------
Total dividends and
distributions (0.35) (0.23)
-------- --------
Net asset value at end of
period $ 13.89 $ 12.58
======== ========
Total investment return (c) 13.57% (22.65%)(f)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.40% 1.84% ++
Net expenses 1.40% 1.29% ++
Expenses (before
waiver/reimbursement) 1.72% 1.50% ++
Portfolio turnover rate 182%(g) 101% (g)
Net assets at end of period
(in 000's) $161,824 $136,858
</Table>
<Table>
<Caption>
CLASS B
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning
of period $ 12.61 $ 20.15 $ 19.86 $ 18.95 $ 17.98
------- ------- -------- -------- --------
Net investment income 0.21 (a) 0.18 (a) 0.21 (a) 0.11 (a) 0.07 (b)
Net realized and unrealized
gain (loss) on investments 1.35 (5.28) 1.89 1.69 (e) 1.29
Net realized and unrealized
gain on foreign currency
transactions 0.00 ++ 0.01 -- -- --
------- ------- -------- -------- --------
Total from investment
operations 1.56 (5.09) 2.10 1.80 1.36
------- ------- -------- -------- --------
Less dividends and
distributions:
From net investment income (0.24) (0.18) (0.21) (0.12) (0.06)
From net realized gain on
investments -- (2.27) (1.60) (0.77) (0.33)
------- ------- -------- -------- --------
Total dividends and
distributions (0.24) (2.45) (1.81) (0.89) (0.39)
------- ------- -------- -------- --------
Net asset value at end of
period $ 13.93 $ 12.61 $ 20.15 $ 19.86 $ 18.95
======= ======= ======== ======== ========
Total investment return (c) 12.77% (28.53%) 11.37% 9.74%(d)(e) 7.66%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.65% 1.12% 1.06% 0.55% 0.35%(b)
Net expenses 2.14% 1.99% 1.94% 1.94% 1.94%
Expenses (before
waiver/reimbursement) 2.47% 2.15% 2.02% 2.09%(d) 2.06%
Portfolio turnover rate 182%(g) 101% (g) 68% 70%(g) 77%(g)
Net assets at end of period
(in 000's) $79,742 $76,420 $156,346 $202,149 $665,908
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income includes $0.01 per share and there was no effect to the
net income ratio, as a result of a special one time dividend from Microsoft
Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.02%, respectively.
(f) Total return is not annualized.
(g) The portfolio turnover rates not including mortgage dollar rolls were 151%,
86%, 55% and 38% for the years ended October 31, 2009, 2008, 2006 and 2005,
respectively.
</Table>
36 MainStay Income Builder 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 A
----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 12.57 $ 20.10 $ 19.82 $ 18.92 $ 17.96
-------- -------- -------- -------- -------
0.33 (a) 0.32 (a) 0.35 (a) 0.27 (a) 0.21 (b)
1.36 (5.27) 1.88 1.67 (e) 1.29
0.00 ++ 0.01 -- -- --
-------- -------- -------- -------- -------
1.69 (4.94) 2.23 1.94 1.50
-------- -------- -------- -------- -------
(0.38) (0.32) (0.35) (0.27) (0.21)
-- (2.27) (1.60) (0.77) (0.33)
-------- -------- -------- -------- -------
(0.38) (2.59) (1.95) (1.04) (0.54)
-------- -------- -------- -------- -------
$ 13.88 $ 12.57 $ 20.10 $ 19.82 $ 18.92
======== ======== ======== ======== =======
13.82% (27.88%) 12.18% 10.53%(d)(e) 8.43%
2.60% 1.93% 1.81% 1.42% 1.10%(b)
1.20% 1.18% 1.19% 1.19% 1.19%
1.23% 1.26% 1.27% 1.34%(d) 1.31%
182%(g) 101%(g) 68% 70%(g) 77%(g)
$222,648 $185,491 $518,547 $502,340 $98,180
<Caption>
CLASS C
----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 12.59 $ 20.12 $ 19.84 $ 18.94 $ 17.98
-------- -------- -------- -------- -------
0.22 (a) 0.18 (a) 0.21 (a) 0.12 (a) 0.07 (b)
1.35 (5.27) 1.88 1.67 (e) 1.28
0.00 ++ 0.01 -- -- --
-------- -------- -------- -------- -------
1.57 (5.08) 2.09 1.79 1.35
-------- -------- -------- -------- -------
(0.24) (0.18) (0.21) (0.12) (0.06)
-- (2.27) (1.60) (0.77) (0.33)
-------- -------- -------- -------- -------
(0.24) (2.45) (1.81) (0.89) (0.39)
-------- -------- -------- -------- -------
$ 13.92 $ 12.59 $ 20.12 $ 19.84 $ 18.94
======== ======== ======== ======== =======
12.69% (28.47%) 11.33% 9.69%(d)(e) 7.60%
1.67% 1.12% 1.06% 0.62% 0.35%(b)
2.17% 1.99% 1.94% 1.94% 1.94%
2.47% 2.15% 2.02% 2.09%(d) 2.06%
182%(g) 101%(g) 68% 70%(g) 77%(g)
$ 9,622 $ 1,563 $ 2,980 $ 3,175 $ 3,854
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
37
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning
of period $ 12.65 $ 20.25 $19.90 $18.98 $17.92
-------- ------- ------ ------ ------
Net investment income 0.77 (a) 0.37 (a) 0.44 (a) 0.36 (a) 0.26 (b)
Net realized and unrealized
gain (loss) on investments 0.97 (5.33) 1.93 1.69 (e) 1.42
Net realized and unrealized
gain on foreign currency
transactions 0.00 ++ 0.01 -- -- --
-------- ------- ------ ------ ------
Total from investment
operations 1.74 (4.95) 2.37 2.05 1.68
-------- ------- ------ ------ ------
Less dividends and
distributions:
From net investment income (0.42) (0.38) (0.42) (0.36) (0.29)
From net realized gain on
investments -- (2.27) (1.60) (0.77) (0.33)
-------- ------- ------ ------ ------
Total dividends and
distributions (0.42) (2.65) (2.02) (1.13) (0.62)
-------- ------- ------ ------ ------
Net asset value at end of
period $ 13.97 $ 12.65 $20.25 $19.90 $18.98
======== ======= ====== ====== ======
Total investment return (c) 14.14% (27.60%) 12.65% 11.11%(d)(e) 9.51%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.74% 2.31% 2.23% 1.86% 1.43%(b)
Net expenses 0.97% 0.79% 0.81% 0.74% 0.86%
Expenses (before
waiver/reimbursement) 0.97% 0.97% 0.93% 0.89%(d) 0.98%
Portfolio turnover rate 182%(g) 101%(g) 68% 70%(g) 77%(g)
Net assets at end of period
(in 000's) $189,333 $ 43 $ 29 $ 13 $ 7
</Table>
<Table>
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income includes $0.01 per share and there was no effect to the
net income ratio, as a result of a special one time dividend from Microsoft
Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.02%, respectively.
(g) The portfolio turnover rates not including mortgage dollar rolls were 151%,
86%, 55% and 38% for the years ended October 31, 2009, 2008, 2006 and 2005,
respectively.
</Table>
38 MainStay Income Builder Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Income Builder Fund (the "Fund"), a diversified fund. Effective October
16, 2009, the Fund changed its name from MainStay Total Return Fund, a
diversified fund.
The Fund currently offers five classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on December
29, 1987. Class C shares commenced operations on September 1, 1998. Class I
shares commenced operations on January 2, 2004. Investor Class shares commenced
operations on February 28, 2008.
Investor Class and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are offered at NAV and 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 and service 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 realize current income consistent with
reasonable opportunity for future growth of capital and income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. 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 (as defined in Note 3(A)),
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. Options contracts are valued at the last posted
settlement price on the market where such options are principally traded.
Investments in other mutual funds are valued at their NAVs as of the close of
the New York Stock Exchange on the valuation date. Foreign currency forward
contracts are valued at their fair market values determined on the basis of the
mean between the last current bid and ask prices based on dealer or exchange
quotations.
Loan assignments, participations and commitments are valued at the average of
bid quotations obtained from a pricing service. The Trust has engaged an
independent pricing service to provide market value quotations from dealers in
loans.
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 ("short-term investments") 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,
mainstayinvestments.com 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, under
normal conditions, it would be open. At October 31, 2009, the Fund held
securities with a value of $1,594,734 that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issuer in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3(A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures. At October 31, 2009, foreign securities
held by the Fund were not fair valued.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2009, maximized the use of observable inputs and minimized the
use of unobservable inputs. The Fund may have utilized some of the following
fair value techniques: multi-dimensional relational pricing models, option
adjusted spread pricing and estimating the price that would have prevailed in a
liquid market for an international equity security given information available
at the time of evaluation, when there are significant events after the close of
local foreign markets. For the year ended October 31, 2009, there have been no
changes to the fair value methodologies.
Generally, a security is considered illiquid if it cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued. Its illiquidity might prevent the sale of such security at a time when
the Manager or Subadvisor, if any, as defined might wish to sell, and these
securities could have the effect of decreasing the overall level of a Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, requiring a Fund to rely on judgments
that may be somewhat subjective in determining value, which could vary from the
amount that a Fund could realize upon disposition. Difficulty in selling
illiquid securities may result in a loss or may be costly to the Fund. Under the
supervision of the Board of Trustees, the Manager or Subadvisor, if any,
determines the liquidity of a Fund's investments; in doing so, the Manager or
Subadvisor, if any, may consider various factors, including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective purchasers, (3)
the dealer undertakings to make a market, and (4) the nature of the security and
the market in which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Illiquid
securities generally will be valued in such manner, as the Board of Trustees in
good faith deems appropriate to reflect their fair market value.
40 MainStay Income Builder Fund
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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 investments, 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
investments 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 NAV
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) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. These securities are
subject to equity price risk and interest rate risk in the normal course of
investing in these transactions. Premiums received are recorded as assets, and
the market value of the written options are recorded as liabilities. The
liabilities are subsequently adjusted and unrealized appreciation or
depreciation is recorded to reflect the current value of the options written.
Premiums received from writing options that expire are treated as realized
gains. Premiums received from writing options that are exercised or are
cancelled in closing purchase transactions are added to the proceeds or netted
against the amount paid on the transaction to determine the realized gain or
loss. By writing a covered call option, in exchange for the premium, the Fund
foregoes the opportunity for capital appreciation above the exercise price
should the price of the underlying security or foreign currency increase. The
Fund, in exchange for the premium, accepts the risk of a decline in the market
value of the underlying security or foreign currency below the exercise price. A
call option may be covered by the call writer's owning the underlying security
throughout the option period. A call option may also be covered by the call
writer's maintaining liquid assets valued at greater than the exercise price of
the call written. When writing a covered call option, the Fund, in return for
the premium on the option, gives up the opportunity to profit from a price
increase in the underlying securities above the exercise price. However, as long
as the obligation as the writer continues, the Fund has retained the risk of
loss should the
mainstayinvestments.com 41
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
price of the underlying security decline. After writing a put option, the Fund
may incur risk exposure equal to the difference between the exercise price of
the option and the sum of the market value of the underlying security plus the
premium received from the sale of the option. The Fund writes covered call
options to try to realize greater return on the sale of a stock. The Fund writes
put options to help protect against unanticipated adverse developments.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing. The Fund may purchase put options on its securities or foreign
currencies to protect against a decline in the value of the security or foreign
currency or to close out covered written put positions. The Fund may also
purchase options to seek to enhance returns. Risks may arise from an imperfect
correlation between the change in market value of the securities or foreign
currencies held by the Fund and the prices of options relating to the securities
or foreign currencies purchased or sold by the Fund and from the possible lack
of a liquid secondary market for an option. The maximum risk exposure for any
purchased option is limited to the premium initially paid for the option. The
Fund did not invest in written options during the year ended October 31, 2009.
(H) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(I) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations
("loans") are agreements to make money available (a "commitment") to a borrower
in a specified amount, at a specified rate and within a specified time. Such
loans are typically senior, secured and collateralized in nature. The Fund
records an investment when the borrower withdraws money and records interest as
earned. These loans pay interest at rates that are periodically reset by
reference to a base lending rate plus a spread. These base lending rates are
generally the prime rate offered by a designated U.S. bank or the London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants become insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are marked to
market and recorded in the Statement of Assets and Liabilities. At October 31,
2009, the Fund had no unfunded commitments.
(J) 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 financial
instrument (i.e., foreign currency, interest rate, security, or securities
index.) The Fund is subject to equity price risk and interest rate risk in the
normal course of investing in these transactions. 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 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
42 MainStay Income Builder Fund
underlying hedged assets, and the possible inability of counterparties to meet
the terms of their contracts. However, the Fund's activities in futures
contracts have minimal counterparty risk as they are conducted through regulated
exchanges that guarantee the futures against default by the counterparty. The
Fund invests in futures contracts to help manage the duration and yield curve of
the portfolio while minimizing the exposure to wider bid/ask spreads in
traditional bonds. The Fund's investment in futures contracts and other
derivatives may increase the volatility of the Fund's NAV and may result in a
loss to the Fund.
(K) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign
currency forward contracts, which are agreements to buy or sell currencies of
different countries on a specified future date at a specified rate. The Fund is
subject to foreign currency exchange rate risk in the normal course of investing
in these transactions. During the period the forward contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. Cash movement occurs on
settlement date. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract. The Fund
enters into foreign currency forward contracts to reduce currency risk versus
the benchmark or for trade settlement.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. While a
Fund may enter into forward contracts to reduce currency exchange risks, changes
in currency exchange rates may result in poorer overall performance for the Fund
than if it had not engaged in such transactions. Exchange rate movements can be
large, depending on the currency, and can last for extended periods of time,
affecting the value of the Fund's assets. Moreover, there may be an imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to the risk of currency exchange loss. The unrealized
appreciation on forward contracts reflects the Fund's exposure at valuation date
to credit loss in the event of a counterparty's failure to perform its
obligations. (See Note 5.)
(L) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(M) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. The Fund maintains liquid assets from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(N) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. In the event the Fund does engage in securities lending, the Fund
will lend through its custodian, State
mainstayinvestments.com 43
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Street Bank and Trust Company ("State Street"). State Street will manage the
Fund's cash collateral in accordance with the Lending Agreement between the Fund
and State Street, and indemnify the Fund's portfolio against counterparty risk.
The loans will be 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 will
receive compensation for lending its securities in the form of fees or retain a
portion of interest on the investment of any cash received as collateral. The
Fund also will continue 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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(O) 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.
(P) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes
called "junk bonds"), which are generally considered speculative because they
present a greater risk of loss, including default, than higher quality debt
securities. These securities pay investors a premium--a high interest rate or
yield--because of the increased risk of loss. These securities can also be
subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific country, industry or region.
The Fund invests in floating rate loans. The floating rate loans in which the
Fund principally invests are usually rated less than investment grade and are
generally considered speculative because they present a greater risk of loss,
including default, than higher quality debt securities. These securities pay
investors a higher interest rate because of the increased risk of loss. Although
certain floating rate loans are collateralized, there is no guarantee that the
value of the collateral will be sufficient to repay the loan. In a recession or
serious credit event, the Fund's NAV could go down and you could lose money.
(Q) 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.
44 MainStay Income Builder Fund
(R) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
Fair Value of Derivatives as of October 31, 2009
ASSET DERIVATIVES
<Table>
<Caption>
STATEMENT OF FOREIGN INTEREST
ASSETS EXCHANGE EQUITY RATE
AND LIABILITIES CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Net Assets--Unrealized
appreciation on investments and
Futures Contracts (a) futures contracts $ -- $ -- $529,470 $529,470
Warrants Investment in securities, at value -- 156,523 -- 156,523
-----------------------------------------------
Total Fair Value $-- $156,523 $529,470 $685,993
===============================================
</Table>
(a) Includes cumulative appreciation (depreciation) of futures contracts as
reported in Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets & Liabilities.
LIABILITY DERIVATIVES
<Table>
<Caption>
STATEMENT OF FOREIGN INTEREST
ASSETS EXCHANGE EQUITY RATE
AND LIABILITIES CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Net Assets--Unrealized
appreciation on investments and
Futures Contracts (a) futures contracts $ -- $1,786,613 $(108,037) $(1,894,650)
---------------------------------------------------
Total Fair Value $-- $1,786,613 $(108,037) $(1,894,650)
===================================================
</Table>
(a) Includes cumulative appreciation (depreciation) of futures contracts as
reported in Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets & Liabilities.
The effect of derivative instruments on the Statement of Operations for the year
ended October 31, 2009.
REALIZED GAIN (LOSS)
<Table>
<Caption>
FOREIGN INTEREST
STATEMENT OF EXCHANGE EQUITY RATE
OPERATIONS CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Net realized gain (loss) on
Purchased Options security transactions $ -- $221,995 $ -- $ 221,995
Net realized gain (loss) on
Rights security transactions -- (81,637) -- (81,637)
Net realized gain (loss) on
Warrants security transactions -- (27,504) -- (27,504)
Net realized gain (loss) on
Futures Contracts futures transactions -- -- (470,017) (470,017)
Net realized gain (loss) on
foreign currency
Forward Contracts transactions 436,668 -- -- 436,668
------------------------------------------------
Total Realized Gain (Loss) $436,668 $112,854 $(470,017) $ 79,505
================================================
</Table>
mainstayinvestments.com 45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
FOREIGN INTEREST
STATEMENT OF EXCHANGE EQUITY RATE
OPERATIONS CONTRACTS CONTRACTS CONTRACTS
LOCATION RISK RISK RISK TOTAL
Net change in
unrealized
appreciation
(depreciation)
on security
Warrants transactions $ -- $ 50,115 $ -- $ 50,115
Net change in
unrealized
appreciation
(depreciation)
Futures Contracts on futures contracts -- (1,786,613) 421,433 (1,365,180)
Net change in
unrealized
appreciation
(depreciation)
on translation of other
assets and liabilities
in
Forward Contracts foreign currencies (404,096) -- -- (404,096)
---------------------------------------------------
Total Change in
Appreciation
(Depreciation) $(404,096) $(1,736,498) $421,433 $(1,719,161)
===================================================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
FOREIGN INTEREST
EXCHANGE EQUITY RATE
CONTRACTS CONTRACTS CONTRACTS
RISK RISK RISK TOTAL
Purchased Options (2) -- 177,533 -- 177,533
Rights (2) -- 29,914 -- 29,914
Warrants (2) -- 29,935 -- 29,935
Futures Contracts Long (2) -- -- -- --
Futures Contracts Short (2) -- -- -- --
Forward Long Contracts (3) $ 3,086,331 -- -- $ 3,086,331
Forward Contracts Short (3) $(2,489,073) -- -- $(2,489,073)
</Table>
(1) Amount disclosed represents the weighted average held during the twelve-
month period.
(2) Amount(s) represent(s) number of contracts or number of shares/units.
(3) Amount(s) represent(s) notional amount.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund. MacKay Shields LLC ("Mackay Shields" or "Subadvisor"), a registered
investment adviser and an indirect, wholly-owned subsidiary of New York Life,
serves as Subadvisor to the fixed-income portion of the Fund and is responsible
for the overall asset allocation decision of the Fund are the day-to-day
portfolio management of the fixed-income portion of the Fund as well as the
overall asset allocation decisions of the Fund. On June 23, 2009, at a meeting
of the Board of Trustees of the Fund ("Board"), the Board approved the
termination of the Subadvisory Agreement between the Manager and Mackay Shields
for the equity portion of the Fund, effective at the opening of the U.S.
financial markets on June 29, 2009. Epoch Investment Partners, Inc. ("Epoch" or
"Subadvisor"), a registered investment advisor, now serves as Subadvisor to the
equity portion of the Fund and is responsible for the day-to-day portfolio
management of the equity portion of the Fund. Pursuant to the terms of Amended
and Restated Subadvisory Agreements ("Subadvisory Agreements") between New York
Life Investments and the Subadvisor, New York Life Investments pays for the
services of the Subadvisors.
The Fund pays the Manager a monthly fee for services performed and facilities
furnished at an annual rate of the
46 MainStay Income Builder Fund
Fund's average daily net assets as follows: 0.64% on assets up to $500 million,
0.60% on assets from $500 million to $1 billion and 0.575% on assets in excess
of $1 billion, plus a fee for fund accounting services previously provided by
New York Life Investments under a separate accounting agreement.
Prior to August 1, 2009, New York Life Investments had entered into a written
expense limitation agreement under which it agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses of the appropriate class of shares (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) did not exceed the following percentages of average daily net
assets: Investor Class, 1.29%; Class A, 1.16%; Class B, 2.04%; Class C, 2.04%;
and Class I, 0.79%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $2,504,941 and waived its fees in the amount of
$702,446.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's NAVs, and assisting New York Life Investments in
conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street is compensated by New York
Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has
entered into a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund
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 Investor Class and Class A shares at an annual
rate of 0.25% of the average daily net assets of the Investor Class and Class A
shares for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Class B and Class C shares of the
Fund pay the Distributor a monthly distribution fee at an 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 an annual rate of 0.25% of the average daily NAV 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
$14,111 and $5,207, respectively, for the year ended October 31, 2009. 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 $236, $88,210 and $177,
respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $1,533,197.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 144,547 0.1%
- --------------------------------------------------
Class B 1,118 0.0++
- --------------------------------------------------
Class C 1,386 0.0++
- --------------------------------------------------
Class I 69,933,936 36.9
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $18,286.
mainstayinvestments.com 47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$166,291 $(128,624,359) $(94,393) $3,062,093 $(125,490,368)
- --------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals and mark to market on forward contracts.
The other temporary differences are primarily due to defaulted bond interest.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$350,279 $(1,486,015) $1,135,736
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss), distribution redesignations and wash sales from the MainStay Income
Manager Fund (See Note 10).
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $128,624,359 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. The fund acquired $53,174,124 of capital losses in its
reorganization with the MainStay Income Manager Fund; use of these losses may be
limited due to the provisions of IRC Section 382. 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. No capital gain
distributions shall be made until any capital loss carryforwards have been fully
utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2015 $ 31,135
2016 47,073
2017 50,416
- ------------------------------------
Total $128,624
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $10,253,375 $25,007,697
Long-Term Capital Gains -- 60,186,672
- -----------------------------------------------------
Total $10,253,375 $85,194,369
- -----------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY TRANSACTIONS:
As of October 31, 2009, the Fund held the following foreign currencies:
<Table>
<Caption>
CURRENCY COST VALUE
Canadian Dollar CAD 49,948 USD 46,321 USD 46,160
- -----------------------------------------------------------------------------------------------------
Euro EUR 101,874 152,801 149,922
- -----------------------------------------------------------------------------------------------------
Hong Kong Dollar HKD 3,500 452 452
- -----------------------------------------------------------------------------------------------------
Japanese Yen JPY 1,184,354 13,119 13,157
- -----------------------------------------------------------------------------------------------------
Pound Sterling GBP 57,777 94,407 94,827
- -----------------------------------------------------------------------------------------------------
Singapore Dollar SGD 4,043 2,850 2,885
- -----------------------------------------------------------------------------------------------------
Swiss Franc CHF 6,954 6,820 6,778
- -----------------------------------------------------------------------------------------------------
Total USD 316,770 USD 314,181
- -----------------------------------------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street is the custodian of the cash and the securities of the Fund.
Custodial fees are charged to the Fund based on the market value of securities
in the Fund and the number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit with a syndicate
of banks in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests.
48 MainStay Income Builder Fund
Effective September 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of U.S. Government
securities were $199,514 and $283,211, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $457,594 and $415,349, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 242,005 $ 3,023,144
Shares issued in connection
with the acquisition of
MainStay Income Manager
Fund 1,097,321 15,304,886
Shares issued to
shareholders in
reinvestment of dividends 294,290 3,729,724
Shares redeemed (1,533,799) (19,165,714)
---------------------------
Net increase in shares
outstanding before
conversion 99,817 2,892,040
Shares converted into
Investor Class (See Note
1) 941,486 11,555,184
Shares converted from
Investor Class (See Note
1) (270,255) (3,666,254)
---------------------------
Net increase 771,048 $ 10,780,970
===========================
Period ended October 31, 2008 (a):
Shares sold 812,726 $ 13,346,743
Shares issued to
shareholders in
reinvestment of dividends 98,985 1,524,092
Shares redeemed (1,186,163) (18,231,948)
---------------------------
Net decrease in shares
outstanding before
conversion (274,452) (3,361,113)
Shares converted into
Investor Class (See Note
1) 11,508,599 182,668,353
Shares converted from
Investor Class (See Note
1) (351,125) (5,287,886)
---------------------------
Net increase 10,883,022 $ 174,019,354
===========================
(a) Investor Class shares were first offered on February
28, 2008.
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 504,555 $ 6,329,236
Shares issued in connection
with the acquisition of
MainStay Income Manager
Fund 2,609,124 36,385,533
Shares issued to
shareholders in
reinvestment of dividends 394,482 5,006,163
Shares redeemed (2,577,635) (32,282,652)
---------------------------
Net increase in shares
outstanding before
conversion 930,526 15,438,280
Shares converted into Class
A (See Note 1) 635,513 8,236,154
Shares converted from Class
A (See Note 1) (281,191) (3,456,525)
---------------------------
Net increase 1,284,848 $ 20,217,909
===========================
Year ended October 31,
2008:
Shares sold 817,366 $ 13,368,766
Shares issued to
shareholders in
reinvestment of dividends
and distributions 3,641,886 63,129,156
Shares redeemed (5,860,026) (94,803,883)
---------------------------
Net decrease in shares
outstanding before
conversion (1,400,774) (18,305,961)
Shares converted into Class
A (See Note 1) 1,366,368 22,037,642
Shares converted from Class
A (See Note 1) (11,009,287) (174,764,780)
---------------------------
Net decrease (11,043,693) $(171,033,099)
===========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 378,313 $ 4,744,010
Shares issued in connection
with the acquisition of
MainStay Income Manager
Fund 1,219,526 17,070,676
Shares issued to
shareholders in
reinvestment of dividends 96,269 1,216,560
Shares redeemed (1,008,696) (12,550,150)
---------------------------
Net increase in shares
outstanding before
conversion 685,412 10,481,096
Shares converted from Class
B (See Note 1) (1,023,431) (12,668,559)
---------------------------
Net decrease (338,019) $ (2,187,463)
===========================
Year ended October 31,
2008:
Shares sold 494,833 $ 8,022,766
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,053,710 18,349,323
Shares redeemed (1,737,249) (27,903,471)
---------------------------
Net decrease in shares
outstanding before
conversion (188,706) (1,531,382)
Shares converted from Class
B (See Note 1) (1,511,398) (24,653,329)
---------------------------
Net decrease (1,700,104) $ (26,184,711)
===========================
</Table>
mainstayinvestments.com 49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 35,299 $ 459,828
Shares issued in connection
with the acquisition of
MainStay Income Manager
Fund 557,265 7,790,170
Shares issued to
shareholders in
reinvestment of dividends 2,214 28,356
Shares redeemed (27,458) (348,595)
---------------------------
Net increase 567,320 $ 7,929,759
===========================
Year ended October 31,
2008:
Shares sold 17,357 $ 287,090
Shares issued to
shareholders in
reinvestment of dividends
and distributions 19,392 337,256
Shares redeemed (60,742) (954,093)
---------------------------
Net decrease (23,993) $ (329,747)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 7,904 $ 110,134
Shares issued in connection
with the acquisition of
MainStay Income Manager
Fund 13,554,329 190,127,923
Shares issued to
shareholders in
reinvestment of dividends 87 1,111
Shares redeemed (8,480) (119,061)
---------------------------
Net increase 13,553,840 $ 190,120,107
===========================
Year ended October 31,
2008:
Shares sold 1,948 $ 30,806
Shares issued to
shareholders in
reinvestment of dividends
and distributions 237 4,049
Shares redeemed (174) (2,705)
---------------------------
Net increase 2,011 $ 32,150
===========================
</Table>
NOTE 10--FUND ACQUISITION:
At a meeting held on June 23, 2009, the Board of Trustees approved a plan of
reorganization whereby the Fund would acquire the assets, including the
investments, and assume the liabilities of MainStay Income Manager Fund, a
series of Eclipse Funds Inc. Shareholders of MainStay Income Manager Fund
approved this reorganization on October 16, 2009, which was then completed on
October 28, 2009. The aggregate net assets of the Fund immediately before the
acquisition were $399,978,528 and the combined net assets after the acquisition
were $666,657,716.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
MAINSTAY INCOME MANAGER FUND
- -------------------------------------------------------
Investor Class 1,391,480 $ 15,304,886
- -------------------------------------------------------
Class A 3,311,840 36,385,533
- -------------------------------------------------------
Class B 1,572,885 17,070,676
- -------------------------------------------------------
Class C 717,340 7,790,170
- -------------------------------------------------------
Class I 17,166,377 190,127,923
- -------------------------------------------------------
</Table>
In exchange for the MainStay Income Manager Fund shares and net assets, the Fund
issued 1,097,321 Investor Class Shares; 2,609,124 Class A shares; 1,219,526
Class B shares; 557,265 Class C shares and 13,554,329 Class I shares.
MainStay Income Manager Fund's net assets after adjustments for any permanent
book-to-tax differences at the acquisition date were as follows, which include
the following amounts of capital stock, unrealized depreciation, accumulated net
realized loss and undistributed net investment loss:
<Table>
<Caption>
DISTRIBUTIONS
ACCUMULATED IN EXCESS OF
TOTAL NET CAPITAL UNREALIZED NET REALIZED NET INVESTMENT
ASSETS STOCK DEPRECIATION LOSS INCOME
MainStay Income Manager Fund $266,679,188 $321,505,238 $(496,554) $(54,299,460) $(30,036)
- -----------------------------------------------------------------------------------------------------------------
</Table>
In December 2007, the Financial Accounting Standards Board issued Accounting
Standards Codification (ASC) 805 (formerly FAS 141R Business Combinations),
which requires the following disclosures by the acquirer, among other things,
when a transaction or other event meets the definition of a business
combination:
- - The identification of the acquiree
- - Recognizing and measuring identifiable assets acquired and liabilities
assumed, at the acquisition date, generally at their fair values
- - Disclosure, by the acquirer, of information that enables users of its
financial statements to evaluate the nature and financial effect of a business
combination that occurs during the current reporting period
50 MainStay Income Builder Fund
ASC 805 requires prospective application to business combinations for which the
acquisition date occurs in an annual reporting period beginning on or after
December 15, 2008.
In accordance with ASC 805, for financial reporting purposes, assets received
and shares issued by the Fund were recorded at fair value; however, the cost
basis of the investments received from MainStay Income Manager Fund was carried
forward to align ongoing reporting of the Fund's realized and unrealized gains
and losses with amounts distributable to shareholders for tax purposes.
ASC 805 will require disclosure in the semi-annual report as of April 30, 2010,
and in the annual report as of October 31, 2010, of the Fund's pro-forma results
of operations, including net investment income, net gain (loss) on investments
and net increase (decrease) in net assets resulting from operations, assuming
the acquisition had been completed on November 1, 2009, the beginning of the
annual reporting period of the Fund, through the end of the applicable reporting
period.
ASC 805 also requires the Fund to report, if practicable, the amounts of revenue
and earnings of the acquiree since the acquisition date included in the combined
entity's income statement for the reporting period. Because the combined
investment portfolios have been managed as a single integrated portfolio since
the acquisition was completed, it is not practicable to separate the amounts of
revenue and earnings of the MainStay Income Manager Fund that will be included
in the Fund's Statement of Operations since November 24, 2009.
NOTE 11--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 12--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified.
mainstayinvestments.com 51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Income Builder Fund (formerly, the
MainStay Total Return Fund) ("the Fund"), one of the funds constituting The
MainStay Funds, as of October 31, 2009, 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, 2009, 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 Income Builder Fund (formerly, the MainStay Total Return Fund) of The
MainStay Funds as of October 31, 2009, 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 23, 2009
52 MainStay Income Builder Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Total Return Fund, subsequently
renamed the MainStay Income Builder Fund ("Fund"), and New York Life Investment
Management LLC ("New York Life Investments"), and the Subadvisory Agreement
between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on
behalf of the Fund.
Separately, on June 23, 2009, the Board approved New York Life Investments'
recommendation to engage Epoch Investment Partners, Inc. ("Epoch") as the co-
subadviser to the Fund along with MacKay Shields, with Epoch managing the equity
component of the Fund, and MacKay Shields (together with Epoch, the
"Subadvisers") continuing to manage the fixed income component of the Fund. The
Board approved Epoch as subadviser of the Fund in accordance with a "manager of
managers" exemptive order from the Securities and Exchange Commission ("SEC"),
which allows New York Life Investments to engage certain new subadvisers for the
Fund with Board approval, but without the approval of Fund shareholders. In
approving the subadvisory agreement with Epoch ("New Subadvisory Agreement"),(1)
the Board took into account that the shareholders of the Fund would not be asked
to vote on the New Subadvisory Agreement. In addition, the Board approved New
York Life Investments' proposal to reorganize the MainStay Income Manager Fund
with and into the Fund and to change the name of the Fund. In determining to
approve these actions, the Board took several factors into account, including
the fact that the actions would be part of a larger initiative designed to
reposition, rationalize and streamline the MainStay Group of Funds to reduce
duplication among funds, strengthen the overall fund lineup, and offer funds
with more significant asset levels.
In reaching its decisions to approve the Agreements, other than the New
Subadvisory Agreement, the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In reaching its decision to approve the New Subadvisory Agreement, the Board
considered information furnished to the Board that was prepared specifically in
connection with a special contract review process that took place at various
meetings of the Board and its Committees between April 2009 and June 2009.
Information provided to the Board in connection with the special contract review
process included information from New York Life Investments concerning the
reorganizations of several of the MainStay Funds to which Epoch was proposed to
serve as subadviser, including the Fund. The Board also considered information
regarding New York Life Investments' larger fund rationalization initiatives,
and the information regarding the nature and depth of New York Life Investments'
relationships with Epoch. The Board further considered responses from Epoch 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 determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and the
Subadvisers; (ii) the investment performance of the Fund, New York Life
Investments and MacKay Shields as subadviser to the Fund (and with respect to
Epoch, the historical investment performance of similar portfolios managed by
Epoch); (iii) the costs of the services to be provided, and profits to be
realized, by New York Life Investments and its affiliates, including MacKay
Shields, from their relationship with the Fund (and with respect to
- ----------
(1) The New Subadvisory Agreement with Epoch and the Subadvisory Agreement with
MacKay Shields may be referred to herein as the "Subadvisory Agreements" and
all of the agreements described herein may be referred to as the
"Agreements."
mainstayinvestments.com 53
Epoch, the anticipated costs of the services to be provided, and the profits
expected to be realized, by Epoch); (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
and subadvisory fee levels and overall total ordinary operating expenses,
particularly as compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the SEC concerning matters relating to the MainStay
Equity Index Fund, including materials provided to the Board of Trustees of The
MainStay Funds in 2002-2004 in connection with the annual review of that fund's
management fee. The Board noted that, since this matter was first brought to the
Board's attention in 2003, New York Life Investments had taken a number of steps
to enhance the quality and completeness of information provided to the Board in
connection with the Board's consideration of the MainStay Group of Funds'
investment advisory contracts. The Board believes that New York Life Investments
has taken appropriate actions in response to this matter.
The Board also examined the nature, extent and quality of the services that each
Subadviser proposed to provide to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund and each Subadviser's experience
in managing other portfolios. It examined each Subadviser's track record and
experience in providing investment advisory services, the experience of
investment advisory, senior management and administrative personnel at each
Subadviser, and each Subadviser's overall legal and compliance environment. The
Board also reviewed each Subadviser's willingness to invest in personnel
designed to benefit the Fund. In this regard, the Board considered the
experience of each Subadviser's portfolio managers, the number of accounts
managed by the portfolio managers and the method for compensating portfolio
managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' experience, personnel,
operations and resources, and, with respect to the New Subadvisory Agreement,
that the Fund likely would benefit from the nature, extent and quality of these
services as a result of Epoch'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 further considered
MacKay Shields' decision to focus primarily on fixed income asset management and
determined that it would be in the best interest of the Fund to retain Epoch as
subadviser of the equity portion of the Fund. With respect to the Board's
consideration of the New Subadvisory Agreement, the Board considered the
historical investment performance results of similar portfolios managed by
Epoch, as
54 MainStay Income Builder Fund
well as the strength of Epoch's resources (including research capabilities) that
may result in stronger long-term investment performance for the Fund over time.
The Board acknowledged that the Fund would be making modifications to its
principal investment strategies, investment processes, principal risks, and
primary benchmark to align it with Epoch's investment approach. The Board
particularly considered the detailed investment analytics reports in regards to
New York Life Investments and MacKay Shields provided by New York Life
Investments' Investment Consulting Group on the Fund throughout the year. These
reports, which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's investment performance, as well as discussions between
each Subadviser's portfolio managers and the Board that occurred at meetings
from time to time throughout the year and in previous years. In connection with
its consideration of the New Subadvisory Agreement, the Board took into account
its discussions with senior management and investment personnel at Epoch. The
Board also considered any specific actions that New York Life Investments had
taken, or had agreed with the Board to take, to enhance Fund investment
performance, and the results of those actions. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements that, while the Fund's
investment performance over time has been satisfactory, in the case of the New
Subadvisory Agreement, the selection of Epoch as co-subadviser to the Fund is
likely to strengthen the Fund's long-term investment performance to the benefit
of shareholders. The Fund discloses more information about investment
performance in the Portfolio Management Discussion and Analysis, Investment and
Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, the estimated costs of the
services to be provided by Epoch under the New Subadvisory Agreement, and the
profits expected to be realized by New York Life Investments and its affiliates
and Epoch due to their relationships with the Fund. Because MacKay Shields is an
affiliate of New York Life Investments whose subadvisory fees are paid directly
by New York Life Investments, the Board considered cost and profitability
information for New York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates and Epoch regarding their profitability or anticipated profitability
due to their overall relationships with the Fund. For New York Life Investments
and MacKay Shields, the Board considered information illustrating the revenues
and expenses allocated to the Fund. With respect to Epoch, the Board did not
consider specific profitability information from Epoch's relationship with the
Fund, since Epoch had not commenced its service as subadviser at the time the
Board considered its approval of the New Subadvisory Agreement. However, the
Board considered information provided by Epoch reflecting Epoch's profitability
with respect to similar mutual funds managed by Epoch, and other information
that allowed the Board to estimate the expected costs and profits of Epoch in
connection with its service as subadviser to the Fund. Because Epoch is not
affiliated with New York Life Investments, and Epoch's fees are paid directly by
New York Life Investments, the Board focused primarily on the profitability of
the relationship among New York Life Investments, its affiliates and the Fund.
mainstayinvestments.com 55
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to the Subadvisers from legally
permitted "soft-dollar" arrangements by which brokers provide or would provide
research and other services to the Subadvisers in exchange for commissions paid
by the Fund with respect to trades on the Fund's portfolio securities. With
respect to Epoch, the Board requested and received information from Epoch and
New York Life Investments concerning other business relationships between Epoch
and its affiliates, on the one hand, and New York Life Investments and its
affiliates, on the other. The Board requested and received assurances that these
other business relationships did not impact New York Life Investments'
recommendation for Epoch to serve as subadviser.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) and Epoch due to their relationships with the Fund
are fair and reasonable. With respect to Epoch, the Board considered that any
profits to be realized by Epoch due to its relationship with the Fund are the
result of arm's-length negotiations between New York Life Investments and Epoch,
and are based on subadvisory fees to be paid to Epoch by New York Life
Investments, not the Fund.
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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements, as
applicable. While recognizing that any precise determination of future economies
of scale is necessarily subjective, the Board considered the extent to which New
York Life Investments and the Subadvisers may realize a larger profit margin as
the Fund's assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to each
Subadviser are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and the Subadvisers on fees charged 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 explanations from New York Life Investments and the
Subadvisers about the different scope of
56 MainStay Income Builder Fund
services provided to retail mutual funds as compared with other investment
advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
The Board noted that, while New York Life Investments believes these efforts
have mitigated the impact that small accounts have had on share class expenses,
the recent economic crisis and resulting declines in assets under management had
further exacerbated the impact that small accounts have on the expense ratios of
certain share classes. This, in turn, had led to a significant increase in the
amount of share class expenses that New York Life Investments subsidized under
historical contractual expense limitation arrangements. New York Life
Investments advised the Board that the amount of subsidization of the MainStay
Group of Funds' expenses under these expense limitation arrangements was
unsustainable. New York Life Investments accordingly asked the Board to
eliminate the expense limitation arrangements on the Fund's share classes. In
reviewing New York Life Investments' proposal, the Board noted that, if the
Board were to approve the proposal, the effect would mean New York Life
Investments would continue to subsidize the MainStay Group of Funds' expenses at
approximately the same level (in real dollars) as under the historical
contractual expense limitation arrangements prior to the recent economic crisis.
The Board further considered the reasonableness of the Fund's expenses as
compared to peer funds under the proposal.
After considering all of the factors outlined above--including the
reasonableness of the Fund's management fee, share class structure and transfer
agent fee schedule--the Board accepted New York Life Investments' proposal to
eliminate the expense limitations on the Fund's share classes. The Board
acknowledged that New York Life Investments may determine voluntarily to waive
expenses of Fund share classes without the right to recoup such expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements and the New Subadvisory Agreement.
mainstayinvestments.com 57
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$2,584,336 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, 2009,
should be multiplied by 56.5% to arrive at the amount eligible for qualified
interest income and 28.6% for the corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND
PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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
MainStay Investments 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).
58 MainStay Income Builder Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 59
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
60 MainStay Income Builder Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 61
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
62 MainStay Income Builder Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t -- Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 63
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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA insured Not a Deposit May lose value
</Table>
<Table>
<Caption>
- ------------------------------------------------------
No Bank Guarantee No Insured by Any Government Agency
- ------------------------------------------------------
</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
The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A017256 (RECYCLE LOGO) MS283-09 MSIB11-12/09
14
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 21
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 28
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT 29
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 34
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 34
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 34
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 35
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 0.04% -5.26% -4.13%
Excluding sales charges 5.87 -4.18 -3.59
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2500(R) RUSSELL 2000(R)
FUND INDEX GROWTH INDEX
-------------- --------------- ---------------
10/31/99 9450 10000 10000
12091 12327 11616
7248 10828 7957
6009 9838 6241
8016 13940 9146
8118 15660 9652
8898 17994 10705
9797 21176 12532
10339 23867 14629
6194 14973 9089
10/31/09 6557 16958 10120
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
With sales charges 0.22% -5.22% -4.12%
Excluding sales charges 6.06 -4.14 -3.57
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2500(R) RUSSELL 2000(R)
FUND INDEX GROWTH INDEX
-------------- --------------- ---------------
10/31/99 23625 25000 25000
30227 30818 29041
18120 27069 19893
15023 24596 15602
20041 34850 22866
20294 39151 24130
22244 44984 26763
24493 52940 31331
25848 59668 36571
15485 37432 22722
10/31/09 16423 42395 25299
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
With sales charges 0.21% -5.28% -4.32%
Excluding sales charges 5.21 -4.90 -4.32
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2500(R) RUSSELL 2000(R)
FUND INDEX GROWTH INDEX
-------------- --------------- ---------------
10/31/99 10000 10000 10000
12694 12327 11616
7549 10828 7957
6216 9838 6241
8224 13940 9146
8269 15660 9652
8996 17994 10705
9831 21176 12532
10297 23867 14629
6114 14973 9089
10/31/09 6433 16958 10120
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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 were contractual. Under
the expense limitation agreement in effect beginning on August 1, 2009, the
Manager was permitted to recoup the amount of certain management fee waivers
or expense reimbursements from the Fund if such action did not cause the Fund
to exceed existing expense limitations and the recoupment was made within the
term of the agreement. This agreement was set to expire on July 31, 2010.
Effective November 24, 2009, the Fund merged with and into MainStay Small
Company Value Fund.
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--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
With sales charges 4.10% -4.90% -4.32%
Excluding sales charges 5.10 -4.90 -4.32
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2500(R) RUSSELL 2000(R)
FUND INDEX GROWTH INDEX
-------------- --------------- ---------------
10/31/99 10000 10000 10000
12694 12327 11616
7549 10828 7957
6216 9838 6241
8224 13940 9146
8269 15660 9652
8996 17994 10705
9831 21176 12532
10303 23867 14629
6121 14973 9089
10/31/09 6433 16958 10120
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------
6.64% -3.69% -3.22%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2500(R) RUSSELL 2000(R)
FUND INDEX GROWTH INDEX
-------------- --------------- ---------------
10/31/99 10000 10000 10000
12826 12327 11616
7708 10828 7957
6407 9838 6241
8568 13940 9146
8698 15660 9652
9558 17994 10705
10571 21176 12532
11225 23867 14629
6759 14973 9089
10/31/09 7208 16958 10120
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell 2500(TM) Index(4) 13.26% 1.61% 5.42%
Russell 2000(R) Growth Index(5) 11.34 0.95 0.12
Average Lipper small-cap growth fund(6) 13.12 0.06 1.35
</Table>
2. Performance figures for Investor Class shares, first offered to the public 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 I shares, first offered to the public on May
31, 2006, include the historical performance of Class A shares through May
30, 2006, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. Russell 2500(TM) Index is an unmanaged index that measures the performance of
the small to mid-cap segment of the U.S. equity universe. The Russell 2500(R)
Index is a subset of the Russell 3000(R) Index. It includes approximately
2500 of the smallest securities based on a combination of their market cap
and current index membership. The Fund selected the Russell 2500(TM) Index as
its primary benchmark in replacement of the Russell 2000(R) Growth Index
because the Fund believed it to be more reflective of the Funds' investment
style.
5. The Russell 2000(R) Growth Index measures the performance of those Russell
2000(R) Index companies with higher price-to-book ratios and higher
forecasted growth values. Total returns assume reinvestment of all dividends
and capital gains. The Russell 2000(R) Index measures the performance of the
2,000 smallest companies in the Russell 3000(R) Index, which, in turn,
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Results assume the reinvestment of all income and
capital gains. An investment cannot be made directly in an index.
6. The average Lipper small-cap growth fund is representative of funds that, by
portfolio practice, invest at least 75% of their equity assets in companies
with market capitalizations (on a three-year weighted basis) below Lipper's
U.S. Diversified Equity small-cap ceiling. Small-cap growth funds typically
have an above-average price-to-earnings ratio, price-to-book ratio, and
three-year sales-per-share growth value, compared to the S&P SmallCap 600
Index. This benchmark is a product of Lipper Inc. 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 Growth Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP GROWTH FUND
(UNAUDITED)
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,137.40 $ 8.51 $1,017.20 $ 8.03
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,139.50 $ 7.98 $1,017.70 $ 7.53
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,133.70 $12.53 $1,013.50 $11.83
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,133.70 $12.53 $1,013.50 $11.83
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,142.10 $ 5.02 $1,020.50 $ 4.74
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.58% for Investor Class, 1.48% for Class A, 2.33% for Class B and Class C
and 0.93% for Class I) multiplied by the average account value over the
period, divided by 365 and multiplied by 184 (to reflect the one-half year
period). The table above represents the actual expenses incurred during the
one-half year period.
mainstayinvestments.com 7
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Insurance 7.4%
Health Care Equipment & Supplies 5.8
Software 5.4
Household Durables 5.1
Chemicals 4.9
Thrifts & Mortgage Finance 4.9
Specialty Retail 4.8
Multi-Utilities 4.7
Capital Markets 4.1
Commercial Banks 4.0
Machinery 3.4
Aerospace & Defense 3.0
Electric Utilities 3.0
Health Care Providers & Services 2.9
Wireless Telecommunication Services 2.8
Communications Equipment 2.6
Containers & Packaging 2.6
Electronic Equipment & Instruments 2.6
Pharmaceuticals 2.4
Real Estate Investment Trusts 2.2
Energy Equipment & Services 2.1
Gas Utilities 2.0
Distributors 1.8
IT Services 1.6
Biotechnology 1.4
Professional Services 1.4
Diversified Consumer Services 1.3
Road & Rail 1.3
Household Products 1.2
Textiles, Apparel & Luxury Goods 1.1
Food Products 1.0
Oil, Gas & Consumable Fuels 1.0
Semiconductors & Semiconductor
Equipment 0.8
Building Products 0.5
Electrical Equipment 0.5
Auto Components 0.3
Hotels, Restaurants & Leisure 0.1
Short-Term Investment 2.4
Liabilities in Excess of Other
Assets (0.4)
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Silgan Holdings, Inc.
2. Washington Federal, Inc.
3. Sybase, Inc.
4. Tupperware Brands Corp.
5. Ventas, Inc.
6. Endo Pharmaceuticals Holdings, Inc.
7. Federated Investors, Inc. Class B
8. Platinum Underwriters Holdings, Ltd.
9. Waddell & Reed Financial, Inc. Class A
10. Vectren Corp.
</Table>
8 MainStay Small Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY MACKAY SHIELDS LLC (MACKAY SHIELDS), THE FUND'S FORMER
SUBADVISOR, AND DAVID PEARL, CFA, WILLIAM PRIEST, CFA AND MICHAEL WELHOELTER,
CFA, OF EPOCH INVESTMENT PARTNERS, INC. (EPOCH), THE FUND'S SUBADVISOR.(1)
HOW DID MAINSTAY SMALL CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Small Cap Growth Fund returned 5.87% for
Investor Class shares, 6.06% for Class A shares, 5.21% for Class B shares and
5.10% for Class C shares for the 12 months ended October 31, 2009. Over the same
period, Class I shares returned 6.64%. All share classes underperformed the
13.12% return of the average Lipper(2) small-cap growth fund and the 13.26%
return of the Russell 2500(TM) Index(3) for the 12 months ended October 31,
2009. All share classes underperformed the 11.34% return of the Russell 2000(R)
Growth Index(4) for the same period. The Russell 2500(TM) 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 OR
INVESTMENT APPROACH DURING THE REPORTING PERIOD?
In connection with a larger initiative by MacKay Shields to reposition and
rationalize its investment capabilities, the Fund's Board of Trustees approved
the replacement of MacKay Shields with Epoch as the Subadvisor to the Fund,
effective June 29, 2009. For the period from November 1, 2008, to June 28, 2009,
the Fund's performance figures referenced above reflect the performance of the
Fund while it was managed by its former subadvisor, MacKay Shields.
On June 23, 2009, the Fund's Board of Trustees approved the reorganization of
the Fund with and into MainStay Small Company Value Fund, which was approved by
Fund shareholders on November 16, 2009. Effective August 14, 2009, the Fund's
primary benchmark index changed from the Russell 2000(R) Growth Index to the
Russell 2500(TM) Index. Effective September 8, 2009, the Fund amended its
principal risks and changed its principal investment strategy and investment
process to more closely align them with those of MainStay Small Company Value
Fund. Effective October 30, 2009, MainStay Small Company Value Fund's name was
changed to MainStay U.S. Small Cap Fund.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE STRONG CONTRIBUTIONS TO THE
FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS DETRACTED?
For the first eight months of the reporting period, the Fund compared itself to
the Russell 2000(R) Growth Index. Favorable stock selection in the energy and
consumer discretionary sectors helped strengthen the Fund's performance relative
this benchmark.
On the other hand, stock selection in the health care, information technology
and consumer staples sectors detracted from the Fund's performance relative to
the Russell 2000(R) Growth Index. An overweight position in industrials also
detracted from the Fund's performance relative to the benchmark during the first
eight months of the reporting period.
During the last four months of the reporting period, the strongest positive
contributions to the Fund's performance relative to the Russell 2500(TM) Index
(the Fund's benchmark Index for most of this portion of the period) came from
the financials and utilities sectors. In the financials sector, an underweight
position relative to the benchmark detracted slightly from the Fund's relative
performance, however, this was more than offset by strong stock selection within
the sector. In the utility sector, the Fund added a number of new securities and
moved from an underweight position to an overweight position relative to the
Russell 2500(TM) Index.
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. Stocks of
small-capitalization companies may be subject to more price volatility,
significantly lower trading volumes, cyclical, static, or moderate growth
prospects and greater spreads between bid and ask prices than stocks of larger
companies. Small-capitalization companies may be more vulnerable to adverse
business or market developments than large-capitalization companies. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings show an absolute
increase. Growth company stocks also typically lack the dividend yield that can
cushion stock prices in market downturns. The Fund's use of securities lending
presents the risk of default by the borrower, which may result in a loss to the
Fund.
1. During the reporting period, New York Life Investments delegated day-to-day
portfolio management responsibilities to MacKay Shields from November 1,
2008, to June 29, 2009, and to Epoch Investment Partners beginning on June
29, 2009. MacKay Shields is an affiliate of New York Life Investments. "New
York Life Investments" is a service mark used by New York Life Investment
Management LLC.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Russell 2500(TM) Index.
4. See footnote on page 6 for more information on the Russell 2000(R) Index.
mainstayinvestments.com 9
On the other hand, stock selection in the industrials, information technology
and consumer staples sectors detracted from the Fund's performance relative to
the Russell 2500(TM) Index during the last four months of the reporting period.
Specifically, stock selection within these sectors was negative and the Fund's
overweight position in information technology and underweight position in
consumer staples detracted from the Fund's performance relative to its
benchmark.
WHICH INDIVIDUAL STOCKS WERE STRONG PERFORMERS DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, the Fund saw strong
performance from health care information systems supplier Quality Systems,
electric utility contractor Quanta Services and online-travel service provided
Priceline.com.
During the last four months of the reporting period, top performers included
packaging and container company Tupperware Brands and apparel companies Guess?
and Warnaco. Each of these stocks posted positive returns.
WHICH INDIVIDUAL STOCKS LOST GROUND DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, telecommunication
services provider NTELOS Holdings, personal products manufacturer Chattem and
pawnshop and payday-lending store operator Cash America International were among
the stocks that detracted from the Fund's performance.
During the last four months of the reporting period, the Fund's weakest
performers included oil and gas marine services company Cal Dive International,
homebuilder KB Homes and semiconductor manufacturer MEMC Electronic Materials,
all of which experienced price declines.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, the Fund established new
positions in several companies, including fertilizer and seed company Scotts
Miracle-Gro and brokerage firm Stifel Financial. Over the same period, the Fund
sold positions in Cash America International, oil and gas exploration company
Penn Virginia and biotechnology firm Biomarin Pharmaceutical.
During the last four months of the reporting period, the Fund established new
positions in several stocks, including asset managers Federated Investors and
Waddell & Reed Financial, as well as insurance companies where prices were
firming, including Hanover Insurance Group and Arthur J. Gallagher & Co. The
Fund continued to focus on financial companies with strong capital bases or
those with excess capital. The Fund also initiated positions in video game
retailer GameStop and packaging and container company Tupperware Brands.
During the last four months of the reporting period, the Fund sold positions in
several industrial stocks, including machinery company Bucyrus International,
airfreight company HUB Group and specialty contracting company Quanta Services.
HOW DID YOU CHANGE THE FUND'S SECTOR WEIGHTINGS DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, the Fund increased its
weightings in the consumer discretionary, financials and materials sectors. Over
the same period, the Fund decreased its weightings in the health care, consumer
staples and industrials sectors.
During the last four months of the reporting period, the Fund increased its
weighting in the financials sector from a significant underweight to a modest
overweight relative to the Russell 2500(TM) Index. The Fund decreased its
weighting in the industrials sector, moving from an overweight position relative
to the benchmark to an underweight position. The Fund also reduced its weighting
in the information technology sector, moving from an overweight to an
underweight position relative to the Russell 2500(TM) Index.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund was modestly overweight relative to the Russell
2500(TM) Index in the utilities, financials and telecommunication services
sectors. As of the same date, the Fund was modestly underweight in the energy,
industrials and information technology sectors. The Fund pursued companies with
solid cash flow and strong management. Diversification was emphasized, but the
Fund focused on economic drivers and bottom-up stock selection more than
sectors.
- ----------
The opinions expressed are those of the responders 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 Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 98.0%+
- --------------------------------------------------------------
AEROSPACE & DEFENSE 3.0%
Alliant Techsystems, Inc. (a) 16,000 $ 1,244,480
Curtiss-Wright Corp. 26,100 778,302
Hexcel Corp. (a) 50,700 557,700
-------------
2,580,482
-------------
AUTO COMPONENTS 0.3%
WABCO Holdings, Inc. 9,228 218,888
-------------
BIOTECHNOLOGY 1.4%
Alkermes, Inc. (a) 92,550 737,624
Onyx Pharmaceuticals, Inc. (a) 17,850 474,810
-------------
1,212,434
-------------
BUILDING PRODUCTS 0.5%
Masco Corp. 35,850 421,238
-------------
CAPITAL MARKETS 4.1%
V Federated Investors, Inc.
Class B 68,050 1,786,312
V Waddell & Reed Financial,
Inc. Class A 62,500 1,753,750
-------------
3,540,062
-------------
CHEMICALS 4.9%
International Flavors &
Fragrances, Inc. 24,050 916,065
Methanex Corp. 66,650 1,143,047
Nalco Holding Co. 52,400 1,108,260
Sensient Technologies Corp. 38,800 981,252
-------------
4,148,624
-------------
COMMERCIAL BANKS 4.0%
Investors Bancorp, Inc. (a) 99,350 1,076,954
Sterling Bancshares, Inc. 83,500 465,095
Texas Capital Bancshares, Inc.
(a) 35,550 517,963
UMB Financial Corp. 33,500 1,332,295
-------------
3,392,307
-------------
COMMUNICATIONS EQUIPMENT 2.6%
3Com Corp. (a) 209,150 1,075,031
ADC Telecommunications, Inc.
(a) 103,700 673,013
Harmonic, Inc. (a) 90,450 474,863
-------------
2,222,907
-------------
CONTAINERS & PACKAGING 2.6%
V Silgan Holdings, Inc. 41,900 2,252,125
-------------
DISTRIBUTORS 1.8%
Genuine Parts Co. 43,400 1,518,566
-------------
DIVERSIFIED CONSUMER SERVICES 1.3%
Service Corp. International 160,550 1,102,979
-------------
ELECTRIC UTILITIES 3.0%
DPL, Inc. 44,150 1,118,761
Westar Energy, Inc. 77,350 1,481,252
-------------
2,600,013
-------------
ELECTRICAL EQUIPMENT 0.5%
Woodward Governor Co. 18,552 436,158
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 2.6%
DTS, Inc. (a) 48,117 1,359,305
Jabil Circuit, Inc. 61,750 826,215
-------------
2,185,520
-------------
ENERGY EQUIPMENT & SERVICES 2.1%
Cal Dive International, Inc.
(a) 128,050 983,424
SEACOR Holdings, Inc. (a) 10,148 824,728
-------------
1,808,152
-------------
FOOD PRODUCTS 1.0%
Corn Products International,
Inc. 31,250 880,625
-------------
GAS UTILITIES 2.0%
ONEOK, Inc. 47,300 1,712,733
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 5.8%
Haemonetics Corp. (a) 19,150 986,225
Inverness Medical Innovations,
Inc. (a) 33,450 1,271,434
SonoSite, Inc. (a) 57,450 1,424,185
Teleflex, Inc. 25,050 1,246,238
-------------
4,928,082
-------------
HEALTH CARE PROVIDERS & SERVICES 2.9%
Bio-Reference Laboratories,
Inc. (a) 23,750 767,837
DaVita, Inc. (a) 32,100 1,702,263
-------------
2,470,100
-------------
HOTELS, RESTAURANTS & LEISURE 0.1%
Multimedia Games, Inc. (a) 11,853 58,198
-------------
HOUSEHOLD DURABLES 5.1%
KB Home 101,800 1,443,524
Ryland Group, Inc. (The) 56,300 1,044,365
V Tupperware Brands Corp. 41,750 1,879,585
-------------
4,367,474
-------------
HOUSEHOLD PRODUCTS 1.2%
Church & Dwight Co., Inc. 18,500 1,052,280
-------------
INSURANCE 7.4%
Arthur J. Gallagher & Co. 67,200 1,499,232
Hanover Insurance Group, Inc.
(The) 32,200 1,354,654
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding short-
term investment. 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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
INSURANCE (CONTINUED)
V Platinum Underwriters
Holdings, Ltd. 49,900 $ 1,784,923
Validus Holdings, Ltd. 67,950 1,719,135
-------------
6,357,944
-------------
IT SERVICES 1.6%
NeuStar, Inc. Class A (a) 60,050 1,387,155
-------------
MACHINERY 3.4%
Actuant Corp. Class A 38,600 602,546
Kennametal, Inc. 42,000 989,520
Wabtec Corp. 35,250 1,295,790
-------------
2,887,856
-------------
MULTI-UTILITIES 4.7%
CMS Energy Corp. 79,950 1,063,335
NSTAR 39,800 1,231,810
V Vectren Corp. 76,300 1,719,802
-------------
4,014,947
-------------
OIL, GAS & CONSUMABLE FUELS 1.0%
Southern Union Co. 44,050 862,059
-------------
PHARMACEUTICALS 2.4%
Auxilium Pharmaceuticals, Inc.
(a) 7,300 229,658
V Endo Pharmaceuticals
Holdings, Inc. (a) 81,700 1,830,080
-------------
2,059,738
-------------
PROFESSIONAL SERVICES 1.4%
FTI Consulting, Inc. (a) 6,650 271,387
IHS, Inc. Class A (a) 17,900 926,504
-------------
1,197,891
-------------
REAL ESTATE INVESTMENT TRUSTS 2.2%
V Ventas, Inc. 45,950 1,843,974
-------------
ROAD & RAIL 1.3%
Genesee & Wyoming, Inc. Class
A (a) 39,600 1,148,796
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.8%
MEMC Electronic Materials,
Inc. (a) 52,300 649,566
-------------
SOFTWARE 5.4%
Rovi Corp. (a) 28,200 776,910
Solera Holdings, Inc. 38,300 1,234,026
V Sybase, Inc. (a) 52,550 2,078,878
THQ, Inc. (a) 91,600 479,068
-------------
4,568,882
-------------
SPECIALTY RETAIL 4.8%
Aeropostale, Inc. (a) 21,150 793,759
GameStop Corp. Class A (a) 52,350 1,271,581
Guess?, Inc. 37,300 1,363,315
PetSmart, Inc. 27,450 645,899
-------------
4,074,554
-------------
TEXTILES, APPAREL & LUXURY GOODS 1.1%
Warnaco Group, Inc. (The) (a) 23,850 966,641
-------------
THRIFTS & MORTGAGE FINANCE 4.9%
First Niagara Financial Group,
Inc. 97,900 1,257,036
Hudson City Bancorp, Inc. 59,650 783,801
V Washington Federal, Inc. 126,200 2,164,330
-------------
4,205,167
-------------
WIRELESS TELECOMMUNICATION SERVICES 2.8%
NTELOS Holdings Corp. 48,800 736,880
Syniverse Holdings, Inc. (a) 95,250 1,631,632
-------------
2,368,512
-------------
Total Common Stocks
(Cost $85,845,757) 83,703,629
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 2.4%
- --------------------------------------------------------------
REPURCHASE AGREEMENT 2.4%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$2,069,540 (Collateralized
by a United States Treasury
Bill with a rate of 0.105%
and a maturity date of
3/18/10, with a Principal
Amount of $2,115,000 and a
Market Value of $2,114,154) $2,069,538 2,069,538
-------------
Total Short-Term Investment
(Cost $2,069,538) 2,069,538
-------------
Total Investments
(Cost $87,915,295) (b) 100.4% 85,773,167
Liabilities in Excess of
Other Assets (0.4) (305,230)
----- ------------
Net Assets 100.0% $ 85,467,937
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) At October 31, 2009, cost is $87,965,014
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 3,971,495
Gross unrealized depreciation (6,163,342)
-----------
Net unrealized depreciation $(2,191,847)
===========
</Table>
12 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $83,703,629 $ -- $ -- $83,703,629
Short-Term Investment
Repurchase Agreement -- 2,069,538 -- 2,069,538
----------- ---------- ----- -----------
Total Investments in Securities $83,703,629 $2,069,538 $-- $85,773,167
=========== ========== ===== ===========
</Table>
At October 31, 2009, the Portfolio did not hold any investments with
significant unobservable inputs (Level 3).
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $87,915,295) $ 85,773,167
Receivables:
Investment securities sold 850,695
Manager (See Note 3) 87,324
Dividends and interest 52,101
Fund shares sold 24,110
------------
Total assets 86,787,397
------------
LIABILITIES:
Payables:
Investment securities purchased 907,475
Transfer agent (See Note 3) 133,287
Shareholder communication 109,538
Professional fees 81,932
Fund shares redeemed 44,294
NYLIFE Distributors (See Note 3) 34,252
Custodian 3,015
Trustees 369
Accrued expenses 5,298
------------
Total liabilities 1,319,460
------------
Net assets $ 85,467,937
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 79,518
Additional paid-in capital 173,072,124
------------
173,151,642
Accumulated net realized loss on
investments (85,541,576)
Net unrealized depreciation on
investments (2,142,129)
------------
Net assets $ 85,467,937
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 31,645,100
============
Shares of beneficial interest
outstanding 2,873,106
============
Net asset value per share
outstanding $ 11.01
Maximum sales charge (5.50% of
offering price) 0.64
------------
Maximum offering price per share
outstanding $ 11.65
============
CLASS A
Net assets applicable to
outstanding shares $ 25,224,665
============
Shares of beneficial interest
outstanding 2,287,310
============
Net asset value per share
outstanding $ 11.03
Maximum sales charge (5.50% of
offering price) 0.64
------------
Maximum offering price per share
outstanding $ 11.67
============
CLASS B
Net assets applicable to
outstanding shares $ 22,193,625
============
Shares of beneficial interest
outstanding 2,199,607
============
Net asset value and offering price
per share outstanding $ 10.09
============
CLASS C
Net assets applicable to
outstanding shares $ 2,203,319
============
Shares of beneficial interest
outstanding 218,375
============
Net asset value and offering price
per share outstanding $ 10.09
============
CLASS I
Net assets applicable to
outstanding shares $ 4,201,228
============
Shares of beneficial interest
outstanding 373,425
============
Net asset value and offering price
per share outstanding $ 11.25
============
</Table>
14 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 395,299
Interest 3,229
------------
Total income 398,528
------------
EXPENSES:
Manager (See Note 3) 832,943
Transfer agent--Investor Class
(See Note 3) 264,716
Transfer agent--Class A (See Note
3) 119,958
Transfer agent--Classes B and C
(See Note 3) 231,242
Transfer agent--Class I (See Note
3) 21,040
Distribution/Service--Investor
Class (See Note 3) 70,430
Distribution/Service--Class A
(See Note 3) 58,440
Service--Class B (See Note 3) 56,599
Service--Class C (See Note 3) 4,969
Distribution--Class B (See Note
3) 169,796
Distribution--Class C (See Note
3) 14,906
Shareholder communication 159,031
Professional fees 111,944
Registration 86,931
Custodian 10,006
Trustees 3,832
Miscellaneous 14,993
------------
Total expenses before waiver 2,231,776
Expense waiver from Manager (See
Note 3) (828,770)
------------
Net expenses 1,403,006
------------
Net investment loss (1,004,478)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investments (13,973,560)
Net change in unrealized
depreciation on investments 19,134,837
------------
Net realized and unrealized gain on
investments 5,161,277
------------
Net increase in net assets
resulting from operations $ 4,156,799
============
</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
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (1,004,478) $ (1,793,109)
Net realized loss on
investments (13,973,560) (28,461,448)
Net change in unrealized
appreciation (depreciation)
on investments 19,134,837 (36,531,508)
---------------------------
Net increase (decrease) in
net assets resulting from
operations 4,156,799 (66,786,065)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 10,739,116 25,100,759
Cost of shares redeemed (19,722,822) (53,978,389)
---------------------------
Decrease in net assets
derived from capital
share transactions (8,983,706) (28,877,630)
---------------------------
Net decrease in net
assets (4,826,907) (95,663,695)
NET ASSETS:
Beginning of year 90,294,844 185,958,539
---------------------------
End of year $ 85,467,937 $ 90,294,844
===========================
</Table>
16 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
----------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
----------------------------
2009 2008
Net asset value at
beginning of period $ 10.40 $ 14.59
------- -------
Net investment loss (0.11)(a) (0.10)(a)
Net realized and
unrealized gain (loss)
on investments 0.72 (4.09)
------- -------
Total from investment
operations 0.61 (4.19)
------- -------
Net asset value at end of
period $ 11.01 $ 10.40
======= =======
Total investment return
(b) 5.87% (28.72%)(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.07%) (1.11%)++
Net expenses 1.58% 1.58% ++
Expenses (before waiver) 2.71% 2.13% ++
Portfolio turnover rate 131% 75%
Net assets at end of
period (in 000's) $31,645 $28,513
</Table>
<Table>
<Caption>
CLASS B
-----------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 9.59 $ 16.15 $ 15.42 $ 14.11 $ 12.97
------- ------- ------- -------- --------
Net investment loss (0.17)(a) (0.24)(a) (0.29) (0.28) (0.25)
Net realized and
unrealized gain (loss)
on investments 0.67 (6.32) 1.02 1.59(d) 1.39
------- ------- ------- -------- --------
Total from investment
operations 0.50 (6.56) 0.73 1.31 1.14
------- ------- ------- -------- --------
Net asset value at end of
period $ 10.09 $ 9.59 $ 16.15 $ 15.42 $ 14.11
======= ======= ======= ======== ========
Total investment return
(b) 5.21% (40.62%) 4.73% 9.28% (c)(d)8.79%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.85%) (1.76%) (1.81%) (1.83%) (1.78%)
Net expenses 2.33% 2.28% 2.23% 2.23% 2.40%
Expenses (before waiver) 3.46% 2.79% 2.62% 2.69% (c) 2.69%
Portfolio turnover rate 131% 75% 95% 29% 57%
Net assets at end of
period (in 000's) $22,194 $28,207 $79,865 $109,872 $159,380
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(c) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(e) Total return is not annualized.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
Class A
- --------------------------------------------------------------
Year ended October 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
$ 10.40 $ 17.36 $ 16.44 $ 14.94 $ 13.63
------- ------- ------- -------- -------
(0.10)(a) (0.14)(a) (0.18) (0.18) (0.15)
0.73 (6.82) 1.10 1.68 (d) 1.46
------- ------- ------- -------- -------
0.63 (6.96) 0.92 1.50 1.31
------- ------- ------- -------- -------
$ 11.03 $ 10.40 $ 17.36 $ 16.44 $ 14.94
======= ======= ======= ======== =======
6.06% (40.09%) 5.53% 10.11% (c)(d) 9.61%
(0.98%) (0.95%) (1.07%) (1.09%) (1.03%)
1.48% 1.48% 1.48% 1.48% 1.65%
2.28% 1.91% 1.87% 1.94% (c) 1.94%
131% 75% 95% 29% 57%
$25,225 $27,388 $96,968 $107,078 $68,981
</Table>
<Table>
<Caption>
Class C
- ---------------------------------------------------------
Year ended October 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 9.59 $ 16.15 $15.42 $14.11 $12.97
------ ------- ------ ------ ------
(0.16)(a) (0.24)(a) (0.29) (0.28) (0.25)
0.66 (6.32) 1.02 1.59 (d) 1.39
------ ------- ------ ------ ------
0.50 (6.56) 0.73 1.31 1.14
------ ------- ------ ------ ------
$10.09 $ 9.59 $16.15 $15.42 $14.11
====== ======= ====== ====== ======
5.21% (f)(40.59%) 4.80% 9.28% (c)(d) 8.79%
(1.83%) (1.77%) (1.81%) (1.83%) (1.78%)
2.33% 2.28% 2.23% 2.23% 2.40%
3.46% 2.79% 2.62% 2.69% (c) 2.69%
131% 75% 95% 29% 57%
$2,203 $ 2,238 $5,382 $6,725 $7,236
</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>
CLASS I
------------------------------------------------------------
MAY 31,
2006**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------------------------
2009 2008 2007 2006
Net asset value at
beginning of period $10.55 $ 17.52 $16.50 $16.60
------ ------- ------ ------
Net investment loss (0.04)(a) (0.06)(a) (0.08) (0.02)
Net realized and
unrealized gain (loss)
on investments 0.74 (6.91) 1.10 (0.08)(d)
------ ------- ------ ------
Total from investment
operations 0.70 (6.97) 1.02 (0.10)
------ ------- ------ ------
Net asset value at end of
period $11.25 $ 10.55 $17.52 $16.50
====== ======= ====== ======
Total investment return
(b) 6.64% (39.78%) 6.18% (0.60%)(c)(d)(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.43%) (0.42%) (0.48%) (0.32%)++
Net expenses 0.93% 0.93% 0.90% 0.77% ++
Expenses (before waiver) 2.03% 1.48% 1.30% 1.43% ++(c)
Portfolio turnover rate 131% 75% 95% 29%
Net assets at end of
period (in 000's) $4,201 $ 3,949 $3,744 $ 535
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(c) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(e) Total return is not annualized.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
20 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Small Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares and Class B
shares commenced operations on June 1, 1998. Class C shares commenced operations
on September 1, 1998. Class I shares commenced operations on May 31, 2006.
Investor Class shares commenced operations on February 28, 2008. Investor Class
and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I shares are offered at NAV and 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 and
service 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.
Effective at the opening of the U.S. financial markets on June 29, 2009, the
Fund's Board of Trustees appointed Epoch Investment Partners, Inc. as
subadvisor. Effective August 14, 2009, the Fund amended its principal risks and
changed its primary benchmark index. Effective September 8, 2009, the Fund
changed its principal investment strategy, and investment process.
The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in securities of small-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). 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. Investments
in other mutual funds are valued at their NAVs as of the close of the New York
Stock Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. Unobservable inputs
are inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the information available in the circumstances. The inputs or
methodology used for valuing securities may not be an indication of the risks
associated with investing in those securities. The three-tier hierarchy of
inputs is summarized in the three broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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 securities
purchased, other than short-term investments, 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
investments 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
22 MainStay Small Cap Growth Fund
allocated to separate classes of shares pro rata based upon their relative NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(I) 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 AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. Effective prior to the opening of the U.S. financial markets on June 29,
2009, the Fund's Board of Trustees terminated MacKay Shields LLC as Subadvisor.
Epoch Investment Partners, Inc. (the "Subadvisor"), a registered investment
adviser, now serves as Subadvisor to the Fund and is responsible for the day-to-
day portfolio management of the Fund. Pursuant to the terms of a Subadvisory
Agreement ("Subadvisory Agreement") between New York Life Investments and the
Subadvisor, New York Life Investments pays for the services of the Subadvisor.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between New York Life Investments
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and the Subadvisor, New York Life Investments pays for the services of the
Subadvisor.
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:
1.00% on assets up to $1 billion and 0.95% on assets in excess of $1 billion,
plus a fee for fund accounting services previously provided by New York Life
Investments under a separate fund accounting agreement. The Manager has
contractually agreed to waive a portion of its management fee so that the
management fee does not exceed 0.85% on assets up to $1 billion and 0.80% on
assets in excess of $1 billion.
Effective August 1, 2009, New York Life Investments 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, 1.58%; Class A, 1.48%; Class B, 2.33%; Class C, 2.33%
and Class I, 0.93%.
Prior to August 1, 2009, New York Investments had written expense limitation
agreements that set the expense limitations for Investor Class, Class A, Class
B, Class C and Class I shares at the same levels as the August 1, 2009
agreement.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $832,943 and waived expenses in the amount of
$828,770.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has
entered into a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund
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 Investor Class and Class A shares at an annual
rate of 0.25% of the average daily net assets of the Investor Class and Class A
shares for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, Class B and Class C shares of the
Fund pay the Distributor a monthly distribution fee at an 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 an annual rate of 0.25% of the average daily NAV 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 was $10,969
and $3,992, respectively for the year ended October 31, 2009. 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 $106, $82,
$38,487 and $130 respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $636,956.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 214 0.0%++
- ----------------------------------------------------
Class C 116 0.0++
- ----------------------------------------------------
Class I 1,675,725 39.9
- ----------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life
24 MainStay Small Cap Growth Fund
Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $3,807.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(85,491,858) $-- $(2,191,847) $(87,683,705)
- -------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income, accumulated net
realized loss on investments and additional paid in capital arising from
permanent differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$1,004,478 $34,095,314 $(35,099,792)
- -------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to net operating losses and
expiration of capital loss carryforwards.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $85,491,858 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2010 $40,252
2011 2,925
2016 28,281
2017 14,034
- ------------------------------------
Total $85,492
- ------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $101,109 and $103,532, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 242,640 $ 2,370,658
Shares redeemed (466,791) (4,516,513)
-----------------------
Net decrease in shares
outstanding before
conversion (224,151) (2,145,855)
Shares converted into
Investor Class (See Note 1) 455,011 4,106,072
Shares converted from
Investor Class (See Note 1) (100,365) (1,091,861)
-----------------------
Net increase 130,495 $ 868,356
=======================
Period ended October 31, 2008
(a):
Shares sold 679,594 $ 9,954,840
Shares redeemed (416,825) (5,766,337)
-----------------------
Net increase in shares
outstanding before
conversion 262,769 4,188,503
Shares converted into
Investor Class (See Note 1) 2,614,981 36,266,582
Shares converted from
Investor Class (See Note 1) (135,139) (1,872,553)
-----------------------
Net increase 2,742,611 $38,582,532
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 370,483 $ 3,546,939
Shares redeemed (805,576) (7,742,258)
-------------------------
Net decrease in shares
outstanding before
conversion (435,093) (4,195,319)
Shares converted into Class
A
(See Note 1) 229,136 2,318,670
Shares converted from Class
A
(See Note 1) (140,685) (1,226,917)
-------------------------
Net decrease (346,642) $ (3,103,566)
=========================
Year ended October 31, 2008:
Shares sold 468,718 $ 6,724,597
Shares redeemed (1,976,844) (28,889,038)
-------------------------
Net decrease in shares
outstanding before
conversion (1,508,126) (22,164,441)
Shares converted into Class
A
(See Note 1) 694,188 10,188,477
Shares converted from Class
A
(See Note 1) (2,138,924) (29,396,808)
-------------------------
Net decrease (2,952,862) $(41,372,772)
=========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 282,501 $ 2,521,631
Shares redeemed (540,988) (4,753,686)
-------------------------
Net decrease in shares
outstanding before
conversion (258,487) (2,232,055)
Shares converted from Class
B
(See Note 1) (481,977) (4,105,964)
-------------------------
Net decrease (740,464) $ (6,338,019)
=========================
Year ended October 31, 2008:
Shares sold 309,084 $ 4,120,854
Shares redeemed (1,195,611) (15,990,020)
-------------------------
Net decrease in shares
outstanding before
conversion (886,527) (11,869,166)
Shares converted from Class
B
(See Note 1) (1,118,496) (15,185,698)
-------------------------
Net decrease (2,005,023) $(27,054,864)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 33,784 $ 296,596
Shares redeemed (48,676) (433,738)
-------------------------
Net decrease (14,892) $ (137,142)
=========================
Year ended October 31, 2008:
Shares sold 30,777 $ 406,562
Shares redeemed (130,676) (1,763,947)
-------------------------
Net decrease (99,899) $ (1,357,385)
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 212,601 $ 2,003,292
Shares redeemed (213,452) (2,276,627)
-------------------------
Net decrease (851) $ (273,335)
=========================
Year ended October 31, 2008:
Shares sold 268,725 $ 3,893,906
Shares redeemed (108,213) (1,569,047)
-------------------------
Net increase 160,512 $ 2,324,859
=========================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
26 MainStay Small Cap Growth Fund
statement adjustment or disclosure have been identified, except for the
following:
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of the Fund was held on
November 16, 2009, at the offices of New York Life Investment Management LLC in
Parsippany, New Jersey. The purpose of the meeting was to approve the
reorganization of the Fund with and into MainStay U.S. Small Cap Fund, formerly
Small Company Value Fund.
No other business came before the special meeting.
The proposal was approved by the shareholders of the Fund by the vote tally
shown below:
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTENTIONS TOTAL
3,812,064 142,463 218,764 4,173,291
- --------------------------------------------------------------------------
</Table>
Effective as of the close of business on November 24, 2009, the Fund merged with
and into MainStay U.S. Small Cap Fund and was subsequently liquidated.
mainstayinvestments.com 27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Growth Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2009, 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, 2009, by correspondence with the custodian
and brokers or by other appropriate 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 Growth Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
28 MainStay Small Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Small Cap Growth Fund ("Fund") and
New York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and MacKay Shields LLC
("MacKay Shields") on behalf of the Fund.
Separately, on June 23, 2009, the Board approved New York Life Investments'
recommendation to replace MacKay Shields with Epoch Investment Partners, Inc.
("Epoch" and together with MacKay Shields, the "Subadvisers") as the subadviser
to the Fund pursuant to a new subadvisory agreement ("New Subadvisory
Agreement"). The Board approved Epoch as subadviser of the Fund in accordance
with a "manager of managers" exemptive order from the Securities and Exchange
Commission ("SEC"), which allows New York Life Investments to engage certain new
subadvisers for the Fund with Board approval, but without the approval of Fund
shareholders. In approving the New Subadvisory Agreement,(1) the Board took into
account that the shareholders of the Fund would not be asked to vote on the New
Subadvisory Agreement. In addition, the Board approved New York Life
Investments' proposal to reorganize the Fund with and into the MainStay Small
Company Value Fund. In determining to approve these actions, the Board took
several factors into account, including the fact that the actions would be part
of a larger initiative designed to reposition, rationalize and streamline the
MainStay Group of Funds to reduce duplication among funds, strengthen the
overall fund lineup, and offer funds with more significant asset levels.
In reaching its decisions to approve the Agreements, other than the New
Subadvisory Agreement, the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In reaching its decision to approve the New Subadvisory Agreement, the Board
considered information furnished to the Board that was prepared specifically in
connection with a special contract review process that took place at various
meetings of the Board and its Committees between April 2009 and June 2009.
Information provided to the Board in connection with the special contract review
process included information from New York Life Investments concerning the
reorganizations of several of the MainStay Funds to which Epoch was proposed to
serve as subadviser, including the Fund. The Board also considered information
regarding New York Life Investments' larger fund rationalization initiatives,
and the information regarding the nature and depth of New York Life Investments'
relationships with Epoch. The Board further considered responses from Epoch 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 determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and the
Subadvisers; (ii) the investment performance of the Fund, New York Life
Investments and MacKay Shields as subadviser to the Fund (and with respect to
Epoch, the historical investment performance of similar portfolios managed by
Epoch); (iii) the costs of the services to be provided, and profits to be
realized, by New York Life Investments and its affiliates, including MacKay
Shields, from their relationship with the Fund (and with respect to Epoch, the
anticipated costs of the services to be provided, and the profits expected to be
realized, by Epoch); (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 and subadvisory
fee levels and
mainstayinvestments.com 29
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information
provided to the Board throughout the year and specifically in connection with
the contract review processes. The Board's conclusions with respect to the
Agreements also were based, in part, on the Board's consideration of the
Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the SEC concerning matters relating to the MainStay
Equity Index Fund, including materials provided to the Board of Trustees of The
MainStay Funds in 2002-2004 in connection with the annual review of that fund's
management fee. The Board noted that, since this matter was first brought to the
Board's attention in 2003, New York Life Investments had taken a number of steps
to enhance the quality and completeness of information provided to the Board in
connection with the Board's consideration of the MainStay Group of Funds'
investment advisory contracts. The Board believes that New York Life Investments
has taken appropriate actions in response to this matter.
The Board also examined the nature, extent and quality of the services that each
Subadviser proposed to provide to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund and each Subadviser's experience
in managing other portfolios. It examined each Subadviser's track record and
experience in providing investment advisory services, the experience of
investment advisory, senior management and administrative personnel at each
Subadviser, and each Subadviser's overall legal and compliance environment. The
Board also reviewed each Subadviser's willingness to invest in personnel
designed to benefit the Fund. In this regard, the Board considered the
experience of each Subadviser's portfolio managers, the number of accounts
managed by the portfolio managers and the method for compensating portfolio
managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' experience, personnel,
operations and resources, and, with respect to the New Subadvisory Agreement,
that the Fund likely would benefit from the nature, extent and quality of these
services as a result of Epoch'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 further considered
MacKay Shields' decision to focus primarily on fixed income asset management and
determined that it would be in the best interest of the Fund to retain Epoch as
the subadviser of the Fund. With respect to the Board's consideration of the New
Subadvisory Agreement, the Board considered the historical investment
performance results of similar portfolios managed by Epoch, as well as the
strength of Epoch's resources (including research capabilities) that may result
in stronger long-term investment performance for the Fund over time. The Board
acknowledged that the Fund would be making modifications to its principal
investment strategies, investment processes, principal risks, and primary
benchmark to align it with Epoch's investment approach. The Board particularly
considered the
30 MainStay Small Cap Growth Fund
detailed investment analytics reports in regards to New York Life Investments
and MacKay Shields provided by New York Life Investments' Investment Consulting
Group on the Fund throughout the year. These reports, which were prepared by New
York Life Investments 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 New York Life Investments
concerning the Fund's investment performance, as well as discussions between
each Subadviser's portfolio managers and the Board that occurred at meetings
from time to time throughout the year and in previous years. In connection with
its consideration of the New Subadvisory Agreement, the Board took into account
its discussions with senior management and investment personnel at Epoch. The
Board also considered any specific actions that New York Life Investments had
taken, or had agreed with the Board to take, to enhance Fund investment
performance, and the results of those actions. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements that, while the Fund's
investment performance over time has been satisfactory, in the case of the New
Subadvisory Agreement, the selection of Epoch as subadviser to the Fund is
likely to strengthen the Fund's long-term investment performance to the benefit
of shareholders. The Fund discloses more information about investment
performance in the Portfolio Management Discussion and Analysis, Investment and
Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, the estimated costs of the
services to be provided by Epoch under the New Subadvisory Agreement, and the
profits expected to be realized by New York Life Investments and its affiliates
and Epoch due to their relationships with the Fund. Because MacKay Shields is an
affiliate of New York Life Investments whose subadvisory fees are paid directly
by New York Life Investments, the Board considered cost and profitability
information for New York Life Investments and MacKay Shields in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates and Epoch regarding their profitability or anticipated profitability
due to their overall relationships with the Fund. For New York Life Investments
and MacKay Shields, the Board considered information illustrating the revenues
and expenses allocated to the Fund. With respect to Epoch, the Board did not
consider specific profitability information from Epoch's relationship with the
Fund, since Epoch had not commenced its service as subadviser at the time the
Board considered its approval of the New Subadvisory Agreement. However, the
Board considered information provided by Epoch reflecting Epoch's profitability
with respect to similar mutual funds managed by Epoch, and other information
that allowed the Board to estimate the expected costs and profits of Epoch in
connection with its service as subadviser to the Fund. Because Epoch is not
affiliated with New York Life Investments, and Epoch's fees are paid directly by
New York Life Investments, the Board focused primarily on the profitability of
the relationship among New York Life Investments, its affiliates and the Fund.
The Board noted 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 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 New York Life
Investments to the Board
mainstayinvestments.com 31
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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to the Subadvisers from legally
permitted "soft-dollar" arrangements by which brokers provide or would provide
research and other services to the Subadvisers in exchange for commissions paid
by the Fund with respect to trades on the Fund's portfolio securities. With
respect to Epoch, the Board requested and received information from Epoch and
New York Life Investments concerning other business relationships between Epoch
and its affiliates, on the one hand, and New York Life Investments and its
affiliates, on the other. The Board requested and received assurances that these
other business relationships did not impact New York Life Investments'
recommendation for Epoch to serve as subadviser.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) and Epoch due to their relationships with the Fund
are fair and reasonable. With respect to Epoch, the Board considered that any
profits to be realized by Epoch due to its relationship with the Fund are the
result of arm's-length negotiations between New York Life Investments and Epoch,
and are based on subadvisory fees to be paid to Epoch by New York Life
Investments, not the Fund.
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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements, as
applicable. While recognizing that any precise determination of future economies
of scale is necessarily subjective, the Board considered the extent to which New
York Life Investments and the Subadvisers may realize a larger profit margin as
the Fund's assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to each
Subadviser are paid by New York Life Investments, not the Fund. The Board also
considered the impact of the Fund's expense limitation arrangements pursuant to
which New York Life Investments has agreed to limit the Fund's total ordinary
operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and the Subadvisers on fees charged 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 explanations from New York Life Investments and the
Subadvisers about the different scope of services provided to retail mutual
funds as compared with other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared
32 MainStay Small Cap Growth Fund
with certain other fees (e.g., management fees), which are charged based on the
Fund's average net assets. The Board took into account information from New York
Life Investments showing that the Fund's transfer agent fee schedule is
reasonable, including industry data showing that the per-account fees that NYLIM
Service Company ("NSC"), the Fund's transfer agent, charges the Fund are within
the range of per-account fees charged by transfer agents to other mutual funds.
In addition, the Board particularly considered representations from New York
Life Investments that the MainStay Group of Funds' transfer agent fee structure
is designed to allow NSC to provide transfer agent services to the Funds
essentially "at cost," and that NSC historically has realized only very modest
profitability from providing transfer agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management and subadvisory fees and total ordinary operating expenses
were within a range that is competitive and, within the context of the Board's
overall conclusions regarding the Agreements, support a conclusion that these
fees and expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements and the New Subadvisory Agreement.
mainstayinvestments.com 33
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND
PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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 Funds' 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
MainStay Investments at 800-MAINSTAY (624-6782).You can also 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).
34 MainStay Small Cap Growth Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 Management LLC and New York
(21 funds); Life Investment Management
ICAP FUNDS, INC.: Director Holdings LLC; Member of the
since 2008 Board of Managers, MacKay
(4 funds); Shields LLC (since 2008);
MAINSTAY TRUST: Trustee since Chairman of the Board,
2008 Institutional Capital LLC,
(14 funds); Madison Capital LLC, McMorgan
MAINSTAY FUNDS TRUST: Trustee & Company LLC, Chairman and
since April 2009 (4 funds); Chief Executive Officer,
and NYLIFE Distributors LLC and
MAINSTAY VP SERIES FUND, INC.: Chairman of the Board of
Managers, NYLCAP Manager, LLC
Director since 2008 (since 2008); President,
(20 portfolios). Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 35
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 2006) State Farm Variable
(21 funds); Product Trust since 2005
ICAP FUNDS, INC.: Director (9 portfolios)
and Audit Committee Financial
Expert since 2007
(4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
36 MainStay Small Cap Growth Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (2000 to 2004); Independent
(21 funds); Consultant (1999 to 2000);
ICAP FUNDS, INC.: Director Head of Global Funds, Citicorp
since 2006 (1995 to 1999)
(4 funds);
MAINSTAY TRUST: Trustee since
2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (1994 to 2004)
(21 funds);
ICAP FUNDS, INC.: Director
since 2007
(4 funds);
MAINSTAY TRUST: Trustee since
2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 Director The Carlyle Group
(21 funds); (private investment firm)
ICAP FUNDS, INC.: Director (2002 to 2004); Senior
since 2007 Managing Director, Partner and
(4 funds); Board Member, Groupe Arnault
MAINSTAY TRUST: Trustee since S.A. (private investment firm)
1994 (1999 to 2002)
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 Business, University of
(2 funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007
(21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007
(4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
10/22/41 Trustee since 2007 to 1995) Direxion Insurance Trust
(2 funds); (3 portfolios) since 2007;
ECLIPSE FUNDS INC.: Director Trustee, Direxion Shares
since 2007 ETF Trust, since 2008 (22
(21 funds); portfolios)
ICAP FUNDS, INC.: Director
since 2007
(4 funds);
MAINSTAY TRUST: Trustee since
2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Small Cap Growth Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t--Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 39
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This page intentionally left blank
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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A015925 (RECYCLE LOGO) MS283-09 MSSG11-12/09
24
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 13
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 19
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 25
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT 26
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 31
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 31
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 31
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 32
INVESTMENT AND PERFORMANCE COMPARISON(1)(UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 8.99% -0.99% -4.90%
Excluding sales charges 15.34 0.14 -4.36
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000(R) S&P 500(R)
APPRECIATION FUND GROWTH INDEX INDEX
----------------- --------------- ----------
10/31/99 9450 10000 10000
10625 10933 10609
6539 6566 7967
5203 5278 6764
6036 6429 8170
6010 6646 8940
6666 7232 9720
7213 8016 11308
8605 9557 12954
5246 6026 8278
10/31/09 6050 7080 9090
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
With sales charges 9.39% -0.88% -4.85%
Excluding sales charges 15.76 0.24 -4.31
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000(R) S&P 500(R)
APPRECIATION FUND GROWTH INDEX INDEX
----------------- --------------- ----------
10/31/99 23625 25000 25000
26563 27333 26523
16348 16415 19918
13008 13195 16909
15091 16073 20426
15024 16616 22350
16664 18081 24299
18033 20041 28270
21512 23893 32386
13138 15064 20696
10/31/09 15209 17701 22725
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
With sales charges 9.46% -0.99% -5.09%
Excluding sales charges 14.46 -0.62 -5.09
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000(R) S&P 500(R)
APPRECIATION FUND GROWTH INDEX INDEX
----------------- --------------- ----------
10/31/99 10000 10000 10000
11159 10933 10609
6814 6566 7967
5380 5278 6764
6191 6429 8170
6118 6646 8940
6736 7232 9720
7235 8016 11308
8567 9557 12954
5182 6026 8278
10/31/09 5931 7080 9090
</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.
Class A shares generally have a $25,000 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, the minimum initial investment is $15,000. 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 shown reflect nonrecurring reimbursements from affiliates for
professional fees and losses attributable to shareholder trading
arrangements. If these nonrecurring reimbursements had not been made, the
total return (excluding sales charges) would have been 0.18% for Class A,
-1.07% for Class B, -0.73% for Class C and 0.68% for Class I for the five-
year period ended October 31, 2009, and -4.34% for Class A, -5.30% for Class
B, -5.15% for Class C and -4.08% for Class I for the ten-year period then
ended. Investor Class shares were not affected because the reimbursement
occurred prior to the launch of the share class. Effective November 24,
2009, the Fund merged with and into MainStay Growth Equity Fund.
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--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 13.45% -0.61% -5.09%
Excluding sales charges 14.45 -0.61 -5.09
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000(R) S&P 500(R)
APPRECIATION FUND GROWTH INDEX INDEX
----------------- --------------- ----------
10/31/99 10000 10000 10000
11159 10933 10609
6814 6566 7967
5380 5278 6764
6191 6429 8170
6118 6646 8940
6736 7232 9720
7235 8016 11308
8569 9557 12954
5185 6026 8278
10/31/09 5934 7080 9090
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
15.99% 0.68% -4.08%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000(R) S&P 500(R)
APPRECIATION FUND GROWTH INDEX INDEX
----------------- --------------- ----------
10/31/99 10000 10000 10000
11247 10933 10609
6894 6566 7967
5496 5278 6764
6387 6429 8170
6371 6646 8940
7089 7232 9720
7715 8016 11308
9259 9557 12954
5681 6026 8278
10/31/09 6590 7080 9090
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell 1000(R) Growth Index(4) 17.51% 1.27% -3.39%
S&P 500(R) Index(5) 9.80 0.33 -0.95
Average Lipper large-cap growth fund(6) 14.74 0.70 -2.13
</Table>
2. Performance figures for Investor Class shares, first offered to the public 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 I shares, first offered on January 2, 2004,
include the historical performance of Class B shares through January 1, 2004,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. The Russell 1000(R) Growth Index measures the performance of those Russell
1000(R) companies with higher price-to-book ratios and higher forecasted
growth values. The Russell 1000(R) Index measures the performance of the
1,000 largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000(R)
Index. The Russell 3000(R) Index measures the performance of the 3,000
largest U.S. companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market. Total returns assume
reinvestment of all dividends and capital gains. The Russell 1000(R) Growth
Index is the Fund's broad-based securities market index for comparison
purposes. An investment cannot be made directly in an index.
5. The S&P 500(R) Index is widely regarded as the standard index for measuring
large-cap U.S. stock market performance. Results assume reinvestment of all
dividends and capital gains. An investment cannot be made directly in an
index.
6. The average Lipper large-cap growth fund is representative of funds that, by
portfolio practice, invest at least 75% of their equity assets in companies
with market capitalization (on a three-year weighted basis) above Lipper's
U.S. Diversified Equity large-cap floor. Large-cap growth funds typically
have an above-average price-to-earning ratio, price-to-book ratio, and three-
year sales-per-share growth value, compared to the S&P 500(R) Index. This
benchmark is a product of Lipper Inc. 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.
6 MainStay Capital Appreciation Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CAPITAL APPRECIATION FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,187.10 $ 8.65 $1,017.30 $ 7.98
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,188.60 $ 7.28 $1,018.60 $ 6.72
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,182.40 $12.65 $1,013.60 $11.67
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,182.90 $12.71 $1,013.60 $11.72
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,190.30 $ 5.91 $1,019.80 $ 5.45
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.57% for Investor Class, 1.32% for Class A, 2.30% for Class B, 2.31% for
Class C and 1.07% for Class I) multiplied by the average account value over
the period, divided by 365 and multiplied by 184 (to reflect the one-half
year period). The table above represents the actual expenses incurred during
the one-half year period.
mainstayinvestments.com 7
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Communications Equipment 8.7%
Software 7.4
Computers & Peripherals 7.0
Machinery 6.8
Beverages 5.4
Internet Software & Services 5.1
Pharmaceuticals 5.0
Biotechnology 4.6
Hotels, Restaurants & Leisure 4.6
Oil, Gas & Consumable Fuels 4.5
Semiconductors & Semiconductor
Equipment 4.3
Capital Markets 4.0
Internet & Catalog Retail 3.0
Health Care Equipment & Supplies 2.7
Multiline Retail 2.7
Energy Equipment & Services 2.1
Food & Staples Retailing 2.1
IT Services 2.0
Specialty Retail 1.8
Health Care Providers & Services 1.7
Road & Rail 1.7
Household Products 1.5
Textiles, Apparel & Luxury Goods 1.3
Tobacco 1.3
Aerospace & Defense 1.2
Consumer Finance 1.0
Diversified Financial Services 0.9
Trading Companies & Distributors 0.9
Wireless Telecommunication Services 0.9
Insurance 0.7
Metals & Mining 0.5
Short-Term Investment 2.5
Other Assets, Less Liabilities 0.1
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Microsoft Corp.
2. Google, Inc. Class A
3. Apple, Inc.
4. Cisco Systems, Inc.
5. Hewlett-Packard Co.
6. QUALCOMM, Inc.
7. PepsiCo, Inc.
8. McDonald's Corp.
9. Mylan, Inc.
10. Abbott Laboratories
</Table>
8 MainStay Capital Appreciation Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY MACKAY SHIELDS LLC (MACKAY SHIELDS), THE FUND'S FORMER
SUBADVISOR, AND HARISH KUMAR, PHD, CFA, OF MADISON SQUARE INVESTORS LLC (MADISON
SQUARE INVESTORS), THE FUND'S INTERIM SUBADVISOR.(1)
HOW DID MAINSTAY CAPITAL APPRECIATION FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Capital Appreciation Fund returned 15.34%
for Investor Class shares, 15.76% for Class A shares, 14.46% for Class B shares
and 14.45% for Class C shares for the 12 months ended October 31, 2009. Over the
same period, the Fund's Class I shares returned 15.99%. Investor Class, Class A
and Class I shares outperformed--and Class B and Class C shares
underperformed--the 14.74% return of the average Lipper(2) large-cap growth
fund. All share classes underperformed the 17.51% return of the Russell 1000(R)
Growth Index(3) for the 12-month reporting period. The Russell 1000(R) Growth
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 OR
INVESTMENT APPROACH DURING THE REPORTING PERIOD?
In connection with a larger initiative by MacKay Shields LLC to reposition and
rationalize its investment capabilities, the Fund's Board of Trustees approved
the replacement of MacKay Shields with Madison Square Investors as the interim
Subadvisor to the Fund, effective June 29, 2009. For the period from November 1,
2008, to June 28, 2009, the Fund's performance figures referenced above reflect
the performance of the Fund while it was managed by its former subadvisor,
MacKay Shields.
On June 23, 2009, the Fund's Board of Trustees approved a reorganization of the
Fund with and into MainStay Growth Equity Fund, which was approved by Fund
shareholders on November 18, 2009. On June 23, 2009, the Board also approved
changing the Fund's investment objective, principal investment strategy and
investment process and amended its principal risks to more closely align them
with those of MainStay Growth Equity Fund, effective
June 29, 2009.
WHAT MAJOR FACTORS AFFECTED THE FUND DURING THE 12 MONTHS ENDED OCTOBER 31,
2009?
In March and April 2009, the equity market began to favor companies that
appeared likely to benefit from an economic recovery and were trading at or near
their historical lows. Interest rapidly shifted from defensive sectors, such as
consumer staples and health care, into other sectors such as retail, technology,
industrials and materials. This quick and dramatic sector rotation caused the
Fund, which was defensively positioned, to underperform the Russell 1000(R)
Growth Index during the first eight months of the reporting period.
During the last four months of the reporting period, the market responded to
significant government intervention with improved investor sentiment that was
accompanied by a strong rally in the Russell 1000(R) Growth Index. This rally
was led by companies that had substantially underperformed the Russell 1000(R)
Growth Index before the turnaround began in March 2009. During the last four
months of the reporting period, the Fund changed from a defensive to a more
balanced position, which helped it outperform the Index.
WHAT MAJOR FACTORS WERE RESPONSIBLE FOR THE FUND'S RELATIVE PERFORMANCE DURING
THE REPORTING PERIOD?
The Fund began the reporting period defensively positioned, which detracted from
the Fund's performance relative to the Russell 1000(R) Growth Index when the
market began to rally in March. In the last
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of the Fund's holdings. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns. The Fund may experience a
portfolio turnover rate of more than 100% and may generate taxable short-term
gains. The Fund's use of securities lending presents the risk of default by the
borrower, which may result in a loss to the Fund. Foreign securities may be
subject to greater risks than U.S. investments, including currency fluctuations,
less-liquid trading markets, greater price volatility, political and economic
instability, less publicly available information and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets.
1. During the reporting period, New York Life Investments delegated day-to-day
portfolio management responsibilities to MacKay Shields from November 1,
2008, to June 29, 2009, and to Madison Square Investors beginning on June 29,
2009. MacKay Shields and Madison Square Investors are both affiliates of New
York Life Investments. "New York Life Investments" is a service mark used by
New York Life Investment Management LLC.
2. See footnote on page 6 for more information about Lipper Inc.
3. See footnote on page 6 for more information on the Russell 1000(R) Growth
Index.
mainstayinvestments.com 9
four months of the reporting period, the Fund outperformed its benchmark,
primarily because of stock selection in the information technology and consumer
discretionary sectors. Unfortunately, these gains were not enough to bring the
Fund into line with the Russell 1000(R) Growth Index for the entire reporting
period.
DURING THE REPORTING PERIOD, WHICH SECTORS AND INDUSTRIES WERE STRONG
CONTRIBUTORS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH SECTORS AND INDUSTRIES
DETRACTED FROM FUND PERFORMANCE?
For the first eight months of the reporting period, strong sector contributors
to the Fund's performance included consumer discretionary, information
technology and energy. Detractors during this portion of the reporting period
included health care, consumer staples and financials.
In the last four months of the reporting period, three industries in the
information technology sector--computers & peripherals, IT services and Internet
software & services--made the strongest industry contributions to the Fund's
performance. Over the same portion of the reporting period, the industries that
detracted most from the Fund's absolute performance included biotechnology, life
sciences tools & services and diversified financial services.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS WERE STRONG PERFORMERS AND
WHICH STOCKS DETRACTED FROM FUND PERFORMANCE?
During the first eight months of the reporting period, Internet-content delivery
company Akami Technologies was a strong absolute performer for the Fund, as were
department-store operator Kohl's and wireless solutions company Research In
Motion. Detractors during this portion of the reporting period included railroad
company Norfolk Southern, biotechnology company Celgene and energy provider NRG
Energy.
During the last four months of the reporting period, the strongest contributions
to the Fund's performance came from information technology companies Apple,
Microsoft and Google. Detractors included global commodities and financial-
products exchange company IntercontinentalExchange, cardiovascular medical
device manufacturer St. Jude Medical and biomedical therapeutics developer
Amgen.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES AND SALES DURING THE REPORTING
PERIOD?
Among the stocks purchased during the first eight months of the reporting period
were home-improvement retailer Lowe's, cruise-line operator Carnival and
shipping company United Parcel Service. Significant sales by the Fund during the
first eight months of the reporting period included auto-parts retailer
AutoZone, beverage giant The Coca-Cola Company and satellite television provider
DIRECTV Group.
During the last four months of the reporting period, new positions were
initiated in Amgen and pharmaceutical manufacturer Mylan. The Fund continued to
sell The Coca-Cola Company. It also sold shares of aerospace & defense company
United Technologies. Both of these positions were entirely eliminated from the
Fund during the last four months of the reporting period.
HOW DID THE FUND'S SECTOR AND INDUSTRY WEIGHTINGS CHANGE DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, the Fund added cyclical
exposure when evidence emerged that the economy was stabilizing. This was
accomplished by increasing the Fund's weightings relative to the Russell 1000(R)
Growth Index in consumer discretionary and industrials. The Fund also reduced
exposure to defensive sectors such as consumer staples and health care.
During the last four months of the reporting period, the Fund modestly increased
its weightings relative to the Russell 1000(R) Growth Index in communications
equipment and machinery and decreased its weightings in chemicals and life
sciences tools & services.
HOW WAS THE FUND POSITIONED AT THE END OF OCTOBER 2009?
The Fund's industry-group positioning is a result of the Subadvisor's bottom-up
stock selection process rather than a top-down macroeconomic viewpoint.
As of October 31, 2009, the Fund was overweight relative to the Russell 1000(R)
Growth Index in diversified financials and retailing. Both of these positions
helped the Fund's performance. On the same date, the Fund held underweight
positions relative to the Russell 1000(R) Growth Index in materials and
household & personal products.
- ----------
The opinions expressed are those of the responders 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 Capital Appreciation Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 97.4%+
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 1.2%
Precision Castparts Corp. 71,624 $ 6,842,241
-------------
BEVERAGES 5.4%
Diageo PLC, Sponsored ADR (a) 75,413 4,903,353
Dr. Pepper Snapple Group,
Inc. (b) 171,105 4,664,323
Hansen Natural Corp. (b) 156,586 5,660,584
V PepsiCo, Inc. 245,764 14,881,010
-------------
30,109,270
-------------
BIOTECHNOLOGY 4.6%
Amgen, Inc. (b) 247,561 13,301,453
Gilead Sciences, Inc. (b) 216,239 9,200,969
Vertex Pharmaceuticals, Inc.
(b) 90,885 3,050,101
-------------
25,552,523
-------------
CAPITAL MARKETS 4.0%
BlackRock, Inc. 45,345 9,816,739
Goldman Sachs Group, Inc.
(The) 45,546 7,750,563
Greenhill & Co., Inc. 53,145 4,582,693
-------------
22,149,995
-------------
COMMUNICATIONS EQUIPMENT 8.7%
Brocade Communications
Systems, Inc. (b) 998,313 8,565,525
V Cisco Systems, Inc. (b) 755,186 17,256,000
Juniper Networks, Inc. (b) 279,004 7,117,392
V QUALCOMM, Inc. 371,848 15,398,226
-------------
48,337,143
-------------
COMPUTERS & PERIPHERALS 7.0%
V Apple, Inc. (b) 99,651 18,784,213
EMC Corp. (b) 265,014 4,364,781
V Hewlett-Packard Co. 328,835 15,606,509
-------------
38,755,503
-------------
CONSUMER FINANCE 1.0%
American Express Co. 153,203 5,337,592
-------------
DIVERSIFIED FINANCIAL SERVICES 0.9%
JPMorgan Chase & Co. 121,500 5,075,055
-------------
ENERGY EQUIPMENT & SERVICES 2.1%
FMC Technologies, Inc. (b) 136,809 7,196,153
Transocean, Ltd. (b) 53,400 4,480,794
-------------
11,676,947
-------------
FOOD & STAPLES RETAILING 2.1%
CVS Caremark Corp. 324,565 11,457,144
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 2.7%
Baxter International, Inc. 185,472 10,026,616
Hospira, Inc. (b) 118,593 5,293,992
-------------
15,320,608
-------------
HEALTH CARE PROVIDERS & SERVICES 1.7%
Medco Health Solutions, Inc.
(b) 168,055 9,431,247
-------------
HOTELS, RESTAURANTS & LEISURE 4.6%
Carnival Corp. 257,762 7,506,029
Las Vegas Sands Corp. (b) 249,442 3,764,080
V McDonald's Corp. 241,879 14,176,528
-------------
25,446,637
-------------
HOUSEHOLD PRODUCTS 1.5%
Colgate-Palmolive Co. 104,441 8,212,196
-------------
INSURANCE 0.7%
Hartford Financial Services
Group, Inc. (The) 168,103 4,121,886
-------------
INTERNET & CATALOG RETAIL 3.0%
Amazon.com, Inc. (b) 89,792 10,668,187
Priceline.com, Inc. (b) 39,562 6,242,488
-------------
16,910,675
-------------
INTERNET SOFTWARE & SERVICES 5.1%
Baidu, Inc., ADR (a)(b) 10,008 3,782,223
Equinix, Inc. (b) 37,565 3,205,046
V Google, Inc. Class A (b) 40,258 21,583,119
-------------
28,570,388
-------------
IT SERVICES 2.0%
Cognizant Technology
Solutions Corp. Class A (b) 295,055 11,403,876
-------------
MACHINERY 6.8%
Danaher Corp. 129,748 8,852,706
Flowserve Corp. 75,069 7,372,527
Illinois Tool Works, Inc. 168,647 7,744,270
Ingersoll-Rand PLC 225,521 7,124,208
Joy Global, Inc. 130,138 6,560,257
-------------
37,653,968
-------------
METALS & MINING 0.5%
Freeport-McMoRan Copper &
Gold, Inc. (b) 41,546 3,047,815
-------------
MULTILINE RETAIL 2.7%
Kohl's Corp. (b) 152,257 8,712,145
Target Corp. 131,567 6,371,790
-------------
15,083,935
-------------
OIL, GAS & CONSUMABLE FUELS 4.5%
Apache Corp. 57,247 5,388,088
PetroHawk Energy Corp. (b) 164,486 3,868,711
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding
short-term investment. 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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS (CONTINUED)
Petroleo Brasileiro S.A., ADR
(a) 160,580 $ 7,422,007
Suncor Energy, Inc. 249,141 8,226,636
-------------
24,905,442
-------------
PHARMACEUTICALS 5.0%
V Abbott Laboratories 270,179 13,662,952
V Mylan, Inc. (b) 868,857 14,110,238
-------------
27,773,190
-------------
ROAD & RAIL 1.7%
Union Pacific Corp. 172,895 9,533,430
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.3%
Broadcom Corp. Class A (b) 219,619 5,844,062
Intel Corp. 289,909 5,540,161
Lam Research Corp. (b) 137,313 4,630,194
Texas Instruments, Inc. 344,897 8,087,835
-------------
24,102,252
-------------
SOFTWARE 7.4%
V Microsoft Corp. 1,026,806 28,473,330
Oracle Corp. 604,119 12,746,911
-------------
41,220,241
-------------
SPECIALTY RETAIL 1.8%
Best Buy Co., Inc. 130,489 4,982,070
Urban Outfitters, Inc. (b) 162,969 5,113,967
-------------
10,096,037
-------------
TEXTILES, APPAREL & LUXURY GOODS 1.3%
Coach, Inc. 216,539 7,139,291
-------------
TOBACCO 1.3%
Lorillard, Inc. 95,865 7,450,628
-------------
TRADING COMPANIES & DISTRIBUTORS 0.9%
Fastenal Co. 148,138 5,110,761
-------------
WIRELESS TELECOMMUNICATION SERVICES 0.9%
American Tower Corp. Class A
(b) 142,508 5,247,144
-------------
Total Common Stocks
(Cost $506,256,093) 543,075,060
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 2.5%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 2.5%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$13,765,544 (Collateralized
by a United States Treasury
Bill with a rate of 0.066%
and a maturity date of
2/18/10, with a Principal
Amount of $14,045,000 and a
Market Value of
$14,042,191) $13,765,533 13,765,533
-------------
Total Short-Term Investment
(Cost $13,765,533) 13,765,533
-------------
Total Investments
(Cost $520,021,626) (c) 99.9% 556,840,593
Other Assets,
Less Liabilities 0.1 803,867
----- ------------
Net Assets 100.0% $ 557,644,460
===== ============
</Table>
<Table>
(a) ADR--American Depositary Receipt.
(b) Non-income producing security.
(c) At October 31, 2009, cost is $520,572,914
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 50,088,006
Gross unrealized depreciation (13,820,327)
------------
Net unrealized appreciation $ 36,267,679
============
</Table>
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $543,075,060 $ -- $ -- $543,075,060
Short-Term Investment
Repurchase Agreement -- 13,765,533 -- 13,765,533
------------ ----------- ----- ------------
Total Investments in Securities $543,075,060 $13,765,533 $-- $556,840,593
============ =========== ===== ============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with
significant unobservable inputs (Level 3).
12 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $520,021,626) $556,840,593
Receivables:
Investment securities sold 16,000,920
Dividends and interest 328,346
Fund shares sold 81,161
Other assets 20,213
------------
Total assets 573,271,233
------------
LIABILITIES:
Payables:
Investment securities purchased 14,120,892
Transfer agent (See Note 3) 453,158
Manager (See Note 3) 324,774
Shareholder communication 230,729
Fund shares redeemed 216,870
NYLIFE Distributors (See Note 3) 197,713
Professional fees 72,758
Custodian 4,027
Trustees 1,851
Accrued expenses 4,001
------------
Total liabilities 15,626,773
------------
Net assets $557,644,460
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number
of shares authorized $ 223,722
Additional paid-in capital 617,345,598
------------
617,569,320
Accumulated net realized loss on
investments
and foreign currency transactions (96,743,827)
Net unrealized appreciation on
investments 36,818,967
------------
Net assets $557,644,460
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $236,855,150
============
Shares of beneficial interest
outstanding 9,263,738
============
Net asset value per share
outstanding $ 25.57
Maximum sales charge (5.50% of
offering price) 1.49
------------
Maximum offering price per share
outstanding $ 27.06
============
CLASS A
Net assets applicable to
outstanding shares $204,436,895
============
Shares of beneficial interest
outstanding 7,953,886
============
Net asset value per share
outstanding $ 25.70
Maximum sales charge (5.50% of
offering price) 1.50
------------
Maximum offering price per share
outstanding $ 27.20
============
CLASS B
Net assets applicable to
outstanding shares $113,076,706
============
Shares of beneficial interest
outstanding 5,012,278
============
Net asset value and offering price
per share outstanding $ 22.56
============
CLASS C
Net assets applicable to
outstanding shares $ 2,824,761
============
Shares of beneficial interest
outstanding 125,187
============
Net asset value and offering price
per share outstanding $ 22.56
============
CLASS I
Net assets applicable to
outstanding shares $ 450,948
============
Shares of beneficial interest
outstanding 17,131
============
Net asset value and offering price
per share outstanding $ 26.32
============
</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
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 7,019,430
Interest 13,906
------------
Total income 7,033,336
------------
EXPENSES:
Manager (See Note 3) 3,494,761
Transfer agent--Investor Class
(See Note 3) 1,229,293
Transfer agent--Class A (See Note
3) 457,147
Transfer agent--Classes B and C
(See Note 3) 677,214
Transfer agent--Class I (See Note
3) 1,495
Distribution/Service--Investor
Class (See Note 3) 520,589
Distribution/Service--Class A
(See Note 3) 463,524
Service--Class B (See Note 3) 280,226
Service--Class C (See Note 3) 6,390
Distribution--Class B (See Note
3) 840,678
Distribution--Class C (See Note
3) 19,169
Shareholder communication 367,659
Professional fees 176,115
Registration 75,578
Trustees 23,736
Custodian 15,246
Miscellaneous 36,083
------------
Total expenses 8,684,903
------------
Net investment loss (1,651,567)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions (49,734,276)
Foreign currency transactions 123
------------
Net realized loss on investments
and foreign currency transactions (49,734,153)
------------
Net change in unrealized
depreciation on investments 123,593,957
------------
Net realized and unrealized gain on
investments and foreign currency
transactions 73,859,804
------------
Net increase in net assets
resulting from operations $ 72,208,237
============
(a) Dividends recorded net of
foreign withholding taxes in the
amount of $15,164.
</Table>
14 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss $ (1,651,567) $ (4,208,153)
Net realized loss on
investments and foreign
currency transactions (49,734,153) (47,229,395)
Net change in unrealized
appreciation
(depreciation) on
investments 123,593,957 (329,545,539)
-----------------------------
Net increase (decrease) in
net assets resulting from
operations 72,208,237 (380,983,087)
-----------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A -- (45,539,744)
Class B -- (20,891,795)
Class C -- (362,052)
Class I -- (97,120)
-----------------------------
Total distributions to
shareholders -- (66,890,711)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares 28,266,673 73,500,237
Net asset value of shares
issued to shareholders in
reinvestment of
distributions -- 65,596,808
Cost of shares redeemed (88,993,781) (217,837,199)
-----------------------------
Decrease in net assets
derived from capital
share transactions (60,727,108) (78,740,154)
-----------------------------
Net increase (decrease)
in net assets 11,481,129 (526,613,952)
NET ASSETS:
Beginning of year 546,163,331 1,072,777,283
-----------------------------
End of year $557,644,460 $ 546,163,331
=============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
------------------------------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
------------------------------------------------
2009 2008
Net asset value at beginning of period $ 22.16 $ 31.36
-------- --------
Net investment income (loss) (a) (0.06) (0.12)
Net realized and unrealized gain (loss) on investments 3.47 (9.08)
-------- --------
Total from investment operations 3.41 (9.20)
-------- --------
Less distributions:
From net realized gain on investments -- --
-------- --------
Net asset value at end of period $ 25.57 $ 22.16
======== ========
Total investment return (c) 15.39% (g) (29.30%)(f)
Ratios (to average net assets)/Supplemental Data:
Net investment income (loss) (0.29%) (0.61%)++
Net expenses 1.66% 1.50% ++
Expenses (before reimbursement) 1.66% 1.50% ++
Portfolio turnover rate 138% 44%
Net assets at end of period (in 000's) $236,855 $207,375
</Table>
<Table>
<Caption>
CLASS B
--------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------------------
2009 2008 2007 2006
Net asset value at
beginning of period $ 19.70 $ 35.05 $ 29.60 $ 27.56
-------- -------- -------- --------
Net investment income loss
(a) (0.20) (0.31) (0.31) (0.38)
Net realized and
unrealized gain (loss)
on investments 3.06 (12.66) 5.76 2.42 (e)
-------- -------- -------- --------
Total from investment
operations 2.86 (12.97) 5.45 2.04
-------- -------- -------- --------
Less distributions:
From net realized gain
on investments -- (2.38) -- --
-------- -------- -------- --------
Net asset value at end of
period $ 22.56 $ 19.70 $ 35.05 $ 29.60
======== ======== ======== ========
Total investment return
(c) 14.52% (g) (39.51%) 18.41% 7.40% (d)(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
loss (1.01%) (1.11%) (0.99%) (1.31%)
Net expenses 2.41% 2.14% 1.99% 2.05%
Expenses (before
reimbursement) 2.41% 2.14% 1.99% 2.06% (d)
Portfolio turnover rate 138% 44% 91% 23%
Net assets at end of
period (in 000's) $113,077 $132,693 $311,590 $394,077
<Caption>
CLASS B
--------------------
YEAR ENDED OCTOBER
31,
--------------------
2005
Net asset value at
beginning of period $ 25.03
--------
Net investment income loss
(a) (0.31)(b)
Net realized and
unrealized gain (loss)
on investments 2.84
--------
Total from investment
operations 2.53
--------
Less distributions:
From net realized gain
on investments --
--------
Net asset value at end of
period $ 27.56
========
Total investment return
(c) 10.11%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
loss (1.16%)(b)
Net expenses 2.02%
Expenses (before
reimbursement) 2.02%
Portfolio turnover rate 27%
Net assets at end of
period (in 000's) $991,328
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment loss and the ratio of net investment loss includes $0.05 per
share and 0.18%, respectively as a result of a special one time dividend from
Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.08 per
share on net realized gains on investments and the effect on total investment
return was 0.11% for Class A, 0.27% for Class I, 0.72% for Class B and 0.32%
for Class C, respectively.
(f) Total return is not annualized.
(g) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
16 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 22.20 $ 38.83 $ 32.55 $ 30.08 $ 27.12
-------- -------- -------- -------- --------
0.01 (0.05) (0.09) (0.20) (0.12)(b)
3.49 (14.20) 6.37 2.67 (e) 3.08
-------- -------- -------- -------- --------
3.50 (14.25) 6.28 2.47 2.96
-------- -------- -------- -------- --------
-- (2.38) -- -- --
-------- -------- -------- -------- --------
$ 25.70 $ 22.20 $ 38.83 $ 32.55 $ 30.08
======== ======== ======== ======== ========
15.77%(g) (38.92%) 19.29% 8.21% (d)(e) 10.91%
0.06% (0.16%) (0.25%) (0.63%) (0.41%)(b)
1.32% 1.23% 1.24% 1.30% 1.27%
1.32% 1.23% 1.24% 1.31% (d) 1.27%
138% 44% 91% 23% 27%
$204,437 $202,343 $754,214 $701,374 $220,611
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
2009 2008 2007 2006 2005
$ 19.71 $ 35.05 $29.60 $27.56 $25.03
-------- ------- ------ ------ ------
(0.20) (0.31) (0.31) (0.39) (0.31)(b)
3.05 (12.65) 5.76 2.43 (e) 2.84
-------- ------- ------ ------ ------
2.85 (12.96) 5.45 2.04 2.53
-------- ------- ------ ------ ------
-- (2.38) -- -- --
-------- ------- ------ ------ ------
$22.56 $ 19.71 $35.05 $29.60 $27.56
======== ======= ====== ====== ======
14.46% (g) (39.50%) 18.45% 7.40% (d)(e)10.11%
(1.03%) (1.12%) (1.00%) (1.35%) (1.16%)(b)
2.41% 2.15% 1.99% 2.05% 2.02%
2.41% 2.15% 1.99% 2.06% (d) 2.02%
138% 44% 91% 23% 27%
$2,825 $ 2,769 $5,443 $5,953 $7,120
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
--------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------------------
2009 2008 2007 2006
Net asset value at
beginning of period $22.68 $ 39.46 $32.88 $30.21
------ ------- ------ ------
Net investment income
(loss) (a) 0.08 0.07 0.03 0.14
Net realized and
unrealized gain (loss)
on investments 3.56 (14.47) 6.55 2.53(e)
------ ------- ------ ------
Total from investment
operations 3.64 (14.40) 6.58 2.67
------ ------- ------ ------
Less distributions:
From net realized gain
on investments -- (2.38) -- --
------ ------- ------ ------
Net asset value at end of
period $26.32 $ 22.68 $39.46 $32.88
====== ======= ====== ======
Total investment return
(c) 16.05%(g) (38.64%) 20.01% 8.84%(d)(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.37% 0.21% 0.09% 0.44%
Net expenses 1.07% 0.79% 0.65% 0.60%
Expenses (before
reimbursement) 1.07% 0.79% 0.65% 0.61%(d)
Portfolio turnover rate 138% 44% 91% 23%
Net assets at end of
period (in 000's) $ 451 $ 983 $1,531 $ 1
<Caption>
CLASS I
--------------------
YEAR ENDED OCTOBER
31,
--------------------
2005
Net asset value at
beginning of period $27.15
------
Net investment income
(loss) (a) (0.06)(b)
Net realized and
unrealized gain (loss)
on investments 3.12
------
Total from investment
operations 3.06
------
Less distributions:
From net realized gain
on investments --
------
Net asset value at end of
period $30.21
======
Total investment return
(c) 11.27%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) (0.18%)(b)
Net expenses 1.04%
Expenses (before
reimbursement) 1.04%
Portfolio turnover rate 27%
Net assets at end of
period (in 000's) $ 1
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment loss and the ratio of net investment loss includes $0.05 per
share and 0.18%, respectively as a result of a special one time dividend from
Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.08 per
share on net realized gains on investments and the effect on total investment
return was 0.11% for Class A, 0.27% for Class I, 0.72% for Class B and 0.32%
for Class C, respectively.
(f) Total return is not annualized.
(g) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Capital Appreciation Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A
shares commenced operations on January 3, 1995. Class B shares commenced
operations on May 1, 1986. Class C shares commenced operations on September 1,
1998. Class I
shares commenced operations on January 2, 2004. Investor Class shares commenced
operations on February 28, 2008. Investor Class and Class A shares are offered
at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred sales charge may be imposed on
redemptions made within one year of purchase of Class C shares. Class I shares
are offered at NAV and 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 and service 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.
Effective at the opening of the U.S. financial markets on June 29, 2009, the
Fund's Board of Trustees appointed Madison Square Investors LLC as interim
subadvisor. Also effective June 29, 2009, the Fund changed its investment
objective, principal investment strategy, investment process and principal
risks.
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. Investments
in other mutual funds are valued at their NAVs as of the close of the New York
Stock Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the
mainstayinvestments.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
risk inherent in a particular valuation technique used to measure fair value
using a pricing model and/or the risk inherent in the inputs for the valuation
technique. Inputs may be observable or unobservable. Observable inputs are
inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of the reporting entity. Unobservable inputs are inputs that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the information
available in the circumstances. The inputs or methodology used for valuing
securities may not be an indication of the risks associated with investing in
those securities. The three-tier hierarchy of inputs is summarized in the three
broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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
investments 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 NAV
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
20 MainStay Capital Appreciation Fund
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(I) 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 AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. Effective prior to the opening of the U.S. financial markets on June 29,
2009, the Fund's Board of Trustees terminated MacKay Shields LLC as subadvisor.
Madison Square Investors LLC ("Madison Square Investors" or "Subadvisor"), a
registered investment adviser and an indirect, wholly-owned subsidiary of New
York Life, now serves as interim Subadvisor to the Fund and is responsible for
the day-to-day portfolio management of the Fund. Pursuant to the terms of an
interim Subadvisory Agreement ("Subadvisory Agreement") between New York Life
Investments and the Subadvisor, New York Life Investments pays for the services
of the Subadvisor.
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:
0.72% on assets up to $200 million, 0.65% on assets from $200 million to $500
million and 0.50% on assets in excess of $500 million, plus a fee for fund
accounting services previously provided by New York Life Investments under a
separate fund accounting agreement.
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $3,494,761.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has
entered into a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund
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 Investor Class and Class A shares at an annual
rate of 0.25% of the average daily net assets of the Investor Class and Class A
shares for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, Class B and Class C shares of the
Fund pay the Distributor a monthly distribution fee at an 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 an annual rate of 0.25% of the average daily NAV 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
$31,886 and $8,298, respectively for the year ended October 31, 2009. 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 $469, $168,964 and
$681, respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $2,365,149.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $246,898 0.1%
- -------------------------------------------------
Class C 67 0.0++
- -------------------------------------------------
Class I 986 0.2
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of
legal services provided to the Fund by the Office of the General Counsel of New
York Life Investments is payable directly by the Fund. For the year ended
October 31, 2009, these fees, which are included in professional fees shown on
the Statement of Operations, were $23,987.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(96,192,539) $-- $36,267,679 $(59,924,860)
- -------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income, accumulated net
realized gain on investments and additional paid-in capital arising from
permanent differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$1,651,567 $268,368 $(1,919,935)
- ------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gains
(loss).
22 MainStay Capital Appreciation Fund
At October 31, 2009 for federal income tax purposes, capital loss carryforwards
of $96,192,539 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $47,122
2017 49,071
- ------------------------------------
Total $96,193
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Long-term Capital Gains $-- $66,890,711
- ---------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to annual rate of 0.10% of the average commitment amount, plus a 0.04% up-
front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $678,558 and $680,662, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 321,829 $ 7,025,201
Shares redeemed (1,241,867) (26,935,406)
---------------------------
Net decrease in shares
outstanding before
conversion (920,038) (19,910,205)
Shares converted into
Investor Class (See Note
1) 1,058,904 22,007,663
Shares converted from
Investor Class (See Note
1) (231,924) (5,650,811)
---------------------------
Net decrease (93,058) $ (3,553,353)
===========================
Period ended October 31, 2008 (a):
Shares sold 1,007,705 $ 31,627,662
Shares redeemed (1,020,782) (29,895,883)
---------------------------
Net increase (decrease) in
shares outstanding before
conversion (13,077) 1,731,779
Shares converted into
Investor Class (See Note
1) 9,646,272 285,397,083
Shares converted from
Investor Class (See Note
1) (276,399) (7,744,678)
---------------------------
Net increase 9,356,796 $ 279,384,184
===========================
(a) Investor Class shares were first offered on February
28, 2008.
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 472,591 $ 10,457,389
Shares redeemed (1,809,503) (39,366,753)
---------------------------
Net decrease in shares
outstanding before
conversion (1,336,912) (28,909,364)
Shares converted into Class
A (See Note 1) 522,928 11,977,001
Shares converted from Class
A (See Note 1) (346,518) (7,075,103)
---------------------------
Net decrease (1,160,502) $ (24,007,466)
===========================
Year ended October 31, 2008:
Shares sold 720,023 $ 22,321,645
Shares issued to
shareholders in
reinvestment of
distributions 1,271,597 44,620,346
Shares redeemed (4,371,880) (135,220,213)
---------------------------
Net decrease in shares
outstanding before
conversion (2,380,260) (68,278,222)
Shares converted into Class
A (See Note 1) 1,186,618 36,717,568
Shares converted from Class
A (See Note 1) (9,115,846) (269,282,227)
---------------------------
Net decrease (10,309,488) $(300,842,881)
===========================
</Table>
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 538,987 $ 10,337,335
Shares redeemed (1,128,631) (21,384,519)
-------------------------
Net decrease in shares
outstanding before
conversion (589,644) (11,047,184)
Shares converted from Class
B
(See Note 1) (1,133,411) (21,258,750)
-------------------------
Net decrease (1,723,055) $(32,305,934)
=========================
Year ended October 31, 2008:
Shares sold 618,992 $ 16,956,722
Shares issued to
shareholders in
reinvestment of
distributions 654,665 20,569,554
Shares redeemed (1,813,698) (49,369,969)
-------------------------
Net decrease in shares
outstanding before
conversion (540,041) (11,843,693)
Shares converted from Class
B
(See Note 1) (1,614,407) (45,087,746)
-------------------------
Net decrease (2,154,448) $(56,931,439)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 22,718 $ 436,901
Shares redeemed (38,064) (723,402)
-------------------------
Net decrease (15,346) $ (286,501)
=========================
Year ended October 31, 2008:
Shares sold 21,238 $ 564,603
Shares issued to
shareholders in
reinvestment of
distributions 9,857 309,788
Shares redeemed (45,824) (1,271,004)
-------------------------
Net decrease (14,729) $ (396,613)
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 419 $ 9,847
Shares redeemed (26,641) (583,701)
-------------------------
Net decrease (26,222) $ (573,854)
=========================
Year ended October 31, 2008:
Shares sold 67,220 $ 2,029,605
Shares issued to
shareholders in
reinvestment of
distributions 2,718 97,120
Shares redeemed (65,383) (2,080,130)
-------------------------
Net increase 4,555 $ 46,595
=========================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 events and transactions subsequent to October 31,
2009 through December 23, 2009, the date the financial statements were issued,
have been evaluated by the Fund's management for possible adjustment and/or
disclosure. No subsequent events requiring financial statement adjustment or
disclosure have been identified, except for the following:
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of the Fund was held on
November 16, 2009, at the offices of New York Life Investment Management LLC in
Parsippany, New Jersey. The purpose of the meeting was to approve the
reorganization of the Fund with and into MainStay Growth Equity Fund.
No other business came before the special meeting.
The proposal was approved by the shareholders of the Fund by the vote tally
shown below:
<Table>
<Caption>
VOTES
VOTES FOR AGAINST ABSTENTIONS TOTAL
10,551,935 369,811 719,561 11,641,307
- ---------------------------------------------------------------------------
</Table>
Effective as of November 24, 2009, the Fund merged with and into MainStay Growth
Equity Fund and was subsequently liquidated.
24 MainStay Capital Appreciation Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Capital Appreciation Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2009, 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, 2009, 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 Capital Appreciation Fund of The MainStay Funds as of October 31, 2009,
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 23, 2009
mainstayinvestments.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Capital Appreciation Fund ("Fund")
and New York Life Investment Management LLC ("New York Life Investments"), and
the Subadvisory Agreement between New York Life Investments and MacKay Shields
LLC ("MacKay Shields") on behalf of the Fund.
Separately, on June 23, 2009, the Board approved New York Life Investments'
recommendation to replace MacKay Shields with Madison Square Investors LLC
("MSI" and together with MacKay Shields, the "Subadvisers") as the subadviser to
the Fund pursuant to an interim subadvisory agreement ("New Subadvisory
Agreement"). In addition, the Board approved New York Life Investments' proposal
to reorganize the Fund with and into the MainStay Growth Equity Fund. The New
Subadvisory Agreement provided that MSI would manage the assets of the Fund on
an interim basis without shareholder approval for a period of 150 days following
the termination of the Fund's previous Subadvisory Agreement with MacKay
Shields, or until the liquidation and dissolution of the Fund, if earlier.(4) In
determining to approve these actions, the Board took several factors into
account, including the fact that the actions would be part of a larger
initiative designed to reposition, rationalize and streamline the MainStay Group
of Funds to reduce duplication among funds, strengthen the overall fund lineup,
and offer funds with more significant asset levels.
In reaching its decisions to approve the Agreements, other than the New
Subadvisory Agreement, the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In reaching its decision to approve the New Subadvisory Agreement, the Board
considered information furnished to the Board that was prepared specifically in
connection with a special contract review process that took place at various
meetings of the Board and its Committees between April 2009 and June 2009. The
Board also considered information regarding New York Life Investments' larger
fund rationalization initiatives. The Board further considered responses from
MSI 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 determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and the
Subadvisers; (ii) the investment performance of the Fund, New York Life
Investments and MacKay Shields as subadviser to the Fund (and with respect to
MSI, the historical investment performance of similar portfolios managed by
MSI); (iii) the costs of the services to be provided, and profits to be
realized, by New York Life Investments and its affiliates, including MacKay
Shields, from their relationship with the Fund (and with respect to MSI, the
anticipated costs of the services to be provided, and the profits expected to be
realized, by MSI); (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 and subadvisory
fee levels and overall total ordinary operating expenses, particularly as
compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review
- ----------
(4) All of the agreements described herein may be referred to as the
"Agreements."
26 MainStay Capital Appreciation Fund
processes. The Board's conclusions with respect to the Agreements also were
based, in part, on the Board's consideration of the Agreements 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, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the Fund. A more detailed discussion of the factors that
figured prominently in the Board's decisions to approve the Agreements is
provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that each
Subadviser proposed to provide to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund and each Subadviser's experience
in managing other portfolios. It examined each Subadviser's track record and
experience in providing investment advisory services, the experience of
investment advisory, senior management and administrative personnel at each
Subadviser, and each Subadviser's overall legal and compliance environment. The
Board also reviewed each Subadviser's willingness to invest in personnel
designed to benefit the Fund. In this regard, the Board considered the
experience of each Subadviser's portfolio managers, the number of accounts
managed by the portfolio managers and the method for compensating portfolio
managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' experience, personnel,
operations and resources, and, with respect to the New Subadvisory Agreement,
that the Fund likely would benefit from the nature, extent and quality of these
services as a result of MSI'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 further considered
MacKay Shields' decision to focus primarily on fixed income asset management and
determined that it would be in the best interest of the Fund to retain MSI as
subadviser of the Fund. With respect to the Board's consideration of the New
Subadvisory Agreement, the Board considered the historical investment
performance results of similar portfolios managed by MSI, as well as the
strength of MSI's resources (including research capabilities) that may result in
stronger long-term investment performance for the Fund over time. The Board
acknowledged that the Fund would be making modifications to its principal
investment strategies, investment processes, and principal risks to align it
with MSI's investment approach. The Board particularly considered the detailed
investment analytics reports in regards to New York Life Investments and MacKay
Shields provided by New York Life Investments' Investment Consulting Group on
the Fund throughout the year. These reports, which were prepared by New York
Life Investments 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-
mainstayinvestments.com 27
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 New York Life Investments
concerning the Fund's investment performance, as well as discussions between
each Subadviser's portfolio managers and the Board that occurred at meetings
from time to time throughout the year and in previous years. In connection with
its consideration of the New Subadvisory Agreement, the Board took into account
its discussions with senior management and investment personnel at MSI. The
Board also considered any specific actions that New York Life Investments had
taken, or had agreed with the Board to take, to enhance Fund investment
performance, and the results of those actions. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements that, while the Fund's
investment performance over time has been satisfactory, in the case of the New
Subadvisory Agreement, the selection of MSI as subadviser to the Fund is likely
to strengthen the Fund's long-term investment performance to the benefit of
shareholders. The Fund discloses more information about investment performance
in the Portfolio Management Discussion and Analysis, Investment and Performance
Comparison 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 NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, the estimated costs of the
services to be provided by MSI under the New Subadvisory Agreement, and the
profits expected to be realized by New York Life Investments and its affiliates
due to their relationships with the Fund. Because each Subadviser is an
affiliate of New York Life Investments whose subadvisory fees are paid directly
by New York Life Investments, the Board considered cost and profitability
information for New York Life Investments and each Subadviser in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates, including each Subadviser, regarding their profitability or
anticipated profitability due to their overall relationships with the Fund. For
New York Life Investments and MacKay Shields, the Board considered information
illustrating the revenues and expenses allocated to the Fund. With respect to
MSI, the Board did not consider specific profitability information from MSI's
relationship with the Fund, since MSI had not commenced its service as
subadviser at the time the Board considered its approval of the New Subadvisory
Agreement. However, the Board considered information provided by MSI reflecting
MSI's profitability with respect to similar mutual funds managed by MSI, and
other information that allowed the Board to estimate the expected costs and
profits of MSI in connection with its service as subadviser to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to the Subadvisers from legally
permitted "soft-dollar" arrangements by which brokers provide or would provide
research and other services to the Subadvisers in exchange for commissions paid
by the Fund with respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the
28 MainStay Capital Appreciation Fund
Fund, New York Life Investments' affiliates also earn revenues from serving the
Fund in various other capacities, including as the Fund's transfer agent and
distributor. The information provided to the Board indicated that the
profitability to New York Life Investments 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 New York Life Investments
and its affiliates as part of the annual contract review process, when
considering the reasonableness of the fees to be paid to New York Life
Investments and its affiliates under the Agreements, the Board considered the
profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including each Subadviser) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements, as
applicable. While recognizing that any precise determination of future economies
of scale is necessarily subjective, the Board considered the extent to which New
York Life Investments and the Subadvisers may realize a larger profit margin as
the Fund's assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to each
Subadviser are paid by New York Life Investments, not the Fund.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and the Subadvisers on fees charged 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 explanations from New York Life Investments and the
Subadvisers about the different scope of services provided to retail mutual
funds as compared with other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often
mainstayinvestments.com 29
maintain smaller account balances than other fund investors. The Board discussed
measures that it and New York Life Investments have taken in recent years to
mitigate the effect of small accounts on the expense ratios of Fund share
classes, including: (i) encouraging New York Life agents to consolidate multiple
small accounts held by the same investor into one MainStay Asset Allocation Fund
account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii)
closing small accounts with balances below $500; (iv) since 2007, charging an
annual $20.00 small account fee on accounts with balances below $1,000; (v)
modifying the approach for billing transfer agent expenses to reduce the degree
of subsidization by large accounts of smaller accounts; and (vi) introducing
Investor Class shares for certain MainStay Funds in early 2008 to consolidate
smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management and subadvisory fees and total ordinary operating expenses
were within a range that is competitive and, within the context of the Board's
overall conclusions regarding the Agreements, support a conclusion that these
fees and expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements and the New Subadvisory Agreement.
30 MainStay Capital Appreciation Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2008, the Fund designates approximately
$6,688,004 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 3.1% to arrive at the amount eligible for qualified
interest income and 100.0% 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 New York Life Investments 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 Funds' 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
MainStay Investments at 800-MAINSTAY (624-6782).You can also 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 31
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
32 MainStay Capital Appreciation Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
34 MainStay Capital Appreciation Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t--Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
36 MainStay Capital Appreciation Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO15932 (RECYCLE LOGO) MS283-09 MSCA11-12/09
04
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 16
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 23
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT 31
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 35
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 35
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 35
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 36
INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- -------------------------------------------------------
With sales charges 9.81% 0.80% -0.63%
Excluding sales charges 16.20 1.95 0.01
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH RUSSELL MIDCAP(R)
FUND GROWTH INDEX
------------ -----------------
1/2/01 9450 10000
7078 6945
5916 5722
7777 7970
8590 8669
10773 10048
11784 11506
14792 13774
8142 7900
10/31/09 9461 9676
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- -------------------------------------------------------
With sales charges 10.15% 0.89% -0.58%
Excluding sales charges 16.56 2.04 0.06
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH RUSSELL MIDCAP(R)
FUND GROWTH INDEX
------------ -----------------
1/2/01 23625 25000
17695 17362
14789 14304
19443 19925
21475 21671
26933 25119
29460 28764
36981 34436
20381 19749
10/31/09 23756 24189
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- -------------------------------------------------------
With sales charges 10.37% 0.84% -0.74%
Excluding sales charges 15.37 1.21 -0.74
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH RUSSELL MIDCAP(R)
FUND GROWTH INDEX
------------ -----------------
1/2/01 10000 10000
7440 6945
6170 5722
8050 7970
8820 8669
10980 10048
11950 11506
14879 13774
8117 7900
10/31/09 9365 9676
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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 R2 shares are sold with no initial
sales charge or CDSC and have an annual 12b-1 fee of 0.25%. 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
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--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- -------------------------------------------------------
With sales charges 14.37% 1.21% -0.74%
Excluding sales charges 15.37 1.21 -0.74
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH RUSSELL MIDCAP(R)
FUND GROWTH INDEX
------------ -----------------
1/2/01 10000 10000
7440 6945
6170 5722
8050 7970
8820 8669
10990 10048
11940 11506
14869 13774
8117 7900
10/31/09 9365 9676
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- ---------------------------------------------
16.81% 2.39% 0.37%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH RUSSELL MIDCAP(R)
FUND GROWTH INDEX
------------ -----------------
1/2/01 10000 10000
7506 6945
6289 5722
8288 7970
9178 8669
11552 10048
12694 11506
15993 13774
8843 7900
10/31/09 10330 9676
</Table>
CLASS R2 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- ---------------------------------------------
16.33% 1.90% -0.06%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH RUSSELL MIDCAP(R)
FUND GROWTH INDEX
------------ -----------------
1/2/01 10000 10000
7484 6945
6249 5722
8207 7970
9055 8669
11345 10048
12398 11506
15547 13774
8553 7900
10/31/09 9949 9676
</Table>
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 reimbursements
were contractual. Under the expense limitation agreement in effect beginning
on August 1, 2009, the Manager was permitted to recoup the amount of certain
management fee waivers or expense reimbursements from the Fund if such action
did not cause the Fund to exceed existing expense limitations and the
recoupment was made within the term of agreement. This agreement was set to
expire on July 31, 2010. Class A, Class B and Class C shares were introduced
on January 2, 2001. Effective November 12, 2009, the Fund merged with and
into MainStay Large Cap Growth Fund.
2. Performance figures for Investor Class shares, first offered to the public 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 I shares, first offered to the public on March
29, 2005, include the historical performance of Class A shares through March
28, 2005, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. Performance figures for Class R2 shares, first offered to the public on
December 14, 2007, include the historical
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 Growth Fund
CLASS R3 SHARES(5)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- ---------------------------------------------
16.15% 1.74% -0.26%
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH RUSSELL MIDCAP(R)
FUND GROWTH INDEX
------------ -----------------
1/2/01 10000 10000
7468 6945
6220 5722
8149 7970
8969 8669
11209 10048
12230 11506
15303 13774
8415 7900
10/31/09 9775 9676
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE SINCE
YEAR YEARS INCEPTION
Russell Midcap(R) Growth Index(6) 22.48% 2.22% -0.37%
Average Lipper mid-cap growth fund(7) 16.74 1.56 -0.58
</Table>
performance of Class A shares through April 30, 2008, adjusted for
differences in certain contractual fees and expenses. Unadjusted, the
performance shown for Class R2 shares might have been lower. Class R2 shares
commenced investment operations on May 1, 2008.
5. Performance figures for Class R3 shares, first offered to the public on April
28, 2006, include the historical performance of Class A 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) Growth Index measures the performance of those Russell
Midcap(R) companies with higher price-to-book ratios and higher forecasted
growth values. The stocks are also members of the Russell 1000(R) Growth
Index. Total returns assume reinvestment of all income and capital gains. The
Russell Midcap(R) Growth Index is the Fund's broad-based securities market
index for comparison purposes. An investment cannot be made directly in an
index.
7. The average Lipper mid-cap growth fund is representative of funds that, by
portfolio practice, invest at least 75% of their equity assets in companies
with market capitalizations (on a three-year weighted basis) below Lipper's
U.S. Diversified Equity large-cap floor. Mid-cap growth funds typically have
an above-average price-to-earnings ratio, price-to-book ratio, and three-year
sales-per-share growth value compared to the S&P MidCap 400 Index. This
benchmark is a product of Lipper Inc.
THE FOOTNOTES ON THE PRECEDING TWO PAGES 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 GROWTH FUND
(UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,160.50 $ 8.71 $1,017.10 $ 8.13
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,162.60 $ 7.03 $1,018.70 $ 6.56
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,155.30 $12.77 $1,013.40 $11.93
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,156.90 $12.78 $1,013.40 $11.93
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,163.80 $ 6.11 $1,019.60 $ 5.70
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,160.30 $ 8.00 $1,017.80 $ 7.48
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,160.10 $ 9.36 $1,016.50 $ 8.74
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.60% for Investor Class, 1.29% for Class A, 2.35% for Class B and Class C,
1.12% for Class I, 1.47% for Class R2 and 1.72% for Class R3) multiplied by
the average account value over the period, divided by 365 and multiplied by
184 (to reflect the one-half year period). The table above represents the
actual expenses incurred during the one-half year period.
8 MainStay Mid Cap Growth Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Specialty Retail 8.4%
Energy Equipment & Services 5.8
Aerospace & Defense 5.3
Electronic Equipment & Instruments 4.5
Textiles, Apparel & Luxury Goods 4.4
Health Care Equipment & Supplies 4.2
Health Care Providers & Services 4.2
Software 4.1
IT Services 3.7
Semiconductors & Semiconductor
Equipment 3.6
Machinery 3.5
Wireless Telecommunication Services 3.5
Commercial Services & Supplies 3.0
Internet Software & Services 3.0
Chemicals 2.6
Biotechnology 2.5
Construction & Engineering 2.5
Oil, Gas & Consumable Fuels 2.5
Hotels, Restaurants & Leisure 2.4
Containers & Packaging 2.1
Life Sciences Tools & Services 1.9
Multiline Retail 1.9
Diversified Consumer Services 1.7
Household Durables 1.7
Personal Products 1.7
Real Estate Investment Trusts 1.7
Electrical Equipment 1.5
Capital Markets 1.3
Distributors 1.2
Household Products 1.2
Communications Equipment 1.1
Exchange Traded Fund 1.0
Road & Rail 0.9
Metals & Mining 0.8
Airlines 0.7
Computers & Peripherals 0.7
Insurance 0.7
Thrifts & Mortgage Finance 0.6
Beverages 0.4
Diversified Telecommunication
Services 0.4
Media 0.3
Commercial Banks 0.2
Diversified Financial Services 0.2
Multi-Utilities 0.2
Automobiles 0.1
Building Products 0.1
Office Electronics 0.1
Tobacco 0.1
Short-Term Investment 0.1
Liabilities in Excess of Other
Assets (0.3)
-----
100.0%
=====
</Table>
See Portfolio of Investments on Page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Amphenol Corp. Class A
2. Newfield Exploration Co.
3. Precision Castparts Corp.
4. Guess?, Inc.
5. Crown Holdings, Inc.
6. SBA Communications Corp. Class A
7. Fluor Corp.
8. Alliant Techsystems, Inc.
9. Coach, Inc.
10. Equinix, Inc.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY MACKAY SHIELDS LLC (MACKAY SHIELDS), THE FUND'S FORMER
SUBADVISOR, AND TONY H. ELAVIA OF NEW YORK LIFE INVESTMENTS, THE FUND'S
MANAGER.(1)
HOW DID MAINSTAY MID CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Mid Cap Growth Fund returned 16.20% for
Investor Class shares, 16.56% for Class A shares, 15.37% for Class B shares and
15.37% for Class C shares for the 12 months ended October 31, 2009. Over the
same period, the Fund's Class I shares returned 16.81%, Class R2 shares returned
16.33% and Class R3 shares returned 16.15%. Class I shares outperformed--and the
remaining share classes underperformed--the 16.74% return of the average
Lipper(2) mid-cap growth fund for the 12-month period ended October 31, 2009.
All share classes underperformed the 22.48% return of the Russell Midcap(R)
Growth Index(3) for the same 12-month period. The Russell Midcap(R) Growth Index
is the Fund's broad-based securities-market index. See pages 5 and 6 for Fund
returns with sales charges.
WERE THERE ANY CHANGES IN THE FUND'S DAY-TO-DAY MANAGEMENT DURING THE REPORTING
PERIOD?
In connection with a larger initiative by MacKay Shields to reposition and
rationalize its investment capabilities, the Fund's Board of Trustees approved
the termination of MacKay Shields as the Subadvisor to the Fund effective June
29, 2009. For the period from November 1, 2008, to June 28, 2009, the Fund's
performance figures referenced above reflect the performance of the Fund while
it was managed by its former subadvisor, MacKay Shields.
On June 23, 2009, the Fund's Board of Trustees approved a reorganization of the
Fund with and into MainStay Large Cap Growth Fund, which was approved by Fund
shareholders on November 5, 2009.
WHAT MAJOR FACTORS AFFECTED THE FUND DURING THE 12 MONTHS ENDED OCTOBER 31,
2009?
During the first few months of the reporting period, the stock market continued
to decline in response to the credit crisis and uncertainty about the
government's intervention plans. In the first quarter of 2009, the stock market
reversed course and rallied through the end of June.
During the last four months of the reporting period, the equity market continued
to strengthen as it became increasingly clear that an economic catastrophe had
been averted.
WHAT FACTORS HAD A POSITIVE IMPACT ON THE FUND'S RELATIVE PERFORMANCE DURING THE
REPORTING PERIOD?
During the first eight months of the reporting period, the Fund benefited from
an underweight position relative to the Russell Midcap(R) Growth Index in the
utilities sector. During this portion of the reporting period, stock selection
in the energy sector also enhanced the Fund's performance relative to the
benchmark.
During the last four months of the reporting period, a significantly overweight
position relative to the Russell Midcap(R) Growth Index in consumer cyclicals,
particularly in the apparel and textiles industry, and underweight positions in
financials and utilities had a positive impact on the Fund's performance. The
Fund maintained a bias toward growth equities that were inexpensively priced in
relation to earnings and book value. This bias also contributed positively to
the Fund's performance during the last four months of the reporting period.
WHAT FACTORS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, the Fund's investments in
the health care, consumer discretionary and consumer staples sectors detracted
from the Fund's performance relative to the Russell Midcap(R) Growth Index.
During the last four months of the reporting period, the Fund's overall security
selection detracted from results. An underweight position in consumer
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
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. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns. The Fund's use of securities
lending presents the risk of default by the borrower, which may result in a loss
to the Fund.
1. During the reporting period, New York Life Investments delegated day-to-day
portfolio management responsibilities to MacKay Shields from November 1,
2008, to June 29, 2009, and managed the Fund directly without the use of a
Subadvisor beginning on June 29, 2009. MacKay Shields is an affiliate of New
York Life Investments. "New York Life Investments" is a service mark used by
New York Life Investment Management LLC.
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) Growth
Index.
10 MainStay Mid Cap Growth Fund
noncyclicals, particularly in the food & beverages industry, also detracted from
the Fund's performance relative to the Russell Midcap(R) Growth Index. Having a
substantial allocation to wireless telecommunication companies hurt the Fund's
relative results as well.
During the last four months of the reporting period, the Fund was slightly
biased against securities that were trending down in favor of those that enjoyed
positive momentum. As a result, the Fund was significantly underweight relative
to the benchmark in many of the lowest-quality securities with the highest
volatility profiles. Many of these securities had fallen precipitously when the
market declined, but were among the leaders in the summer rally. As a result,
the Fund's momentum positioning detracted from results relative to the Russell
Midcap(R) Growth Index during the last four months of the reporting period.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG CONTRIBUTORS TO THE FUND'S
ABSOLUTE RETURN AND WHICH STOCKS WERE SIGNIFICANT DETRACTORS?
During the first eight months of the reporting period, the Fund's absolute
performance benefited from positions in oil and natural gas exploration company
Newfield Exploration, Internet content and delivery company Akamai Technologies
and casual apparel company Guess?, Inc. Significant detractors during this
portion of the reporting period included Chattem, a manufacturer of branded
over-the-counter health care products; Atwood Oceanics, an oil and gas drilling
company; and Thermo Fisher Scientific, an analytical instruments company selling
to pharmaceutical and manufacturing companies.
In the last four months of the reporting period, the three strongest
contributors to the Fund's absolute performance were retailer Guess?, Inc.,
defense and aerospace contractor Precision Castparts and electronic equipment
manufacturer Amphenol. Major detractors from the Fund's absolute performance
during this portion of the reporting period were construction and engineering
firm Fluor, information-management services provider Iron Mountain and computer
hardware manufacturer Synaptics.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, the Fund established new
positions in computer security software company McAfee, video game retailer
GameStop, and restaurant company Yum! Brands. Stocks that were sold during the
first eight months of the reporting period included design and engineering
software developer Autodesk and clinical research and development services
provider ICON PLC.
During the last four months of the reporting period, turnover was kept to a
minimum. The Fund established positions in consumer products firm Newell
Rubbermaid, specialty retailer Foot Locker and information technology services
provider Amdocs. Significant sales during the last four months of the reporting
period included graphics chip maker NVIDIA, energy equipment and services
provider Weatherford International and medical product maker Thermo Fisher
Scientific.
HOW DID THE FUND'S SECTOR AND INDUSTRY GROUP WEIGHTINGS CHANGE DURING THE
REPORTING PERIOD?
During the first eight months of the reporting period, the Fund increased
exposure to the consumer discretionary, information technology and materials
sectors. Over the same period, the Fund decreased its weightings in the health
care and industrials sectors.
During the last four months of the reporting period, the biggest weighting
increase relative to the Russell Midcap(R) Growth Index was in the consumer
discretionary sector--particularly in the consumer services, consumer durables &
apparel and retailing industry groups. The Fund also increased its exposure to
financials, though the position remained underweight relative to the benchmark.
During the last four months of the reporting period, the Fund's greatest
weighting reduction was in the information technology sector, especially in the
technology hardware & equipment industry group. The Fund's exposure to the
energy and industrials sectors also declined.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund was overweight relative to the Russell
Midcap(R) Growth Index in the consumer discretionary, industrials and
telecommunication services sectors. On the same date, the Fund was underweight
relative to the benchmark index in financials, consumer staples and utilities.
- ----------
The opinions expressed are those of the responders 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, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 99.2%+
- ------------------------------------------------------------
AEROSPACE & DEFENSE 5.3%
V Alliant Techsystems, Inc.
(a) 36,714 $ 2,855,615
L-3 Communications Holdings,
Inc. 24,717 1,786,792
V Precision Castparts Corp. 36,998 3,534,419
-------------
8,176,826
-------------
AIRLINES 0.7%
AMR Corp. (a) 169,225 912,123
Copa Holdings S.A. Class A 5,137 216,935
-------------
1,129,058
-------------
AUTOMOBILES 0.1%
Thor Industries, Inc. 8,466 221,978
-------------
BEVERAGES 0.4%
Hansen Natural Corp. (a) 15,981 577,713
-------------
BIOTECHNOLOGY 2.5%
Alexion Pharmaceuticals, Inc.
(a) 26,145 1,161,099
Cephalon, Inc. (a) 28,796 1,571,686
United Therapeutics Corp. (a) 27,102 1,152,919
-------------
3,885,704
-------------
BUILDING PRODUCTS 0.1%
Armstrong World Industries,
Inc. (a) 4,739 176,528
-------------
CAPITAL MARKETS 1.3%
Affiliated Managers Group,
Inc. (a) 28,781 1,827,306
Investment Technology Group,
Inc. (a) 6,703 144,584
Northern Trust Corp. 1,269 63,767
-------------
2,035,657
-------------
CHEMICALS 2.6%
Airgas, Inc. 35,267 1,564,444
Ashland, Inc. 14,218 491,090
Scotts Miracle-Gro Co. (The)
Class A 48,383 1,965,317
-------------
4,020,851
-------------
COMMERCIAL BANKS 0.2%
CapitalSource, Inc. 97,968 348,766
-------------
COMMERCIAL SERVICES & SUPPLIES 3.0%
Brink's Co. (The) 4,807 114,070
Copart, Inc. (a) 47,798 1,537,662
Iron Mountain, Inc. (a) 75,849 1,852,991
Stericycle, Inc. (a) 20,180 1,056,826
-------------
4,561,549
-------------
COMMUNICATIONS EQUIPMENT 1.1%
Brocade Communications
Systems, Inc. (a) 129,915 1,114,671
Harris Corp. 14,877 620,668
-------------
1,735,339
-------------
COMPUTERS & PERIPHERALS 0.7%
Diebold, Inc. 5,226 158,034
NCR Corp. (a) 43,946 446,052
Synaptics, Inc. (a) 18,905 425,363
-------------
1,029,449
-------------
CONSTRUCTION & ENGINEERING 2.5%
V Fluor Corp. 64,606 2,869,798
Quanta Services, Inc. (a) 46,694 989,913
-------------
3,859,711
-------------
CONTAINERS & PACKAGING 2.1%
V Crown Holdings, Inc. (a) 121,386 3,234,937
-------------
DISTRIBUTORS 1.2%
LKQ Corp. (a) 107,511 1,856,715
-------------
DIVERSIFIED CONSUMER SERVICES 1.7%
Capella Education Co. (a) 26,278 1,810,554
H&R Block, Inc. 34,381 630,548
Hillenbrand, Inc. 4,752 94,945
Weight Watchers
International, Inc. 4,033 106,915
-------------
2,642,962
-------------
DIVERSIFIED FINANCIAL SERVICES 0.2%
CIT Group, Inc. 349,626 251,731
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.4%
Windstream Corp. 56,407 543,763
-------------
ELECTRICAL EQUIPMENT 1.5%
Roper Industries, Inc. 46,321 2,341,527
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 4.5%
V Amphenol Corp. Class A 95,628 3,836,595
Anixter International, Inc.
(a) 12,583 526,599
Avnet, Inc. (a) 103,955 2,576,005
-------------
6,939,199
-------------
ENERGY EQUIPMENT & SERVICES 5.8%
Atwood Oceanics, Inc. (a) 73,785 2,618,630
Dresser-Rand Group, Inc. (a) 43,968 1,295,737
ENSCO International, Inc. 23,176 1,061,229
National Oilwell Varco, Inc.
(a) 65,097 2,668,326
Seahawk Drilling, Inc. (a) 7,056 190,512
Smith International, Inc. 39,844 1,104,874
-------------
8,939,308
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 4.2%
Becton, Dickinson & Co. 17,274 1,180,851
C.R. Bard, Inc. 16,350 1,227,394
Gen-Probe, Inc. (a) 5,631 234,925
Hill-Rom Holdings, Inc. 16,151 316,398
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding
short-term investment. May be subject to change daily.
12 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HEALTH CARE EQUIPMENT & SUPPLIES (CONTINUED)
Hospira, Inc. (a) 47,743 $ 2,131,248
St. Jude Medical, Inc. (a) 38,732 1,319,987
-------------
6,410,803
-------------
HEALTH CARE PROVIDERS & SERVICES 4.2%
Coventry Health Care, Inc.
(a) 28,391 562,994
DaVita, Inc. (a) 21,505 1,140,410
Henry Schein, Inc. (a) 38,281 2,022,385
Lincare Holdings, Inc. (a) 11,258 353,614
Medco Health Solutions, Inc.
(a) 42,937 2,409,624
-------------
6,489,027
-------------
HOTELS, RESTAURANTS & LEISURE 2.4%
Choice Hotels International,
Inc. 4,715 140,601
MGM MIRAGE (a) 86,176 798,852
Panera Bread Co. Class A (a) 18,253 1,094,815
Yum! Brands, Inc. 50,971 1,679,494
-------------
3,713,762
-------------
HOUSEHOLD DURABLES 1.7%
M.D.C. Holdings, Inc. 6,636 216,466
Newell Rubbermaid, Inc. 161,688 2,346,093
-------------
2,562,559
-------------
HOUSEHOLD PRODUCTS 1.2%
Church & Dwight Co., Inc. 32,479 1,847,405
-------------
INSURANCE 0.7%
Arthur J. Gallagher & Co. 11,991 267,519
Endurance Specialty Holdings,
Ltd. 5,954 214,285
Erie Indemnity Co. Class A 2,316 81,639
OneBeacon Insurance Group,
Ltd. Class A 2,517 30,003
Validus Holdings, Ltd. 19,321 488,821
-------------
1,082,267
-------------
INTERNET SOFTWARE & SERVICES 3.0%
Akamai Technologies, Inc. (a) 82,610 1,817,420
V Equinix, Inc. (a) 32,231 2,749,949
WebMD Health Corp. Class A
(a) 2,045 69,653
-------------
4,637,022
-------------
IT SERVICES 3.7%
Alliance Data Systems Corp.
(a) 43,047 2,366,724
Amdocs, Ltd. (a) 42,395 1,068,354
Fiserv, Inc. (a) 47,317 2,170,431
NeuStar, Inc. Class A (a) 5,498 127,004
-------------
5,732,513
-------------
LIFE SCIENCES TOOLS & SERVICES 1.9%
Millipore Corp. (a) 31,450 2,107,464
Thermo Fisher Scientific,
Inc. (a) 16,350 735,750
-------------
2,843,214
-------------
MACHINERY 3.5%
Actuant Corp. Class A 48,605 758,724
AGCO Corp. (a) 26,737 751,577
Joy Global, Inc. 51,016 2,571,716
Toro Co. (The) 4,439 164,332
Valmont Industries, Inc. 15,466 1,117,728
-------------
5,364,077
-------------
MEDIA 0.3%
Clear Channel Outdoor
Holdings, Inc. Class A (a) 10,738 73,233
New York Times Co. (The)
Class A 38,310 305,331
Warner Music Group Corp. (a) 15,924 91,722
-------------
470,286
-------------
METALS & MINING 0.8%
Compass Minerals
International, Inc. 10,754 670,189
Schnitzer Steel Industries,
Inc. Class A 13,480 582,875
-------------
1,253,064
-------------
MULTI-UTILITIES 0.2%
Integrys Energy Group, Inc. 8,956 309,878
-------------
MULTILINE RETAIL 1.9%
Big Lots, Inc. (a) 2,753 68,963
Dollar Tree, Inc. (a) 12,005 541,785
Kohl's Corp. (a) 39,682 2,270,604
-------------
2,881,352
-------------
OFFICE ELECTRONICS 0.1%
Zebra Technologies Corp.
Class A (a) 4,869 121,725
-------------
OIL, GAS & CONSUMABLE FUELS 2.5%
V Newfield Exploration Co.
(a) 87,326 3,582,113
Peabody Energy Corp. 6,655 263,471
-------------
3,845,584
-------------
PERSONAL PRODUCTS 1.7%
Avon Products, Inc. 62,686 2,009,087
Chattem, Inc. (a) 6,662 422,171
Herbalife, Ltd. 7,042 236,963
-------------
2,668,221
-------------
REAL ESTATE INVESTMENT TRUSTS 1.7%
Alexandria Real Estate
Equities, Inc. 15,105 818,238
Digital Realty Trust, Inc. 38,592 1,741,657
-------------
2,559,895
-------------
ROAD & RAIL 0.9%
J.B. Hunt Transport Services,
Inc. 43,527 1,308,422
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.6%
Cypress Semiconductor Corp.
(a) 31,889 268,824
Integrated Device Technology,
Inc. (a) 120,670 709,540
Intersil Corp. Class A 46,478 583,299
Linear Technology Corp. 33,289 861,519
Marvell Technology Group,
Ltd. (a) 131,134 1,799,158
Microsemi Corp. (a) 18,007 239,673
NVIDIA Corp. (a) 35,824 428,455
Silicon Laboratories, Inc.
(a) 16,763 702,370
-------------
5,592,838
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
SOFTWARE 4.1%
FactSet Research Systems,
Inc. 27,892 $ 1,786,483
McAfee, Inc. (a) 46,107 1,930,961
MICROS Systems, Inc. (a) 76,560 2,060,995
Novell, Inc. (a) 17,694 72,368
Solera Holdings, Inc. 13,553 436,678
-------------
6,287,485
-------------
SPECIALTY RETAIL 8.4%
American Eagle Outfitters,
Inc. 94,859 1,659,084
Barnes & Noble, Inc. 14,455 240,097
Foot Locker, Inc. 105,884 1,109,664
V Guess?, Inc. 96,330 3,520,861
Penske Auto Group, Inc. 12,553 196,580
PetSmart, Inc. 75,279 1,771,315
RadioShack Corp. 41,703 704,364
Sherwin-Williams Co. (The) 26,440 1,508,138
TJX Cos., Inc. 46,036 1,719,445
Williams-Sonoma, Inc. 22,244 417,742
-------------
12,847,290
-------------
TEXTILES, APPAREL & LUXURY GOODS 4.4%
V Coach, Inc. 83,675 2,758,765
Deckers Outdoor Corp. (a) 26,566 2,382,173
Phillips-Van Heusen Corp. 38,933 1,563,160
-------------
6,704,098
-------------
THRIFTS & MORTGAGE FINANCE 0.6%
New York Community Bancorp,
Inc. 85,372 921,164
-------------
TOBACCO 0.1%
Lorillard, Inc. 1,514 117,668
-------------
WIRELESS TELECOMMUNICATION SERVICES 3.5%
American Tower Corp. Class A
(a) 46,429 1,709,516
NTELOS Holdings Corp. 56,674 855,777
V SBA Communications Corp.
Class A (a) 101,765 2,870,791
-------------
5,436,084
-------------
Total Common Stocks
(Cost $149,776,886) 152,516,974
-------------
EXCHANGE TRADED FUND 1.0% (B)
- ------------------------------------------------------------
iShares Russell Midcap Growth
Index Fund 39,105 1,597,439
-------------
Total Exchange Traded Fund
(Cost $1,663,024) 1,597,439
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 0.1%
- ------------------------------------------------------------
REPURCHASE AGREEMENT 0.1%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$122,537
(Collateralized by an
United States Treasury Bill
with a rate of 0.105% and a
maturity date of 3/18/10,
with a Principal Amount of
$130,000 and a Market Value
of $129,948) $122,537 $ 122,537
-------------
Total Short-Term Investment
(Cost $122,537) 122,537
-------------
Total Investments
(Cost $151,562,447) (c) 100.3% 154,236,950
Liabilities in Excess of
Other Assets (0.3) (534,497)
----- ------------
Net Assets 100.0% $ 153,702,453
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Exchange Traded Fund--represents a basket
of securities that is traded on an
exchange.
(c) At October 31, 2009, cost is $152,604,108
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized
appreciation $ 12,401,591
Gross unrealized
depreciation (10,768,749)
------------
Net unrealized appreciation $ 1,632,842
============
</Table>
14 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
<Table>
<Caption>
QUOTED
PRICES
IN ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $152,516,974 $ -- $ -- $152,516,974
Exchange Traded Fund 1,597,439 -- -- 1,597,439
Short-Term Investment
Repurchase Agreement -- 122,537 -- 122,537
------------ -------- ----- ------------
Total Investments in Securities $154,114,413 $122,537 $-- $154,236,950
============ ======== ===== ============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with significant
unobservable inputs (Level 3).
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $151,562,447) $154,236,950
Receivables:
Fund shares sold 43,489
Investment securities sold 39,759
Dividends and interest 24,056
Other assets 14,820
------------
Total assets 154,359,074
------------
LIABILITIES:
Payables:
Fund shares redeemed 260,581
Transfer agent (See Note 3) 123,684
Shareholder communication 115,332
Professional fees 75,247
NYLIFE Distributors (See Note 3) 53,679
Manager (See Note 3) 21,697
Custodian 2,528
Trustees 525
Accrued expenses 3,348
------------
Total liabilities 656,621
------------
Net assets $153,702,453
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 170,890
Additional paid-in capital 186,667,804
------------
186,838,694
Accumulated net realized loss on
investments (35,810,744)
Net unrealized appreciation on
investments 2,674,503
------------
Net assets $153,702,453
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 18,800,419
============
Shares of beneficial interest
outstanding 2,063,844
============
Net asset value per share
outstanding $ 9.11
Maximum sales charge (5.50% of
offering price) 0.53
------------
Maximum offering price per share
outstanding $ 9.64
============
CLASS A
Net assets applicable to
outstanding shares $ 45,361,690
============
Shares of beneficial interest
outstanding 4,957,679
============
Net asset value per share
outstanding $ 9.15
Maximum sales charge (5.50% of
offering price) 0.53
------------
Maximum offering price per share
outstanding $ 9.68
============
CLASS B
Net assets applicable to
outstanding shares $ 24,559,872
============
Shares of beneficial interest
outstanding 2,895,206
============
Net asset value and offering price
per share outstanding $ 8.48
============
CLASS C
Net assets applicable to
outstanding shares $ 17,526,414
============
Shares of beneficial interest
outstanding 2,066,613
============
Net asset value and offering price
per share outstanding $ 8.48
============
CLASS I
Net assets applicable to
outstanding shares $ 45,162,965
============
Shares of beneficial interest
outstanding 4,852,891
============
Net asset value and offering price
per share outstanding $ 9.31
============
CLASS R2
Net assets applicable to
outstanding shares $ 90,541
============
Shares of beneficial interest
outstanding 9,924
============
Net asset value and offering price
per share outstanding $ 9.12
============
CLASS R3
Net assets applicable to
outstanding shares $ 2,200,552
============
Shares of beneficial interest
outstanding 242,859
============
Net asset value and offering price
per share outstanding $ 9.06
============
</Table>
16 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,059,514
Interest 4,378
------------
Total income 1,063,892
------------
EXPENSES:
Manager (See Note 3) 1,146,609
Transfer agent--Investor Class
(See Note 3) 101,123
Transfer agent--Class A (See Note
3) 174,825
Transfer agent--Class B and C
(See Note 3) 252,785
Transfer agent--Classes I, R2 and
R3 (See Note 3) 170,996
Distribution--Class B (See Note
3) 180,341
Distribution--Class C (See Note
3) 132,291
Distribution--Class R3 (See Note
3) 4,516
Distribution/Service--Investor
Class (See Note 3) 41,683
Distribution/Service--Class A
(See Note 3) 112,457
Service--Class B (See Note 3) 60,114
Service--Class C (See Note 3) 44,097
Distribution/Service--Class R2
(See Note 3) 97
Distribution/Service--Class R3
(See Note 3) 4,516
Shareholder communication 187,635
Professional fees 113,548
Registration 92,357
Custodian 10,324
Trustees 6,873
Shareholder service--Class R2
(See Note 3) 39
Shareholder service--Class R3
(See Note 3) 1,806
Miscellaneous 17,984
------------
Total expenses before waiver 2,857,016
Expense waiver from Manager (See
Note 3) (526,560)
------------
Net expenses 2,330,456
------------
Net investment loss (1,266,564)
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss on investments (29,929,904)
Net change in unrealized
depreciation on investments 53,007,200
------------
Net realized and unrealized gain on
investments 23,077,296
------------
Net increase in net assets
resulting from operations $ 21,810,732
============
</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
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (1,266,564) $ (2,536,274)
Net realized loss on
investments (29,929,904) (5,815,695)
Net change in unrealized
appreciation (depreciation)
on investments 53,007,200 (126,003,444)
----------------------------
Net increase (decrease) in
net assets resulting from
operations 21,810,732 (134,355,413)
----------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A -- (7,429,800)
Class B -- (3,346,490)
Class C -- (2,373,368)
Class I -- (1,272,029)
Class R3 -- (32,821)
----------------------------
Total distributions to
shareholders -- (14,454,508)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 22,612,143 127,139,225
Net asset value of shares
issued to shareholders in
reinvestment of
distributions -- 12,105,806
Cost of shares redeemed (49,364,211) (118,114,858)
----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions (26,752,068) 21,130,173
----------------------------
Net decrease in net
assets (4,941,336) (127,679,748)
NET ASSETS:
Beginning of year 158,643,789 286,323,537
----------------------------
End of year $153,702,453 $ 158,643,789
============================
</Table>
18 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
--------------------------
2009 2008
Net asset value at
beginning of period $ 7.84 $ 12.74
------- -------
Net investment loss (a) (0.07) (0.08)
Net realized and
unrealized gain (loss)
on investments 1.34 (4.82)
------- -------
Total from investment
operations 1.27 (4.90)
------- -------
Less distributions:
From net realized gain
on investments -- --
------- -------
Net asset value at end of
period $ 9.11 $ 7.84
======= =======
Total investment return(b) 16.20% (38.46%)(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.88%) (1.03%)++
Net expenses 1.60% 1.56% ++
Expenses (before
recoupment/waiver/-
reimbursement) 1.93% 1.56% ++
Portfolio turnover rate 59% 55%
Net assets at end of
period (in 000's) $18,800 $16,217
</Table>
<Table>
<Caption>
CLASS B
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 7.35 $ 14.26 $ 11.95 $ 10.98 $ 8.82
------- ------- ------- ------- -------
Net investment loss (a) (0.12) (0.19) (0.18) (0.17) (0.17)
Net realized and
unrealized gain (loss)
on investments 1.25 (5.96) 3.01 1.14 2.33
------- ------- ------- ------- -------
Total from investment
operations 1.13 (6.15) 2.83 0.97 2.16
------- ------- ------- ------- -------
Less distributions:
From net realized gain
on investments -- (0.76) (0.52) -- --
------- ------- ------- ------- -------
Net asset value at end of
period $ 8.48 $ 7.35 $ 14.26 $ 11.95 $ 10.98
======= ======= ======= ======= =======
Total investment return
(b) 15.37% (45.45%) 24.51% 8.83% 24.49%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.63%) (1.66%) (1.37%) (1.44%) (1.66%)
Net expenses 2.35% 2.27% 2.25% 2.25% 2.25%
Expenses (before
recoupment/waiver/-
reimbursement) 2.68% 2.25% 2.19% 2.30% 2.38%
Portfolio turnover rate 59% 55% 48% 52% 44%
Net assets at end of
period (in 000's) $24,560 $27,477 $62,665 $57,469 $62,792
</Table>
<Table>
** Commencement of operations.
++ Annualized.
*** Class R2 commenced operations on December 14, 2007, but investment operations
did not commence until May 1, 2008.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R2 and Class R3
shares are not subject to sales charges.
(c) Total return is not annualized.
(d) The amount shown for a share outstanding does not correspond with aggregate
net realized and unrealized gain (loss) on investments due to the timing of
purchases and redemptions of Fund shares in relation to fluctuating market
values of the investments of the Fund during the period.
(e) Total return is calculated assuming a purchase of a share of the first day and
a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total return includes the effect of expense
subsidies.
</Table>
mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
2009 2008 2007 2006 2005
$ 7.85 $ 15.03 $ 12.47 $ 11.40 $ 9.09
------- ------- -------- -------- -------
(0.04) (0.09) (0.09) (0.09) (0.10)
1.34 (6.33) 3.17 1.16 2.41
------- ------- -------- -------- -------
1.30 (6.42) 3.08 1.07 2.31
------- ------- -------- -------- -------
-- (0.76) (0.52) -- --
------- ------- -------- -------- -------
$ 9.15 $ 7.85 $ 15.03 $ 12.47 $ 11.40
======= ======= ======== ======== =======
16.56% (44.89%) 25.53% 9.39% 25.41%
(0.57%) (0.75%) (0.63%) (0.69%) (0.91%)
1.29% 1.37% 1.50% 1.50% 1.50%
1.71% 1.48% 1.44% 1.55% 1.63%
59% 55% 48% 52% 44%
$45,362 $50,497 $146,359 $124,741 $48,597
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 7.35 $ 14.25 $ 11.94 $ 10.99 $ 8.82
------- ------- ------- ------- -------
(0.12) (0.19) (0.18) (0.17) (0.17)
1.25 (5.95) 3.01 1.12 2.34
------- ------- ------- ------- -------
1.13 (6.14) 2.83 0.95 2.17
------- ------- ------- ------- -------
-- (0.76) (0.52) -- --
------- ------- ------- ------- -------
$ 8.48 $ 7.35 $ 14.25 $ 11.94 $ 10.99
======= ======= ======= ======= =======
15.37% (45.41%) 24.53% 8.64% 24.60%
(1.63%) (1.64%) (1.36%) (1.44%) (1.66%)
2.35% 2.25% 2.25% 2.25% 2.25%
2.68% 2.25% 2.19% 2.30% 2.38%
59% 55% 48% 52% 44%
$17,526 $20,414 $44,769 $42,625 $14,181
</Table>
20 MainStay Mid Cap Growth Fund
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
------------------------------------------------------
MARCH 29,
2005**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at beginning of period $ 7.97 $ 15.20 $ 12.56 $11.43 $10.45
------- ------- ------- ------ ------
Net investment loss (a) (0.03) (0.06) (0.03) (0.04) (0.03)
Net realized and unrealized gain (loss) on investments 1.37 (6.41) 3.19 1.17 1.01
------- ------- ------- ------ ------
Total from investment operations 1.34 (6.47) 3.16 1.13 0.98
------- ------- ------- ------ ------
Less distributions:
From net realized gain on investments -- (0.76) (0.52) -- --
------- ------- ------- ------ ------
Net asset value at end of period $ 9.31 $ 7.97 $ 15.20 $12.56 $11.43
======= ======= ======= ====== ======
Total investment return (b) 16.81% (44.71%) 25.99% 9.89% 9.38% (c)
Ratios (to average net assets)/Supplemental Data:
Net investment loss (0.40%) (0.49%) (0.19%) (0.28%) (0.51%)++
Net expenses 1.12% 1.07% 1.01% 1.07% 1.10% ++
Expenses (before recoupment/waiver/reimbursement) 1.46% 1.22% 1.00% 1.04% 1.23% ++
Portfolio turnover rate 59% 55% 48% 52% 44%
Net assets at end of period (in 000's) $45,163 $42,450 $31,993 $1,626 $4,205
</Table>
<Table>
<Caption>
CLASS R3
------------------------------------------
APRIL 28,
2006**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------
2009 2008 2007 2006
Net asset value at beginning of period $ 7.80 $ 14.99 $12.46 $13.24
------ ------- ------ ------
Net investment loss (a) (0.08) (0.13) (0.10) (0.08)
Net realized and unrealized gain (loss) on investments 1.34 (6.30) 3.15 (0.70)(d)
------ ------- ------ ------
Total from investment operations 1.26 (6.43) 3.05 (0.78)
------ ------- ------ ------
Less distributions:
From net realized gain on investments -- (0.76) (0.52) --
------ ------- ------ ------
Net asset value at end of period $ 9.06 $ 7.80 $14.99 $12.46
====== ======= ====== ======
Total investment return (b) 16.15% (45.01%) 25.13% (e) (5.89%)(c)
Ratios (to average net assets)/Supplemental Data:
Net investment loss (1.01%) (1.13%) (0.76%) (1.27%)(d)++
Net expenses 1.72% 1.69% 1.64% 1.62% ++
Expenses (before recoupment/waiver/reimbursement) 2.06% 1.85% 1.60% 1.75% ++
Portfolio turnover rate 59% 55% 48% 52%
Net assets at end of period (in 000's) $2,201 $ 1,574 $ 536 $ 762
</Table>
<Table>
** Commencement of operations.
++ Annualized.
*** Class R2 commenced operations on December 14, 2007, but investment operations
did not commence until May 1, 2008.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R2 and Class R3
shares are not subject to sales charges.
(c) Total return is not annualized.
(d) The amount shown for a share outstanding does not correspond with aggregate
net realized and unrealized gain (loss) on investments due to the timing of
purchases and redemptions of Fund shares in relation to fluctuating market
values of the investments of the Fund during the period.
(e) Total return is calculated assuming a purchase of a share of the first day and
a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total return includes the effect of expense
subsidies.
</Table>
mainstayinvestments.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R2
- --------------------------
APRIL 30,
2008***
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
- --------------------------
2009 2008
$ 7.84 $ 12.69
------ -------
(0.06) (0.05)
1.34 (4.80)
------ -------
1.28 (4.85)
------ -------
-- ,--
------ -------
$ 9.12 $ 7.84
====== =======
16.33% (38.22%)(c)
(0.74%) (0.92%)++
1.47% 1.47% ++
1.80% 1.69% ++
59% 55%
$ 91 $ 15
</Table>
22 MainStay Mid Cap Growth Fund
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Mid Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares, Class B
shares and Class C shares commenced operations on January 2, 2001. Class I
shares commenced operations on March 29, 2005. Class R3 shares commenced
operations on April 28, 2006. Class R2 shares were first offered to the public
on December 14, 2007 but did not commence investment operations until May 1,
2008. Investor Class shares commenced operations on February 28, 2008. Investor
Class and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I, Class R2 and Class R3 shares are offered at NAV and 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 seven 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 and service 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 shares are not subject to a distribution or service fee.
Class R2 and Class R3 shares are authorized to pay a shareholder service fee 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 R2 or
Class R3 shares.
Effective prior to the opening of the U.S. financial markets on June 29, 2009,
the Fund's Board of Trustees terminated the Subadvisory Agreement with Mackay
Shields LLC.
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. Investments
in other mutual funds are valued at their NAVs as of the close of the New York
Stock Exchange on the valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to establish classification of fair value measurements for disclosure purposes.
"Inputs" refer broadly to the assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk, such as the
risk inherent in a particular valuation technique used to measure fair value
using a pricing model and/or the risk inherent in the inputs for the valuation
technique. Inputs may be observable or unobservable. Observable inputs are
inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of the reporting entity. Unobservable inputs are inputs that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the information
available in the circumstances. The inputs or methodology used for valuing
securities may not be an indication of the risks associated with investing in
those securities. The three-tier hierarchy of inputs is summarized in the three
broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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
investments 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 NAV
on the date the expenses are incurred. The expenses borne by the Fund, including
those of related parties to the Fund, are shown in the Statement of Operations.
24 MainStay Mid Cap Growth Fund
(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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments reserve the right to
reinstitute lending when deemed appropriate.
(I) 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 AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund and is
responsible for the day-to-day portfolio management of 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.
Effective prior to the opening of the U.S. financial markets on June 29, 2009,
the Fund's Board of Trustees terminated MacKay Shields LLC as subadvisor. From
June 29, 2009 until the merger with MainStay Large Cap Growth Fund, the Fund was
managed solely by New York Life Investments.
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:
0.75% on assets up to $500 million and 0.70% on assets in excess of $500
million, plus a fee for accounting services previously provided by New York Life
Investments under a separate fund accounting agreement.
Effective August 1, 2009, New York Life Investments entered into a written
expense limitation agreement under which it agreed to waive a portion of the
Fund's management fee or reimburse the expenses of the appropriate class
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1.60%; Class A, 1.29%; Class B, 2.35%; Class C, 2.35%;
Class I, 1.12%; Class R2, 1.47%; and Class R3, 1.72%.
Prior to August 1, 2009, New York Investments had written expense limitation
agreements that set the expense limitations for Investor Class, Class A, Class
B, Class C and Class I shares at the same levels as the August 1, 2009
agreement. For the year ended October 31, 2009, New York Life Investments earned
fees from the Fund in the amount of $1,146,609 and waived its fees in the amount
of $526,560.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV of the Class B and Class C shares of the Fund. Pursuant
to the Class R3 Plan, the Distributor receives a monthly distribution and
shareholder service fee from the Class R3 shares at an annual rate of 0.50% of
the average daily net assets of the Class R3 shares, which is an expense of the
Class R3 shares 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 Plans for the 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 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
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 $9,463
and $6,360, respectively, for the year ended October 31, 2009. 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 $19, $98,
$48,613 and $1,959, respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $699,729.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 197 0.0%++
- ----------------------------------------
Class C 94 0.0++
- ----------------------------------------
Class I 1,956 0.0++
- ----------------------------------------
Class R2 17,967 19.8
- ----------------------------------------
Class R3 7,522 0.3
- ----------------------------------------
</Table>
++ Less than one-tenth of a percent.
26 MainStay Mid Cap Growth Fund
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $6,975.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(34,769,083) $-- $1,632,842 $(33,136,241)
- -------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$1,266,564 $8,420 $(1,274,984)
- ------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to net operating loss.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $34,769,083 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000)'S
2016 $ 5,085
2017 29,684
- ------------------------------------
Total $34,769
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Long-Term Capital Gains $-- $14,454,508
- --------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 fund maintain a line of credit 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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
or the one month LIBOR rate, whichever is higher. There were no borrowings made
or outstanding with respect to the Fund on the line of credit during the year
ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $84,120 and $95,320, respectively.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 266,203 $ 2,099,647
Shares redeemed (465,162) (3,608,828)
-----------------------
Net decrease in shares
outstanding before
conversion (198,959) (1,509,181)
Shares converted into
Investor Class (See Note 1) 320,024 2,382,215
Shares converted from
Investor Class (See Note 1) (126,301) (1,125,167)
-----------------------
Net decrease (5,236) $ (252,133)
=======================
Period ended October 31, 2008
(a):
Shares sold 650,644 $ 8,080,031
Shares redeemed (437,418) (4,985,772)
-----------------------
Net increase in shares
outstanding before
conversion 213,226 3,094,259
Shares converted into
Investor Class (See Note 1) 1,990,946 23,392,469
Shares converted from
Investor Class (See Note 1) (135,092) (1,467,071)
-----------------------
Net increase 2,069,080 $25,019,657
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 1,106,705 $ 8,618,884
Shares redeemed (2,668,784) (21,148,584)
-------------------------
Net decrease in shares
outstanding before
conversion (1,562,079) (12,529,700)
Shares converted into Class
A (See Note 1) 247,797 2,094,577
Shares converted from Class
A (See Note 1) (163,428) (1,200,734)
-------------------------
Net decrease (1,477,710) $(11,635,857)
=========================
Year ended October 31, 2008:
Shares sold 2,119,917 $ 26,323,936
Shares issued to
shareholders in
reinvestment of
distributions 448,564 6,185,696
Shares redeemed (4,255,998) (51,074,655)
-------------------------
Net decrease in shares
outstanding before
conversion (1,687,517) (18,565,023)
Shares converted into Class
A (See Note 1) 307,231 3,621,491
Shares converted from Class
A (See Note 1) (1,925,040) (22,590,926)
-------------------------
Net decrease (3,305,326) $(37,534,458)
=========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 302,682 $ 2,191,542
Shares redeemed (846,930) (6,010,471)
-------------------------
Net decrease in shares
outstanding before
conversion (544,248) (3,818,929)
Shares converted from Class
B (See Note 1) (297,853) (2,150,891)
-------------------------
Net decrease (842,101) $ (5,969,820)
=========================
Year ended October 31, 2008:
Shares sold 594,315 $ 6,771,739
Shares issued to
shareholders in
reinvestment of
distributions 240,662 3,135,647
Shares redeemed (1,239,107) (13,549,287)
-------------------------
Net decrease in shares
outstanding before
conversion (404,130) (3,641,901)
Shares converted from Class
B (See Note 1) (254,524) (2,955,963)
-------------------------
Net decrease (658,654) $ (6,597,864)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 179,320 $ 1,272,902
Shares redeemed (889,744) (6,409,535)
-------------------------
Net decrease (710,424) $ (5,136,633)
=========================
Year ended October 31, 2008:
Shares sold 589,483 $ 6,948,196
Shares issued to
shareholders in
reinvestment of
distributions 114,038 1,483,727
Shares redeemed (1,068,004) (11,848,473)
-------------------------
Net decrease (364,483) $ (3,416,550)
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 977,153 $ 7,585,135
Shares redeemed (1,452,386) (11,723,752)
-------------------------
Net decrease (475,233) $ (4,138,617)
=========================
Year ended October 31, 2008:
Shares sold 5,989,672 $ 76,499,333
Shares issued to
shareholders in
reinvestment of
distributions 90,825 1,267,915
Shares redeemed (2,857,388) (36,138,977)
-------------------------
Net increase 3,223,109 $ 41,628,271
=========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 7,955 $ 66,805
Shares redeemed (1) (7)
-------------------------
Net increase 7,954 $ 66,798
=========================
Year ended October 31, 2008
(b):
Shares sold 1,970 $ 25,000
-------------------------
Net increase 1,970 $ 25,000
=========================
</Table>
(b) Class R2 was seeded April 30, 2008. Investment operations did not commence
until May 1, 2008
28 MainStay Mid Cap Growth Fund
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 100,080 $ 777,228
Shares redeemed (58,879) (463,034)
--------------------
Net increase 41,201 $ 314,194
====================
Year ended October 31, 2008:
Shares sold 210,199 $2,490,990
Shares issued to shareholders
in reinvestment of
distributions 2,389 32,821
Shares redeemed (46,726) (517,694)
--------------------
Net increase 165,862 $2,006,117
====================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified, except for the
following:
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of the Fund was held on
November 5, 2009, at the offices of New York Life Investment Management LLC in
Parsippany, New Jersey. The purpose of the meeting was to approve the
reorganization of the Fund with and into MainStay Large Cap Growth Fund.
No other business came before the special meeting.
The proposal was approved by the shareholders of the Fund by the vote tally
shown below:
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTENTIONS TOTAL
9,590,135 115,185 237,887 9,943,206
- -------------------------------------------------------------------------------
</Table>
Effective as of the close of business on November 12, 2009, the Fund merged with
and into MainStay MAP Fund and was subsequently liquidated.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Growth Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Mid Cap Growth Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
30 MainStay Mid Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Mid Cap Growth Fund ("Fund") and
New York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and MacKay Shields LLC
("MacKay Shields") on behalf of the Fund.
Separately, on June 23, 2009, the Board approved New York Life Investments'
proposal to reorganize the Fund with and into the MainStay Large Cap Growth Fund
and to terminate the Subadvisory Agreement with MacKay Shields. At the same
meeting, the Board also approved the appointment of Tony Elavia as portfolio
manager of the Fund, in his position as an officer of New York Life Investments,
effective upon the termination of MacKay Shields. In determining to approve
these actions, the Board took several factors into account, including the fact
that the actions would be part of a larger initiative designed to reposition,
rationalize and streamline the MainStay Group of Funds to reduce duplication
among funds, strengthen the overall fund lineup, and offer funds with more
significant asset levels.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience
mainstayinvestments.com 31
with overseeing affiliated and non-affiliated subadvisers. The Board considered
the experience of senior personnel at New York Life Investments providing
management and administrative services to the Fund, as well as New York Life
Investments' reputation and financial condition. The Board considered New York
Life Investments' performance in fulfilling its responsibilities for overseeing
the Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
32 MainStay Mid Cap Growth Fund
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to MacKay Shields from legally
permitted "soft-dollar" arrangements by which brokers provide research and other
services to MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund. The Board also
considered the impact of the Fund's expense limitation arrangements pursuant to
which New York Life Investments has agreed to limit the Fund's total ordinary
operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses
mainstayinvestments.com 33
charged by similar mutual funds managed by other investment advisers. The Board
noted the impact of the recent economic crisis on the MainStay Group of Funds
and, consistent with statements from SEC staff members and with published advice
from Strategic Insight, the Board reviewed supplemental peer data that reflected
more recent peer groupings based on relatively smaller asset sizes. In addition,
the Board considered information provided by New York Life Investments and
MacKay Shields on fees charged 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 explanations
from New York Life Investments and MacKay Shields about the different scope of
services provided to retail mutual funds as compared with other investment
advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management and subadvisory fees and total ordinary operating expenses
were within a range that is competitive and, within the context of the Board's
overall conclusions regarding the Agreements, support a conclusion that these
fees and expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
34 MainStay Mid Cap Growth Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2008, the Fund designates approximately
$6,688,004 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 3.1% to arrive at the amount eligible for qualified
interest income and 100.0% 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 New York Life Investments 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 SEC's 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 Funds' 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
MainStay Investments at 800-MAINSTAY (624-6782).You can also 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
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
36 MainStay Mid Cap Growth Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Mid Cap Growth Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t--Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
40 MainStay Mid Cap Growth Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO15916 (RECYCLE LOGO) MS283-09 MSMG11-12/09
11
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 13
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT 31
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 36
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 36
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 36
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 37
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(1) YEARS(1)
- ---------------------------------------------------------
With sales charges -1.62% -1.45% 0.55%
Excluding sales charges 4.11 -0.33 1.12
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE S&P 500(R) RUSSELL 1000(R)
FUND INDEX VALUE INDEX
-------------- ---------- ---------------
10/31/99 9450 10000 10000
10496 10609 10552
9773 7967 9300
7983 6764 8368
9642 8170 10283
10737 8940 11871
11825 9720 13280
13871 11308 16130
15599 12954 17877
10147 8278 11299
10/31/09 10563 9090 11839
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges -1.52% -1.44% 0.55%
Excluding sales charges 4.21 -0.32 1.12
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE S&P 500(R) RUSSELL 1000(R)
FUND INDEX VALUE INDEX
-------------- ---------- ---------------
10/31/99 23625 25000 25000
26240 26523 26379
24434 19918 23251
19959 16909 20921
24106 20426 25706
26843 22350 29679
29563 24299 33200
34677 28270 40324
38999 32386 44692
25348 20696 28247
10/31/09 26416 22725 29598
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges -1.75% -1.43% 0.34%
Excluding sales charges 3.25 -1.12 0.34
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE S&P 500(R) RUSSELL 1000(R)
FUND INDEX VALUE INDEX
-------------- ---------- ---------------
10/31/99 10000 10000 10000
11028 10609 10552
10187 7967 9300
8259 6764 8368
9902 8170 10283
10947 8940 11871
11962 9720 13280
13928 11308 16130
15552 12954 17877
10023 8278 11299
10/31/09 10349 9090 11839
</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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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 CDSC and have an annual 12b-1 fee of 0.25%.
Class R1 and Class R2 shares are available only through corporate-sponsored
retirement programs, which include certain minimum program requirements.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee
THE FOOTNOTES ON THE FOLLOWING 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--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- --------------------------------------------------------
With sales charges 2.25% -1.12% 0.34%
Excluding sales charges 3.25 -1.12 0.34
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE S&P 500(R) RUSSELL 1000(R)
FUND INDEX VALUE INDEX
-------------- ---------- ---------------
10/31/99 10000 10000 10000
11028 10609 10552
10187 7967 9300
8259 6764 8368
9902 8170 10283
10947 8940 11871
11962 9720 13280
13928 11308 16130
15545 12954 17877
10023 8278 11299
10/31/09 10348 9090 11839
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------
4.69% 0.07% 1.44%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE S&P 500(R) RUSSELL 1000(R)
FUND INDEX VALUE INDEX
-------------- ---------- ---------------
10/31/99 10000 10000 10000
11133 10609 10552
10381 7967 9300
8499 6764 8368
10291 8170 10283
11500 8940 11871
12691 9720 13280
14947 11308 16130
16890 12954 17877
11025 8278 11299
10/31/09 11542 9090 11839
</Table>
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------
4.47% -0.03% 1.35%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE S&P 500(R) RUSSELL 1000(R)
FUND INDEX VALUE INDEX
-------------- ---------- ---------------
10/31/99 10000 10000 10000
11129 10609 10552
10368 7967 9300
8480 6764 8368
10256 8170 10283
11452 8940 11871
12634 9720 13280
14866 11308 16130
16782 12954 17877
10948 8278 11299
10/31/09 11438 9090 11839
</Table>
waivers and/or expense limitations were contractual. Under the expense
limitation agreement in effect beginning on August 1, 2009, the Manager was
permitted to recoup the amount of certain management fee waivers or expense
reimbursements from the Fund if such action did not cause the Fund to exceed
existing expense limitations and the recoupment was made within the term of
the agreement. This agreement was set to expire on July 31, 2010. Performance
figures shown reflect nonrecurring reimbursements from affiliates for
professional fees and losses attributable to shareholder trading
arrangements. If these nonrecurring reimbursements had not been made the
total return (excluding sales charges) would have been -0.33% for Class A,
-1.21% for Class B, -1.13% for Class C, 0.07% for Class I, -0.02% for Class
R1 and -0.30% for Class R2 for the five-year period ended October 31, 2009,
and 1.12% for Class A, 0.30% for Class B, 0.34% for Class C, 1.44% for Class
I, 1.35% for Class R1 and 1.08% for Class R2 for the ten-year period then
ended. Investor Class shares were not affected because the reimbursement
occurred prior to the launch of the share class. Effective November 12, 2009,
the Fund merged with and into MainStay ICAP Select Equity Fund.
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.
THE FOOTNOTES ON THE PRECEDING PAGE AND ON THE FOLLOWING PAGE ARE AN INTEGRAL
PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH
THEM.
6 MainStay Value Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------
4.26% -0.29% 1.09%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE S&P 500(R) RUSSELL 1000(R)
FUND INDEX VALUE INDEX
-------------- ---------- ---------------
10/31/99 10000 10000 10000
11097 10609 10552
10313 7967 9300
8417 6764 8368
10154 8170 10283
11307 8940 11871
12440 9720 13280
14612 11308 16130
16435 12954 17877
10689 8278 11299
10/31/09 11144 9090 11839
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
S&P 500(R) Index(4) 9.80% 0.33% -0.95%
Russell 1000(R) Value Index(5) 4.78 -0.05 1.70
Average Lipper large-cap value fund(6) 8.59 -0.05 1.43
</Table>
3. Performance figures for Class I, R1 and R2 shares, each of which was first
offered on January 2, 2004, include the historical performance of Class B
shares through January 1, 2004, adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for Class I,
R1 and R2 shares might have been lower.
4. "S&P 500," and "S&P," are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500(R) Index is widely regarded as the standard index for measuring
large-cap U.S. stock market performance. Results assume reinvestment of all
dividends and capital gains. The S&P 500 index is the Fund's broad-based
securities market index for comparison purposes. An investment cannot be made
directly in an index. The Fund has selected the S&P 500(R) Index as its
primary benchmark index in replacement of the Russell 1000(R) Value Index
because it believes that the S&P 500(R) Index is more reflective of the
Fund's investment style.
5. The Russell 1000(R) Value Index measures the performance of those Russell
1000(R) companies with lower price-to-book ratios and lower forecasted growth
rates. The Russell 1000(R) Index measures the performance of the 1,000
largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000(R)
Index. The Russell 3000(R) Index measures the performance of the 3,000
largest U.S. companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market. Total returns assume
reinvestment of all dividends and capital gains. An investment cannot be made
directly in an index.
6. The average Lipper large-cap value fund is representative of funds that, by
portfolio practice, invest at least 75% of their equity assets in companies
with market capitalization (on a three-year weighted basis) above Lipper's
U.S. Diversified Equity large-cap floor. Large-cap value funds typically have
a below-average price-to-earning ratio, price-to-book ratio, and three-year
sales-per-share growth value, compared to the S&P 500(R) Index. This
benchmark is a product of Lipper Inc. 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 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 VALUE FUND (UNAUDITED)
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,192.30 $ 7.02 $1,018.80 $ 6.46
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,193.50 $ 6.08 $1,019.70 $ 5.60
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,187.60 $11.14 $1,015.00 $10.26
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,187.60 $11.14 $1,015.00 $10.26
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,195.50 $ 3.93 $1,021.60 $ 3.62
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,195.20 $ 3.38 $1,022.10 $ 3.11
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,193.40 $ 5.86 $1,019.90 $ 5.40
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.27% for Investor Class, 1.10% for Class A, 2.02% for Class B and Class C,
0.71% for Class I, 0.81% for Class R1 and 1.06% for Class R2) multiplied by
the average account value over the period, divided by 365 and multiplied by
184 (to reflect the one-half year period). The table above represents the
actual expenses incurred during the one-half year period.
8 MainStay Value Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Pharmaceuticals 13.8%
Commercial Banks 9.4
Semiconductors & Semiconductor
Equipment 7.7
Oil, Gas & Consumable Fuels 6.0
Machinery 5.9
Beverages 5.1
Aerospace & Defense 4.8
Insurance 4.8
Road & Rail 4.0
Energy Equipment & Services 3.9
Food & Staples Retailing 3.9
Wireless Telecommunication Services 3.8
Metals & Mining 3.6
Computers & Peripherals 3.3
Specialty Retail 3.2
Diversified Financial Services 3.1
Media 3.1
Health Care Equipment & Supplies 2.7
Consumer Finance 2.5
Auto Components 2.2
Industrial Conglomerates 0.9
Cash and Other Assets, Less
Liabilities 2.3
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 13 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Pfizer, Inc.
2. Schering-Plough Corp.
3. PepsiCo, Inc.
4. Texas Instruments, Inc.
5. Caterpillar, Inc.
6. CSX Corp.
7. CVS Caremark Corp.
8. Halliburton Co.
9. Vodafone Group PLC
10. Wells Fargo & Co.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY MACKAY SHIELDS LLC (MACKAY SHIELDS), THE FUND'S FORMER
SUBADVISOR, AND JERROLD K. SENSER, CFA, AND THOMAS R. WENZEL, CFA, OF
INSTITUTIONAL CAPITAL LLC (ICAP), THE FUND'S INTERIM SUBADVISOR.(1)
HOW DID MAINSTAY VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Value Fund returned 4.11% for Investor
Class shares, 4.21% for Class A shares and 3.25% for both Class B and Class C
shares for the 12 months ended October 31, 2009. Over the same period, the
Fund's Class I shares returned 4.69%, Class R1 shares returned 4.47% and Class
R2 shares returned 4.26%. All share classes underperformed the 8.59% return of
the average Lipper(2) large-cap value fund, the 9.80% return of the S&P 500(R)
Index(3) and the 4.78% return of the Russell 1000(R) Value Index(4) for the 12
months ended October 31, 2009. The S&P 500(R) Index is the Fund's broad-based
securities-market index. See pages 5 and 6 for Fund returns with sales charges.
WERE THERE ANY CHANGES IN THE FUND'S DAY-TO-DAY MANAGEMENT DURING THE REPORTING
PERIOD?
In connection with a larger initiative by MacKay Shields to reposition and
rationalize its investment capabilities, the Fund's Board of Trustees approved
the replacement of MacKay Shields with ICAP as the interim Subadvisor to the
Fund, effective June 29, 2009. For the period from November 1, 2008, to June 28,
2009, the Fund's performance figures referenced above reflect the performance of
the Fund while it was managed by its former subadvisor, MacKay Shields.
On June 23, 2009, the Fund's Board of Trustees approved changing the Fund's
investment objective, principal investment strategy and investment process and
amending its principal risks to more closely align them with those of the
MainStay ICAP Select Equity Fund. Effective June 29, 2009, the Fund's primary
benchmark index changed from the Russell 1000(R) Value Index to the S&P 500(R)
Index. A proposed reorganization of the Fund with and into MainStay ICAP Select
Equity Fund was approved by Fund shareholders on November 5, 2009.
WHAT MAJOR FACTORS AFFECTED THE FUND DURING THE 12 MONTHS ENDED OCTOBER 31,
2009?
During the first few months of the reporting period, the stock market continued
to decline in response to the credit crisis and uncertainty about the
government's intervention plans. In the first quarter of 2009, the stock market
reversed course and rallied through the end of June.
During the last four months of the reporting period, the equity market continued
to strengthen as it became increasingly clear that an economic catastrophe had
been averted.
WHAT FACTORS ACCOUNTED FOR THE FUND'S PERFORMANCE RELATIVE TO ITS BENCHMARK
INDEX DURING THE REPORTING PERIOD?
During the first eight months of the reporting period, strong stock selection in
the industrials, consumer discretionary and materials sectors helped the Fund's
performance relative to the Russell 1000(R) Value Index. The Fund's underweight
position and poor stock selection in the financials sector detracted from
performance during the first eight months of the reporting period.
During the last four months of the reporting period, the Fund outperformed the
S&P 500(R) Index largely because of favorable stock selection in the health care
and industrials sectors. These strong contributors more than offset the Fund's
weaker stock selection in the consumer staples and consumer discretionary
sectors.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE STRONG CONTRIBUTIONS TO THE
FUND'S PERFORMANCE AND WHICH SECTORS DETRACTED FROM PERFORMANCE?
During the first eight months of the reporting period, the Fund saw strong
performance in the information technology, consumer discretionary and materials
sectors. The Fund's financial holdings detracted from performance.
- ----------
Investments in common stocks and other equity securities are particularly
subject to the risk of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
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.
1. During the reporting period, New York Life Investments delegated day-to-day
portfolio management responsibilities to MacKay Shields from November 1,
2008, to June 29, 2009, and to ICAP beginning on June 29, 2009. MacKay
Shields and ICAP are both affiliates of New York Life Investments. "New York
Life Investments" is a service mark used by New York Life Investment
Management LLC.
2. See footnote on page 7 for more information about Lipper Inc.
3. See footnote on page 7 for more information on the S&P 500(R) Index.
4. See footnote on page 7 for more information on the Russell 1000(R) Value
Index.
10 MainStay Value Fund
During the last four months of the reporting period, the Fund's strongest
contributing sector relative to the S&P 500(R) Index was industrials, followed
by utilities and telecommunication services. The sectors that detracted the most
from the Fund's performance relative to the Index included consumer staples,
information technology and consumer discretionary.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE
FUND'S ABSOLUTE RETURN AND WHICH STOCKS WERE PARTICULARLY WEAK?
During the first eight months of the reporting period, positive performers
included diversified technology and manufacturing company Honeywell
International and aerospace and defense security company Northrop Grumman.
Retail holdings Kohl's, TJX, and Home Depot were also strong. Energy-related
companies Suncor Energy and Schlumberger helped the Fund's performance during
this portion of the reporting period, as did information technology companies
International Business Machines, Microsoft and Intel.
Weak performers in the first eight months of the reporting period included
financial companies Citigroup and Bank of America, supermarket company Kroger,
food manufacturer General Mills and offshore drilling companies Transocean and
Diamond Offshore.
During the last four months of the reporting period, the holdings that made the
strongest positive contributions to the Fund's absolute performance were bank
holdings JPMorgan Chase and Capital One Financial and construction equipment
manufacturer Caterpillar. Stock prices at these companies rose as the economic
outlook improved.
Major detractors from the Fund's absolute performance during this portion of the
reporting period included capital markets holding Bank of New York Mellon, which
was eliminated from the Fund, and defense contractor Lockheed Martin. A position
in pharmaceutical company Sanofi-Aventis SA also detracted slightly from the
Fund's absolute returns.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, the Fund initiated new
positions in insurance company MetLife and oil services giant Schlumberger, and
diversified manufacturing company Ingersoll-Rand. The Fund added to its position
in Suncor Energy. During this portion of the reporting period, we eliminated the
Fund's positions in Diamond Offshore Drilling and First Energy Corp.
During the last four months of the reporting period, it was ICAP's opinion that
strong companies would become stronger. The Fund pursued companies that had
strong balance sheets, good market positions and solid operating characteristics
and that were perceived to have the greatest potential to increase their market
share.
The Fund added Halliburton, one of the world's largest energy services
companies, to the Fund's holdings, replacing the Fund's existing position in oil
and natural gas consultant Baker Hughes. In addition to the sales previously
mentioned, the Fund sold networking equipment maker Cisco Systems on the belief
that other candidates offered more attractive valuations and investment
potential.
CAN YOU DESCRIBE THE FUND FROM A SECTOR PERSPECTIVE?
During the first eight months of the reporting period, sector weightings
reflected the Fund's bottom-up stock selection process. They were not determined
by a top-down macroeconomic viewpoint. At the midpoint of the reporting period,
the Fund was overweight relative to the Russell 1000(R) Value Index in the
information technology and industrials sectors. At the same time, the Fund was
underweight in the consumer staples, energy, financials, health care and
utilities sectors. The Fund's exposure was roughly neutral to the Index in the
consumer discretionary, materials and telecommunication services sectors.
During the last four months of the reporting period, the Fund increased its
sector exposure relative to the S&P 500(R) Index in health care, industrials and
information technology. Despite the increase, the Fund's allocation to
information technology remained underweight relative to the Index. The
allocation shift moved the Fund's health care position from underweight to
overweight relative to the S&P 500(R) Index. The Fund's already overweight
exposure to industrials increased even further.
During the last four months of the reporting period, the Fund decreased its
exposure to the energy sector, moving from overweight to underweight relative to
the S&P 500(R) Index.
mainstayinvestments.com 11
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund held an overweight position relative to the S&P
500(R) Index in the financials, health care and industrials sectors. As of the
same date, the Fund was underweight relative to the S&P 500(R) Index in
information technology, consumer staples and utilities. This positioning
reflected ICAP's positive view on the prospects for economic recovery and on the
relative attractiveness of individual holdings in these sectors.
- ----------
The opinions expressed are those of the responders 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.
12 MainStay Value Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 97.7%+
- -------------------------------------------------------------
AEROSPACE & DEFENSE 4.8%
Honeywell International, Inc. 351,176 $ 12,603,706
Lockheed Martin Corp. 52,858 3,636,102
-------------
16,239,808
-------------
AUTO COMPONENTS 2.2%
Johnson Controls, Inc. 313,840 7,507,053
-------------
BEVERAGES 5.1%
V PepsiCo, Inc. 288,247 17,453,356
-------------
COMMERCIAL BANKS 9.4%
BB&T Corp. 300,700 7,189,737
U.S. Bancorp 513,600 11,925,792
V Wells Fargo & Co. 461,228 12,692,994
-------------
31,808,523
-------------
COMPUTERS & PERIPHERALS 3.3%
Hewlett-Packard Co. 233,987 11,105,023
-------------
CONSUMER FINANCE 2.5%
Capital One Financial Corp. 230,893 8,450,684
-------------
DIVERSIFIED FINANCIAL SERVICES 3.1%
JPMorgan Chase & Co. 249,549 10,423,662
-------------
ENERGY EQUIPMENT & SERVICES 3.9%
V Halliburton Co. 449,589 13,132,495
-------------
FOOD & STAPLES RETAILING 3.9%
V CVS Caremark Corp. 377,696 13,332,669
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 2.7%
Covidien PLC 220,090 9,270,191
-------------
INDUSTRIAL CONGLOMERATES 0.9%
Textron, Inc. 173,850 3,091,053
-------------
INSURANCE 4.8%
ACE, Ltd. (a) 174,966 8,986,254
Aon Corp. 188,250 7,249,507
-------------
16,235,761
-------------
MACHINERY 5.9%
V Caterpillar, Inc. 251,953 13,872,532
Cummins, Inc. 139,512 6,007,387
-------------
19,879,919
-------------
MEDIA 3.1%
Viacom, Inc. Class B (a) 375,852 10,369,757
-------------
METALS & MINING 3.6%
Newmont Mining Corp. 279,040 12,127,078
-------------
OIL, GAS & CONSUMABLE FUELS 6.0%
Marathon Oil Corp. 333,778 10,670,883
Occidental Petroleum Corp. 128,439 9,745,951
-------------
20,416,834
-------------
PHARMACEUTICALS 13.8%
V Pfizer, Inc. 1,030,061 17,541,939
Sanofi-Aventis, Sponsored ADR
(b) 316,200 11,674,104
V Schering-Plough Corp. 621,694 17,531,771
-------------
46,747,814
-------------
ROAD & RAIL 4.0%
V CSX Corp. 321,767 13,572,132
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 7.7%
Intel Corp. 608,440 11,627,288
V Texas Instruments, Inc. 623,220 14,614,509
-------------
26,241,797
-------------
SPECIALTY RETAIL 3.2%
Lowe's Cos., Inc. 553,080 10,823,776
-------------
WIRELESS TELECOMMUNICATION SERVICES 3.8%
V Vodafone Group PLC,
Sponsored ADR (b) 581,250 12,897,937
-------------
Total Investments
(Cost $304,397,356) (c) 97.7% 331,127,322
Cash and Other Assets,
Less Liabilities 2.3 7,894,292
----- ------------
Net Assets 100.0% $ 339,021,614
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) At October 31, 2009, cost is $305,952,685
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $31,725,992
Gross unrealized depreciation (6,551,355)
-----------
Net unrealized appreciation $25,174,637
===========
</Table>
+ Percentages indicated are based on Fund net assets.
v Among the Fund's 10 largest holdings, as of October 31, 2009,
excluding short-term investment. 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
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009 (CONTINUED)
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities Common Stocks $331,127,322 $ -- $ -- $331,127,322
------------ -------- -------- ------------
Total Investments in Securities $331,127,322 $-- $-- $331,127,322
============ ======== ======== ============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with significant
unobservable inputs (Level 3).
14 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $304,397,356) $ 331,127,322
Cash 8,796,963
Receivables:
Dividends and interest 379,896
Fund shares sold 57,305
Other assets 23,135
-------------
Total assets 340,384,621
-------------
LIABILITIES:
Payables:
Investment securities purchased 458,483
Fund shares redeemed 251,909
Transfer agent (See Note 3) 234,766
Shareholder communication 175,205
NYLIFE Distributors (See Note 3) 111,264
Manager (See Note 3) 63,226
Professional fees 59,228
Custodian 4,116
Trustees 1,129
Accrued expenses 3,681
-------------
Total liabilities 1,363,007
-------------
Net assets $ 339,021,614
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 247,987
Additional paid-in capital 423,422,311
-------------
423,670,298
Accumulated undistributed net
investment income 2,747,895
Accumulated net realized loss on
investments and foreign currency
transactions (114,126,545)
Net unrealized appreciation on
investments 26,729,966
-------------
Net assets $ 339,021,614
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 126,788,739
=============
Shares of beneficial interest
outstanding 9,256,788
=============
Net asset value per share
outstanding $ 13.70
Maximum sales charge (5.50% of
offering price) 0.80
-------------
Maximum offering price per share
outstanding $ 14.50
=============
CLASS A
Net assets applicable to
outstanding shares $ 138,662,799
=============
Shares of beneficial interest
outstanding 10,132,052
=============
Net asset value per share
outstanding $ 13.69
Maximum sales charge (5.50% of
offering price) 0.80
-------------
Maximum offering price per share
outstanding $ 14.49
=============
CLASS B
Net assets applicable to
outstanding shares $ 54,759,411
=============
Shares of beneficial interest
outstanding 4,041,128
=============
Net asset value and offering price
per share outstanding $ 13.55
=============
CLASS C
Net assets applicable to
outstanding shares $ 5,216,836
=============
Shares of beneficial interest
outstanding 384,887
=============
Net asset value and offering price
per share outstanding $ 13.55
=============
CLASS I
Net assets applicable to
outstanding shares $ 13,548,347
=============
Shares of beneficial interest
outstanding 980,529
=============
Net asset value and offering price
per share outstanding $ 13.82
=============
CLASS R1
Net assets applicable to
outstanding shares $ 1,030
=============
Shares of beneficial interest
outstanding 74
=============
Net asset value and offering price
per share outstanding $ 13.84
=============
CLASS R2
Net assets applicable to
outstanding shares $ 44,452
=============
Shares of beneficial interest
outstanding 3,230
=============
Net asset value and offering price
per share outstanding $ 13.76
=============
</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
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 8,228,907
Interest 13,454
------------
Total income 8,242,361
------------
EXPENSES:
Manager (See Note 3) 2,325,340
Transfer agent--Investor Class
(See Note 3) 672,105
Transfer agent--Class A (See Note
3) 201,973
Transfer agent--Classes B and C
(See Note 3) 358,763
Transfer agent--Classes I, R1 and
R2 (See Note 3) 31,442
Distribution/Service--Investor
Class (See Note 3) 285,998
Distribution/Service--Class A
(See Note 3) 328,179
Service--Class B (See Note 3) 139,661
Service--Class C (See Note 3) 12,842
Distribution/Service--Class R2
(See Note 3) 81
Distribution--Class B (See Note
3) 418,982
Distribution--Class C (See Note
3) 38,525
Shareholder communication 278,985
Professional fees 138,641
Registration 90,544
Trustees 15,112
Custodian 12,990
Shareholder service--Class R1
(See Note 3) 1
Shareholder service--Class R2
(See Note 3) 32
Miscellaneous 27,027
------------
Total expenses before waiver 5,377,223
Expense waiver from Manager (See
Note 3) (1,074,716)
------------
Net expenses 4,302,507
------------
Net investment income 3,939,854
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized loss on:
Security transactions (90,806,851)
Foreign currency transactions (308)
------------
Net realized loss on investments
and foreign currency transactions (90,807,159)
------------
Net change in unrealized
depreciation on investments 92,991,166
------------
Net realized and unrealized gain on
investments and foreign currency
transactions 2,184,007
------------
Net increase in net assets
resulting from operations $ 6,123,861
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$40,974.
16 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 3,939,854 $ 6,329,782
Net realized loss on
investments, written option
transactions and foreign
currency transactions (90,807,159) (22,198,261)
Net change in unrealized
appreciation (depreciation)
on investments 92,991,166 (202,803,052)
----------------------------
Net increase (decrease) in
net assets resulting from
operations 6,123,861 (218,671,531)
----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (2,186,486) --
Class A (3,117,569) (3,992,924)
Class B (492,699) (323,082)
Class C (44,270) (25,973)
Class I (673,430) (648)
Class R1 (22) --
Class R2 (488) --
----------------------------
(6,514,964) (4,342,627)
----------------------------
From net realized gain on investments:
Class A -- (52,313,598)
Class B -- (15,626,249)
Class C -- (1,242,018)
Class I -- (15,209)
Class R1 -- (151)
Class R2 -- (1,090)
----------------------------
-- (69,198,315)
----------------------------
Total dividends and
distributions to
shareholders (6,514,964) (73,540,942)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares $ 20,526,010 $ 71,692,332
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 6,309,542 70,886,486
Cost of shares redeemed (83,950,338) (154,472,103)
----------------------------
Decrease in net assets
derived from capital
share transactions (57,114,786) (11,893,285)
----------------------------
Net decrease in net
assets (57,505,889) (304,105,758)
NET ASSETS:
Beginning of year 396,527,503 700,633,261
----------------------------
End of year $339,021,614 $ 396,527,503
============================
Accumulated undistributed net
investment income at end of
year $ 2,747,895 $ 5,323,313
============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
---------------------------------
FEBRUARY 28,
2008**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
---------------------------------
2009 2008
Net asset value at beginning of
year $ 13.43 $ 18.50
-------- --------
Net investment income (a) 0.14 0.16
Net realized and unrealized gain
(loss) on investments 0.37 (5.23)
-------- --------
Total from investment operations 0.51 (5.07)
-------- --------
Less dividends and distributions:
From net investment income (0.24) --
From net realized gain on
investments -- --
-------- --------
Total dividends and distributions -- --
-------- --------
Net asset value at end of year $ 13.70 $ 13.43
======== ========
Total investment return (b) 4.11% (27.41%)(e)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.18% 1.43% ++
Net expenses 1.27% 1.27% ++
Expenses (before
waiver/reimbursement) 1.72% 1.45% ++
Portfolio turnover rate 149% 57%
Net assets at end of period (in
000's) $126,789 $121,212
</Table>
<Table>
<Caption>
CLASS B
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of year $ 13.22 $ 22.99 $ 23.12 $ 19.96 $ 18.28
------- ------- -------- -------- --------
Net investment income (a) 0.06 0.10 0.09 0.06 0.01
Net realized and
unrealized gain (loss)
on investments 0.37 (7.50) 2.38 3.21(d) 1.68
------- ------- -------- -------- --------
Total from investment
operations 0.43 (7.40) 2.47 3.27 1.69
------- ------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.10) (0.04) (0.06) (0.09) (0.01)
From net realized gain
on investments -- (2.33) (2.54) (0.02) --
------- ------- -------- -------- --------
Total dividends and
distributions (0.10) (2.37) (2.60) (0.11) (0.01)
------- ------- -------- -------- --------
Net asset value at end of
year $ 13.55 $ 13.22 $ 22.99 $ 23.12 $ 19.96
======= ======= ======== ======== ========
Total investment return
(b) 3.25% (35.55%) 11.66% 16.44%(c)(d) 9.27%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 0.54% 0.55% 0.39% 0.30% 0.07%
Net expenses 2.02% 1.97% 1.92% 1.92% 1.96%
Expenses (before
waiver/reimburse-
ment) 2.47% 2.12% 1.96% 2.05%(c) 2.03%
Portfolio turnover rate 149% 57% 50% 48% 43%
Net assets at end of year
(in 000's) $54,759 $71,477 $156,553 $191,086 $560,139
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumed the
reinvestment of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.01 per
share on net realized gains on investments and the effect on total investment
return was 0.05%, respectively.
(e) Total return is not annualized.
</Table>
18 MainStay Value Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 13.41 $ 23.23 $ 23.27 $ 20.09 $ 18.39
-------- -------- -------- -------- --------
0.17 0.24 0.26 0.24 0.16
0.36 (7.57) 2.39 3.21 (d) 1.70
-------- -------- -------- -------- --------
0.53 (7.33) 2.65 3.45 1.86
-------- -------- -------- -------- --------
(0.25) (0.16) (0.15) (0.25) (0.16)
-- (2.33) (2.54) (0.02) --
-------- -------- -------- -------- --------
(0.25) (2.49) (2.69) (0.27) (0.16)
-------- -------- -------- -------- --------
$ 13.69 $ 13.41 $ 23.23 $ 23.27 $ 20.09
======== ======== ======== ======== ========
4.21% (35.00%) 12.46% 17.30%(c)(d) 10.13%
1.42% 1.32% 1.13% 1.11% 0.82%
1.12% 1.16% 1.17% 1.17% 1.21%
1.29% 1.25% 1.21% 1.30%(c) 1.28%
149% 57% 50% 48% 43%
$138,663 $168,582 $531,440 $514,015 $128,918
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
$13.23 $ 22.99 $ 23.12 $ 19.96 $ 18.28
------ ------- ------- ------- -------
0.06 0.10 0.09 0.07 0.02
0.35 (7.49) 2.38 3.20 (d) 1.67
------ ------- ------- ------- -------
0.41 (7.39) 2.47 3.27 1.69
------ ------- ------- ------- -------
(0.09) (0.04) (0.06) (0.09) (0.01)
-- (2.33) (2.54) (0.02) --
------ ------- ------- ------- -------
(0.09) (2.37) (2.60) (0.11) (0.01)
------ ------- ------- ------- -------
$13.55 $ 13.23 $ 22.99 $ 23.12 $ 19.96
====== ======= ======= ======= =======
3.25% (35.52%) 11.61% 16.44%(c)(d) 9.27%
0.50% 0.55% 0.38% 0.34% 0.07%
2.02% 1.97% 1.92% 1.92% 1.96%
2.47% 2.12% 1.96% 2.05%(c) 2.03%
149% 57% 50% 48% 43%
$5,217 $ 6,068 $12,475 $13,381 $13,555
</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>
CLASS I
-------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of year $ 13.54 $ 23.26 $23.24 $ 20.06 $18.43
------- ------- ------ ------- ------
Net investment income (a) 0.24 0.41 0.35 0.32 0.21
Net realized and
unrealized gain (loss)
on investments 0.34 (7.71) 2.41 3.21 (d) 1.69
------- ------- ------ ------- ------
Total from investment
operations 0.58 (7.30) 2.76 3.53 1.90
------- ------- ------ ------- ------
Less dividends and
distributions:
From net investment
income (0.30) (0.09) (0.20) (0.33) (0.27)
From net realized gain
on investments -- (2.33) (2.54) (0.02) --
------- ------- ------ ------- ------
Total dividends and
distributions (0.30) (2.42) (2.74) (0.35) (0.27)
------- ------- ------ ------- ------
Net asset value at end of
year $ 13.82 $ 13.54 $23.26 $ 23.24 $20.06
======= ======= ====== ======= ======
Total investment return
(b) 4.69% (34.73%) 13.00% 17.78%(c)(d) 10.36%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.97% 3.12% 1.54% 1.44% 1.13%
Net expenses 0.71% 0.71% 0.70% 0.75% 0.90%
Expenses (before
waiver/reimbursement) 1.04% 0.94% 0.75% 0.88%(c) 0.97%
Portfolio turnover rate 149% 57% 50% 48% 43%
Net assets at end of
period (in 000's) $13,548 $29,163 $ 152 $19,671 $ 1
</Table>
<Table>
<Caption>
CLASS R2
---------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of year $13.48 $ 23.15 $23.20 $ 20.01 $ 18.38
------ ------- ------ ------- -------
Net investment income (a) 0.16 0.26 0.32 0.25 0.16
Net realized and
unrealized gain (loss)
on investments 0.37 (7.60) 2.33 3.22 (d) 1.67
------ ------- ------ ------- -------
Total from investment
operations 0.53 (7.34) 2.65 3.47 1.83
------ ------- ------ ------- -------
Less dividends and
distributions:
From net investment
income (0.25) -- (0.16) (0.26) (0.20)
From net realized gain
on investments -- (2.33) (2.54) (0.02) --
------ ------- ------ ------- -------
Total dividends and
distributions (0.25) (2.33) (2.70) (0.28) (0.20)
------ ------- ------ ------- -------
Net asset value at end of
year $13.76 $ 13.48 $23.15 $ 23.20 $ 20.01
====== ======= ====== ======= =======
Total investment return
(b) 4.26% (34.96%) 12.48% 17.46%(c)(d) 10.02%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.30% 1.48% 1.43% 1.16% 0.79%
Net expenses 1.06% 1.06% 1.06% 1.10% 1.24%
Expenses (before
waiver/reimbursement) 1.38% 1.23% 1.11% 1.23%(c) 1.31%
Portfolio turnover rate 149% 57% 50% 48% 43%
Net assets at end of
period (in 000's) $ 44 $ 26 $ 11 $13,340 $11,356
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumed the
reinvestment of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.01 per
share on net realized gains on investments and the effect on total investment
return was 0.05%, respectively.
(e) Total return is not annualized.
</Table>
20 MainStay Value Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
-------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
2009 2008 2007 2006 2005
$13.57 $ 23.24 $23.23 $20.05 $18.42
------ ------- ------ ------ ------
0.22 0.32 0.34 0.31 0.21
0.35 (7.66) 2.40 3.20 (d) 1.69
------ ------- ------ ------ ------
0.57 (7.34) 2.74 3.51 1.90
------ ------- ------ ------ ------
(0.30) -- (0.19) (0.31) (0.27)
-- (2.33) (2.54) (0.02) --
------ ------- ------ ------ ------
(0.30) (2.33) (2.73) (0.33) (0.27)
------ ------- ------ ------ ------
$13.84 $ 13.57 $23.24 $23.23 $20.05
====== ======= ====== ====== ======
4.47% (34.76%) 12.89% 17.67%(c)(d) 10.31%
1.77% 1.71% 1.48% 1.43% 1.03%
0.81% 0.81% 0.81% 0.85% 1.00%
1.13% 0.96% 0.86% 0.98%(c) 1.07%
149% 57% 50% 48% 43%
$ 1 $ 1 $ 2 $ 1 $ 1
</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:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Value Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares commenced
operations on January 3, 1995. Class B shares commenced operations on May 1,
1986. Class C shares commenced operations on September 1, 1998. Class I shares,
Class R1 shares and Class R2 shares commenced operations on January 2, 2004.
Investor Class shares commenced operations on February 28, 2008. Investor Class
and Class A shares are offered at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I, Class R1 and Class R2 are offered at NAV and 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 seven 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 and service fee rates than Investor Class, Class A and Class R2
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 and Class R2 shares are authorized to pay a shareholder service fee 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 R1 or
Class R2 shares.
Effective at the opening of the U.S. financial markets on June 29, 2009, the
Fund's Board of Trustees appointed Institutional Capital LLC as interim
subadvisor. Also, effective June 29, 2009, the Fund changed its investment
objective, principal investment strategy, investment process, principal risks
and primary benchmark.
The Fund's investment objective is to seek a superior 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. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in other mutual funds are
valued at their NAVs as of the close of the New York Stock Exchange on the
valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable
22 MainStay Value Fund
market data and minimizes the use of unobservable inputs to establish
classification of fair value measurements for disclosure purposes. "Inputs"
refer broadly to the assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk, such as the risk
inherent in a particular valuation technique used to measure fair value using a
pricing model and/or the risk inherent in the inputs for the valuation
technique. Inputs may be observable or unobservable. Observable inputs are
inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of the reporting entity. Unobservable inputs are inputs that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the information
available in the circumstances. The inputs or methodology used for valuing
securities may not be an indication of the risks associated with investing in
those securities. The three-tier hierarchy of inputs is summarized in the three
broad Levels listed below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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 securities
purchased, other than short-term investments, 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
investments 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.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. These securities are
subject to equity price risk in the normal course of investing in these
transactions. Premiums received are recorded as assets, and the market value of
the written options are recorded as liabilities. The liabilities are
subsequently adjusted and unrealized appreciation or depreciation is recorded to
reflect the current value of the options written. Premiums received from writing
options that expire are treated as realized gains. Premiums received from
writing options that are exercised or are cancelled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, in exchange for the premium, the Fund foregoes the opportunity for
capital appreciation above the exercise price should the price of the underlying
security or foreign currency increase. The Fund, in exchange for the premium,
accepts the risk of a decline in the market value of the underlying security or
foreign currency below the exercise price. A call option may be covered by the
call writer's owning the underlying security throughout the option period. A
call option may also be covered by the call writer's maintaining liquid assets
valued at greater than the exercise price of the call written. When writing a
covered call option, the Fund, in return for the premium on the option, gives up
the opportunity to profit from a price increase in the underlying securities
above the exercise price. However, as long as the obligation as the writer
continues, the Fund has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur risk
exposure equal to the difference between the exercise price of the option and
the sum of the market value of the underlying security plus the premium received
from the sale of the option. The Fund writes covered call options to try to
realize greater return on the sale of a stock. The Fund writes put options to
help protect against unanticipated adverse developments.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing or to increase its current return. The Fund may purchase put options
on its securities or foreign currencies to protect against a decline in the
value of the security or foreign currency or to close out covered written put
positions. The Fund may also purchase options to seek to enhance returns. Risks
may arise from an imperfect correlation between the change in market value of
the securities or foreign currencies held by the Fund and the prices of options
relating to the securities or foreign currencies purchased or sold by the Fund
and from the possible lack of a liquid secondary market for an option. The
maximum risk exposure for any purchased option is limited to the premium
initially paid for the option. At October 31, 2009 there were no open purchased
or written options.
(I) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be collateralized by
cash or securities at least equal at all times to the market value of the
securities
24 MainStay Value Fund
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 will receive compensation for lending its
securities in the form of fees or retain a portion of interest on the investment
of any cash received as collateral. The Fund also will continue 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.
Although the Fund and New York Life Investments have temporarily suspended
Securities Lending, the Fund and New York Life Investments 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.
(K) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show
additional disclosures about the Fund's derivative and hedging activities,
including how such activities are accounted for and their effect on the Fund's
financial positions, performance and cash flows. These derivatives are not
accounted for as hedging instruments.
The Effect of Derivative Instruments on the Statement of Operations for the Year
Ended October 31, 2009
REALIZED GAIN (LOSS)
<Table>
<Caption>
STATEMENT OF EQUITY
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Purchased Options Net realized gain
(loss) on security
transactions $1,090,087 $1,090,087
-----------------------
Total Realized
Gain (Loss) $1,090,087 $1,090,087
=======================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
EQUITY
CONTRACTS
RISK TOTAL
Purchased Options (2) 10,053 10,053
</Table>
(1) Amount disclosed represents the weighted average held during the twelve-
month period.
(2) Amount(s) represent(s) number of contracts or number of shares/units.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of 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. Effective prior to the opening of the U.S. financial markets on June 29,
2009, the Fund's Board of Trustees terminated MacKay Shields LLC as subadvisor.
Institutional Capital LLC (the "Subadvisor"), a registered investment adviser,
now serves as interim subadvisor to the Fund and is responsible for the day-to-
day portfolio management of the Fund. Pursuant to the terms of an interim
Subadvisory Agreement ("Subadvisory Agreement"), between New York Life
Investments and the Subadvisor, New York Life Investments pays for the services
of the Subadvisor.
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:
0.72% on assets up to $200 million, 0.65% on assets from $200 million to $500
million and 0.50% on assets in excess of $500 million, plus a fee for fund
accounting services previously provided by New York Life Investments under a
separate fund accounting agreement.
Effective August 1, 2009, New York Life Investments has 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
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1.27%; Class A, 1.17%; Class B,
2.02%; Class C, 2.02%; Class I, 0.71%; Class R1, 0.81% and Class R2, 1.06%.
Prior to August 1, 2009, New York Investments had written expense limitation
agreements that set the expense limitations for Investor Class, Class A, Class
B, Class C and Class I shares at the same levels as the August 1, 2009
agreement.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $2,325,340 and waived its fees in the amount of
$1,074,716.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV of the Class B and Class C shares of the Fund. Class I
and Class R1 shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1 and Class R2
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 and Class R2 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 and Class R2 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 was $15,772
and $4,427, respectively, for the year ended October 31, 2009. 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 $149, $65,594 and $360,
respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $1,264,283.
(E) MINIMUM BALANCE FEE. 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 minimum balance 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. These fees are included in
transfer agent fees shown on the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $275,945 0.2%
- --------------------------------------------------
Class C 225 0.0++
- --------------------------------------------------
Class I 1,036 0.0++
- --------------------------------------------------
Class R1 1,030 100.0
- --------------------------------------------------
Class R2 1,014 2.3
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $14,900.
26 MainStay Value Fund
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$2,747,895 $(112,571,216) $-- $25,174,637 $(84,648,684)
- --------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals and class action payments basis adjustment.
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, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(308) $308 $--
- ------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss).
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $112,571,216 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $ 21,479
2017 91,092
- ------------------------------------
Total $112,571
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $6,514,964 $21,030,694
Long-Term Capital Gains -- 52,510,248
- -----------------------------------------------------
Total $6,514,964 $73,540,942
- -----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $472,160 and $517,896, respectively.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 287,058 $ 3,382,486
Shares issued to
shareholders in
reinvestment of dividends 184,142 2,171,041
Shares redeemed (1,378,594) (16,362,626)
-------------------------
Net decrease in shares
outstanding before
conversion (907,394) (10,809,099)
Shares converted into
Investor Class (See Note
1) 1,587,922 17,304,404
Shares converted from
Investor Class (See Note
1) (449,766) (6,009,980)
-------------------------
Net increase 230,762 $ 485,325
=========================
Period ended October 31,
2008 (a):
Shares sold 972,151 $ 18,100,434
Shares redeemed (1,105,382) (18,742,164)
-------------------------
Net decrease in shares
outstanding before
conversion (133,231) (641,730)
Shares converted into
Investor Class (See Note
1) 9,563,073 168,412,158
Shares converted from
Investor Class (See Note
1) (403,816) (6,685,141)
-------------------------
Net increase 9,026,026 $161,085,287
=========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 571,332 $ 6,812,169
Shares issued to
shareholders in
reinvestment of dividends 251,704 2,960,019
Shares redeemed (2,897,526) (34,213,869)
---------------------------
Net decrease in shares
outstanding before
conversion (2,074,490) (24,441,681)
Shares converted into Class
A (See Note 1) 727,012 9,348,170
Shares converted from Class
A (See Note 1) (1,089,886) (11,530,851)
---------------------------
Net decrease (2,437,364) $ (26,624,362)
===========================
Year ended October 31,
2008:
Shares sold 841,552 $ 15,161,281
Shares issued to
shareholders in
reinvestment of dividends
and distributions 2,738,278 54,704,352
Shares redeemed (5,669,456) (102,755,321)
---------------------------
Net decrease in shares
outstanding before
conversion (2,089,626) (32,889,688)
Shares converted into Class
A (See Note 1) 1,083,791 19,239,392
Shares converted from Class
A (See Note 1) (9,297,228) (163,532,013)
---------------------------
Net decrease (10,303,063) $(177,182,309)
===========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 382,622 $ 4,482,169
Shares issued to
shareholders in
reinvestment of dividends 40,866 479,771
Shares redeemed (1,003,691) (11,606,188)
---------------------------
Net decrease in shares
outstanding before
conversion (580,203) (6,644,248)
Shares converted from Class
B (See Note 1) (784,045) (9,111,743)
---------------------------
Net decrease (1,364,248) $ (15,755,991)
===========================
Year ended October 31,
2008:
Shares sold 468,919 $ 8,311,600
Shares issued to
shareholders in
reinvestment of dividends
and distributions 783,199 15,470,650
Shares redeemed (1,684,722) (29,642,920)
---------------------------
Net decrease in shares
outstanding before
conversion (432,604) (5,860,670)
Shares converted from Class
B (See Note 1) (970,181) (17,434,396)
---------------------------
Net decrease (1,402,785) $ (23,295,066)
===========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 53,417 $ 642,489
Shares issued to
shareholders in
reinvestment of dividends 2,110 24,771
Shares redeemed (129,447) (1,555,882)
---------------------------
Net decrease (73,920) $ (888,622)
===========================
Year ended October 31,
2008:
Shares sold 66,078 $ 1,210,761
Shares issued to
shareholders in
reinvestment of dividends
and distributions 35,147 694,385
Shares redeemed (185,004) (3,231,612)
---------------------------
Net decrease (83,779) $ (1,326,466)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 460,233 $ 5,190,690
Shares issued to
shareholders in
reinvestment of dividends 56,926 673,430
Shares redeemed (1,690,685) (20,210,679)
---------------------------
Net decrease (1,173,526) $ (14,346,559)
===========================
Year ended October 31,
2008:
Shares sold 2,154,268 $ 28,886,685
Shares issued to
shareholders in
reinvestment of dividends
and distributions 792 15,857
Shares redeemed (7,531) (98,237)
---------------------------
Net increase 2,147,529 $ 28,804,305
===========================
</Table>
28 MainStay Value Fund
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2009:
Shares issued to
shareholders in
reinvestment of dividends 1 $ 22
---------------------------
Net increase 1 $ 22
===========================
Year ended October 31,
2008:
Shares issued to
shareholders in
reinvestment of
distributions 8 $ 152
---------------------------
Net increase 8 $ 152
===========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 1,371 $ 16,007
Shares issued to
shareholders in
reinvestment of dividends 41 488
Shares redeemed (98) (1,094)
---------------------------
Net increase 1,314 $ 15,401
===========================
Year ended October 31,
2008:
Shares sold 1,495 $ 21,571
Shares issued to
shareholders in
reinvestment of
distributions 55 1,090
Shares redeemed (102) (1,849)
---------------------------
Net increase 1,448 $ 20,812
===========================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its management fees relating to the Equity Index Fund for the relevant period)
as well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment of disclosure have been identified, except for the
following:
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of the Fund was held on
November 5, 2009, at the offices of New York Life Investment Management LLC in
Parsippany, New Jersey. The purpose of the meeting was to approve the
reorganization of the Fund with and into MainStay ICAP Select Equity Fund.
No other business came before the special meeting.
The proposal was approved by the shareholders of the Fund by the vote tally
shown below:
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTENTIONS TOTAL
12,352,037 373,334 711,272 13,436,643
- ---------------------------------------------------------
</Table>
Effective as of November 24, 2009, the Fund merged with and into MainStay ICAP
Select Equity Fund and was subsequently liquidated.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Value Fund ("the Fund"), one of
the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, 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 Value Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
30 MainStay Value Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Value Fund ("Fund") and New York
Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and MacKay Shields LLC
("MacKay Shields") on behalf of the Fund.
Separately, on June 23, 2009, the Board approved New York Life Investments'
recommendation to replace MacKay Shields with Institutional Capital LLC ("ICAP"
and together with MacKay Shields, the "Subadvisers") as the subadviser to the
Fund pursuant to an interim subadvisory agreement ("New Subadvisory Agreement").
In addition, the Board approved New York Life Investments' proposal to
reorganize the Fund with and into the MainStay ICAP Select Equity Fund. The New
Subadvisory Agreement provided that ICAP would manage the assets of the Fund on
an interim basis without shareholder approval for a period of 150 days following
the termination of the Fund's previous Subadvisory Agreement with MacKay
Shields, or until the liquidation and dissolution of the Fund, if earlier.(5) In
determining to approve these actions, the Board took several factors into
account, including the fact that the actions would be part of a larger
initiative designed to reposition, rationalize and streamline the MainStay Group
of Funds to reduce duplication among funds, strengthen the overall fund lineup,
and offer funds with more significant asset levels.
In reaching its decisions to approve the Agreements, other than the New
Subadvisory Agreement, the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In reaching its decision to approve the New Subadvisory Agreement, the Board
considered information furnished to the Board that was prepared specifically in
connection with a special contract review process that took place at various
meetings of the Board and its Committees between April 2009 and June 2009. The
Board also considered information regarding New York Life Investments' larger
fund rationalization initiatives. The Board further considered responses from
ICAP 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 determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and the
Subadvisers; (ii) the investment performance of the Fund, New York Life
Investments and MacKay Shields as subadviser to the Fund (and with respect to
ICAP, the historical investment performance of similar portfolios managed by
ICAP); (iii) the costs of the services to be provided, and profits to be
realized, by New York Life Investments and its affiliates, including MacKay
Shields, from their relationship with the Fund (and with respect to ICAP, the
anticipated costs of the services to be provided, and the profits expected to be
realized, by ICAP); (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 and subadvisory
fee levels and overall total ordinary operating expenses, particularly as
compared to similar funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review
- ----------
(5) All of the agreements described herein may be referred to as the
"Agreements."
mainstayinvestments.com 31
processes. The Board's conclusions with respect to the Agreements also were
based, in part, on the Board's consideration of the Agreements 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, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the Fund. A more detailed discussion of the factors that
figured prominently in the Board's decisions to approve the Agreements is
provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience with overseeing
affiliated and non-affiliated subadvisers. The Board considered the experience
of senior personnel at New York Life Investments providing management and
administrative services to the Fund, as well as New York Life Investments'
reputation and financial condition. The Board considered New York Life
Investments' performance in fulfilling its responsibilities for overseeing the
Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that each
Subadviser proposed to provide to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund and each Subadviser's experience
in managing other portfolios. It examined each Subadviser's track record and
experience in providing investment advisory services, the experience of
investment advisory, senior management and administrative personnel at each
Subadviser, and each Subadviser's overall legal and compliance environment. The
Board also reviewed each Subadviser's willingness to invest in personnel
designed to benefit the Fund. In this regard, the Board considered the
experience of each Subadviser's portfolio managers, the number of accounts
managed by the portfolio managers and the method for compensating portfolio
managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' experience, personnel,
operations and resources, and, with respect to the New Subadvisory Agreement,
that the Fund likely would benefit from the nature, extent and quality of these
services as a result of ICAP'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 further considered
MacKay Shields' decision to focus primarily on fixed income asset management and
determined that it would be in the best interest of the Fund to retain ICAP as
subadviser of the Fund. With respect to the Board's consideration of the New
Subadvisory Agreement, the Board considered the historical investment
performance results of similar portfolios managed by ICAP, as well as the
strength of ICAP's resources (including research capabilities) that may result
in stronger long-term investment performance for the Fund over time. The Board
acknowledged that the Fund would be making modifications to its principal
investment strategies, investment processes, principal risks, and primary
benchmark to align it with ICAP's investment approach. The Board particularly
considered the detailed investment analytics reports in regards to New York Life
Investments and MacKay Shields provided by New York Life Investments' Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by New York Life Investments 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
32 MainStay Value 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 New York Life Investments
concerning the Fund's investment performance, as well as discussions between
each Subadviser's portfolio managers and the Board that occurred at meetings
from time to time throughout the year and in previous years. In connection with
its consideration of the New Subadvisory Agreement, the Board took into account
its discussions with senior management and investment personnel at ICAP. The
Board also considered any specific actions that New York Life Investments had
taken, or had agreed with the Board to take, to enhance Fund investment
performance, and the results of those actions. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements that, while the Fund's
investment performance over time has been satisfactory, in the case of the New
Subadvisory Agreement, the selection of ICAP as subadviser to the Fund is likely
to strengthen the Fund's long-term investment performance to the benefit of
shareholders. The Fund discloses more information about investment performance
in the Portfolio Management Discussion and Analysis, Investment and Performance
Comparison 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 NEW YORK LIFE
INVESTMENTS AND EACH SUBADVISER
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, the estimated costs of the
services to be provided by ICAP under the New Subadvisory Agreement, and the
profits expected to be realized by New York Life Investments and its affiliates
due to their relationships with the Fund. Because each Subadviser is an
affiliate of New York Life Investments whose subadvisory fees are paid directly
by New York Life Investments, the Board considered cost and profitability
information for New York Life Investments and each Subadviser in the aggregate.
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates, including each Subadviser, regarding their profitability or
anticipated profitability due to their overall relationships with the Fund. For
New York Life Investments and MacKay Shields, the Board considered information
illustrating the revenues and expenses allocated to the Fund. With respect to
ICAP, the Board did not consider specific profitability information from ICAP's
relationship with the Fund, since ICAP had not commenced its service as
subadviser at the time the Board considered its approval of the New Subadvisory
Agreement. However, the Board considered information provided by ICAP reflecting
ICAP's profitability with respect to similar mutual funds managed by ICAP, and
other information that allowed the Board to estimate the expected costs and
profits of ICAP in connection with its service as subadviser to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to the Subadvisers from legally
permitted "soft-dollar" arrangements by which brokers provide or would provide
research and other services to the Subadvisers in exchange for commissions paid
by the Fund with respect to trades on the Fund's portfolio securities.
mainstayinvestments.com 33
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including each Subadviser) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements, as
applicable. While recognizing that any precise determination of future economies
of scale is necessarily subjective, the Board considered the extent to which New
York Life Investments and the Subadvisers may realize a larger profit margin as
the Fund's assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to each
Subadviser are paid by New York Life Investments, not the Fund. The Board also
considered the impact of the Fund's expense limitation arrangements pursuant to
which New York Life Investments has agreed to limit the Fund's total ordinary
operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses charged by similar mutual funds managed by other investment
advisers. The Board noted the impact of the recent economic crisis on the
MainStay Group of Funds and, consistent with statements from SEC staff members
and with published advice from Strategic Insight, the Board reviewed
supplemental peer data that reflected more recent peer groupings based on
relatively smaller asset sizes. In addition, the Board considered information
provided by New York Life Investments and the Subadvisers on fees charged 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 explanations from New York Life Investments and the
Subadvisers about the different scope of services provided to retail mutual
funds as compared with other investment advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts
34 MainStay Value Fund
relative to competitor funds. The Board noted the role that the MainStay Group
of Funds historically has played in serving the investment needs of New York
Life Insurance Company ("New York Life") policyholders, who often maintain
smaller account balances than other fund investors. The Board discussed measures
that it and New York Life Investments have taken in recent years to mitigate the
effect of small accounts on the expense ratios of Fund share classes, including:
(i) encouraging New York Life agents to consolidate multiple small accounts held
by the same investor into one MainStay Asset Allocation Fund account; (ii)
increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small
accounts with balances below $500; (iv) since 2007, charging an annual $20.00
small account fee on accounts with balances below $1,000; (v) modifying the
approach for billing transfer agent expenses to reduce the degree of
subsidization by large accounts of smaller accounts; and (vi) introducing
Investor Class shares for certain MainStay Funds in early 2008 to consolidate
smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management and subadvisory fees and total ordinary operating expenses
were within a range that is competitive and, within the context of the Board's
overall conclusions regarding the Agreements, support a conclusion that these
fees and expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements and the New Subadvisory Agreement.
mainstayinvestments.com 35
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$8,038,347 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, 2009,
should be multiplied by 0.1% to arrive at the amount eligible for qualified
interest income and 70.4% for the corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND
PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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 Funds' 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
MainStay Investments at 800-MAINSTAY (624-6782). You can also 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).
36 MainStay Value Fund
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 Management LLC and New York
(21 funds); Life Investment Management
ICAP FUNDS, INC.: Director Holdings LLC; Member of the
since 2008 Board of Managers, MacKay
(4 funds); Shields LLC (since 2008);
MAINSTAY TRUST: Trustee since Chairman of the Board,
2008 Institutional Capital LLC,
(14 funds); Madison Capital LLC, McMorgan
MAINSTAY FUNDS TRUST: Trustee & Company LLC, Chairman and
since April 2009 (4 funds); Chief Executive Officer,
and NYLIFE Distributors LLC and
MAINSTAY VP SERIES FUND, INC.: Chairman of the Board of
Director since 2008 Managers, NYLCAP Manager, LLC
(20 portfolios). (since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 2006) State Farm Variable
(21 funds); Product Trust since 2005
ICAP FUNDS, INC.: Director (9 portfolios)
and Audit Committee Financial
Expert since 2007
(4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Value Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (2000 to 2004); Independent
(21 funds); Consultant (1999 to 2000);
ICAP FUNDS, INC.: Director Head of Global Funds, Citicorp
since 2006 (1995 to 1999)
(4 funds);
MAINSTAY TRUST: Trustee since
2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (1994 to 2004)
(21 funds);
ICAP FUNDS, INC.: Director
since 2007
(4 funds);
MAINSTAY TRUST: Trustee since
2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 Director The Carlyle Group
(21 funds); (private investment firm)
ICAP FUNDS, INC.: Director (2002 to 2004); Senior
since 2007 Managing Director, Partner and
(4 funds); Board Member, Groupe Arnault
MAINSTAY TRUST: Trustee since S.A. (private investment firm)
1994 (1999 to 2002)
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 Business, University of
(2 funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007
(21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007
(4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 to 1995) Direxion Insurance Trust
(2 funds); (3 portfolios) since 2007;
ECLIPSE FUNDS INC.: Director Trustee, Direxion Shares
since 2007 ETF Trust, since 2008 (22
(21 funds); portfolios)
ICAP FUNDS, INC.: Director
since 2007
(4 funds);
MAINSTAY TRUST: Trustee since
2007
(14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
40 MainStay Value Fund
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t--Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
mainstayinvestments.com 41
This page intentionally left blank
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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
- ----------------------------------------------------
Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
- -------------------------------------------------------
No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A015950 (RECYCLE LOGO) MS283-09 MSV11-12/09
15
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
Message from the President
and
Annual Report
October 31, 2009
MESSAGE FROM THE PRESIDENT
The 12-month period ended October 31, 2009, was generally positive for stock and
bond investors alike. Signs that the economy was beginning to stabilize brought
renewed hope to investors and helped generate a sharp turnaround in the stock
market.
When the reporting period began, the stock and bond markets were still reacting
to the government's massive bailout plan. Several new facilities were instituted
to help restore market liquidity, and the Federal Reserve agreed to purchase
various types of securities in a strategy known as quantitative easing.
On December 16, 2008, the Federal Open Market Committee lowered the federal
funds target rate to a range between 0.0% and 0.25%. Over time, the markets
responded favorably to the coordinated efforts
of Congress, the Treasury Department, the Federal Deposit Insurance Corporation,
the Federal Reserve and other central banks to address the credit crisis. The
turning point for the U.S. stock market came in March 2009, when investors
became convinced that the worst was over and an economic recovery was likely.
Domestic equities generally advanced for the remainder of the reporting period,
with the strongest results coming from stocks that had been among the hardest
hit when the market fell. Despite advances in some financial stocks, the
financials sector as a whole declined during the reporting period.
International stocks advanced, with strong results in the materials sector as
commodity prices recovered. As investors moved from defensive sectors to more
cyclical stocks, utilities weakened but semiconductor companies recorded strong
results.
In the fixed-income markets, higher-risk segments were particularly strong.
High-yield bonds, floating-rate debt and emerging-market debt were generally
strong performers. U.S. Treasury securities and high-grade corporate issues,
which had been stellar performers in the first half of the reporting period,
weakened as investors' appetite for risk increased.
To keep your investments on a solid footing in a shifting market environment,
our portfolio managers pursued their respective investment objectives and
strategies with confidence and determination. Although short-term variations are
an inevitable part of investing, our portfolio managers know that long-term
results are the ultimate measure of investment success.
Fortunately, after three calendar quarters of economic contraction, gross
domestic product was once again positive in the third quarter of 2009. Corporate
profits, while still below third-quarter 2008 levels, have advanced for three
consecutive quarters. At MainStay Funds, we find this economic data encouraging,
and we hope you do too.
At MainStay, we have long recommended that our clients get invested, stay
invested and add to their investments over time. With prudent diversification,
gradual portfolio adjustments and a long-term perspective, MainStay shareholders
can maintain a positive outlook as they pursue their financial goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
MainStay Funds
Annual Report
October 31, 2009
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND NEW SUBADVISORY
AGREEMENT 31
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 35
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 35
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 35
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 36
INVESTMENT AND PERFORMANCE COMPARISON(1)(UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, 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 10.77% -0.71% 4.22%
Excluding sales charges 17.21 0.42 4.81
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP(R)
FUND VALUE INDEX
------------ -----------------
10/31/99 9450 10000
11676 11185
11409 11031
10397 10703
12725 14286
14808 17106
16298 20442
18857 24635
20481 27031
12903 16536
10/31/09 15124 18937
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
With sales charges 10.90% -0.66% 4.25%
Excluding sales charges 17.36 0.47 4.84
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP(R)
FUND VALUE INDEX
------------ -----------------
10/31/99 23625 25000
29190 27962
28523 27577
25992 26757
31813 35715
37021 42765
40744 51105
47143 61588
51203 67579
32292 41340
10/31/09 37897 47343
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
With sales charges 11.34% -0.58% 4.04%
Excluding sales charges 16.34 -0.31 4.04
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP(R)
FUND VALUE INDEX
------------ -----------------
10/31/99 10000 10000
12259 11185
11901 11031
10757 10703
13072 14286
15100 17106
16500 20442
18945 24635
20427 27031
12776 16536
10/31/09 14864 18937
</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,
changes 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. Class A
shares generally have a $25,000 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, the minimum initial investment is $15,000. 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
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--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 15.34% -0.31% 4.04%
Excluding sales charges 16.34 -0.31 4.04
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP(R)
FUND VALUE INDEX
------------ -----------------
10/31/99 10000 10000
12259 11185
11901 11031
10757 10703
13072 14286
15100 17106
16500 20442
18945 24635
20414 27031
12776 16536
10/31/09 14864 18937
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
18.00% 0.93% 5.23%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP(R)
FUND VALUE INDEX
------------ -----------------
10/31/99 10000 10000
12390 11185
12137 11031
11086 10703
13603 14286
15891 17106
17556 20442
20380 24635
22262 27031
14104 16536
10/31/09 16642 18937
</Table>
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
17.73% 0.83% 5.13%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP(R)
FUND VALUE INDEX
------------ -----------------
10/31/99 10000 10000
12376 11185
12111 11031
11052 10703
13551 14286
15819 17106
17456 20442
20268 24635
22104 27031
14005 16536
10/31/09 16489 18937
</Table>
investors with a minimum initial investment of $5 million. Class R1 shares
are sold with no initial sales charge or CDSC and have no annual 12b-1 fee.
Class R2 shares are sold with no initial sales charge or CDSC and have an
annual 12b-1 fee of 0.25%. Class R1 and R2 shares are available only through
corporate-sponsored retirement programs, which include certain minimum
program requirements. Performance figures reflect certain fee waivers and/or
expense limitations, without which total returns may have been lower. These
fee waivers and/or expense limitations were contractual. Under the expense
limitation agreement in effect beginning on August 1, 2009, the Manager was
permitted to recoup the amount of certain management fee waivers or expense
reimbursements from the Fund if such action did not cause the Fund to exceed
existing expense limitations and the recoupment was made within the term of
the agreement. This agreement was set to expire on July 31, 2010. Effective
November 24, 2009, the Fund merged with and into ICAP Select Equity Fund.
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 the Investor Class 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 Value Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
17.36% 0.56% 4.84%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP(R)
FUND VALUE INDEX
------------ -----------------
10/31/99 10000 10000
12341 11185
12048 11031
10968 10703
13405 14286
15599 17106
17169 20442
19875 24635
21633 27031
13669 16536
10/31/09 16042 18937
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell Midcap(R) Value Index(4) 14.52% 2.05% 6.59%
Average Lipper multi-cap value fund(5) 13.06 -0.07 3.22
</Table>
3. Performance figures for Class I, R1 and R2 shares, each of which was first
offered to the public on January 2, 2004, include the historical performance
of Class A shares through January 1, 2004 adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for the
Class I, R1 and R2 shares might have been lower.
4. The Russell Midcap(R) Value Index measures the performance of those Russell
Midcap(R) companies with lower price-to-book ratios and lower forecasted
growth values. The stocks are also members of the Russell 1000(R) Value
Index. Total returns assume reinvestment of all dividends and capital gains.
The Russell Midcap(R) Value Index is the Fund's broad-based securities market
index for comparison purposes. An investment cannot be made directly in an
index.
5. The average Lipper multi-cap value fund is representative of funds that, by
portfolio practice, invest in a variety of market-capitalization ranges
without concentrating 75% of their equity assets in any one market-
capitalization range over an extended period of time. Multi-Cap Value funds
typically have a below-average price-to-earnings ratio, price-to-book ratio,
and three-year sales-per-share growth value, compared to the S&P
SuperComposite 1500 Index.
THE FOOTNOTES ON THE PREVIOUS TWO PAGES 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 VALUE FUND
(UNAUDITED)
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2009, to October 31, 2009,
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, 2009, to October 31, 2009.
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, 2009. 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 5/1/09 10/31/09 PERIOD(1) 10/31/09 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,196.10 $ 7.75 $1,018.10 $ 7.12
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,197.10 $ 7.20 $1,018.70 $ 6.61
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,192.10 $11.88 $1,014.40 $10.92
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,192.10 $11.88 $1,014.40 $10.92
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,199.60 $ 4.32 $1,021.30 $ 3.97
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,200.00 $ 4.94 $1,020.70 $ 4.53
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,195.90 $ 6.25 $1,019.50 $ 5.75
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Investor Class,1.30% for Class A, 2.15% for Class B and Class C,
0.78% for Class I, 0.89% for Class R1 and 1.13% for Class R2) multiplied by
the average account value over the period, divided by 365 and multiplied by
184 (to reflect the one-half year period). The table above represents the
actual expenses incurred during the one-half year period.
8 MainStay Mid Cap Value Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
<Table>
<Caption>
Insurance 11.4%
Multi-Utilities 5.8
Food Products 5.4
Real Estate Investment Trusts 5.2
Specialty Retail 4.9
Electronic Equipment & Instruments 4.7
Oil, Gas & Consumable Fuels 4.2
Electric Utilities 4.0
Machinery 3.9
Chemicals 3.2
Media 3.2
Capital Markets 3.1
Energy Equipment & Services 3.1
IT Services 3.1
Health Care Providers & Services 2.9
Metals & Mining 2.7
Food & Staples Retailing 2.3
Diversified Telecommunication
Services 2.2
Commercial Banks 2.1
Beverages 2.0
Office Electronics 1.8
Containers & Packaging 1.7
Thrifts & Mortgage Finance 1.7
Aerospace & Defense 1.6
Hotels, Restaurants & Leisure 1.6
Gas Utilities 1.5
Consumer Finance 1.4
Commercial Services & Supplies 1.3
Air Freight & Logistics 1.2
Exchange Traded Fund 1.0
Road & Rail 1.0
Trading Companies & Distributors 1.0
Electrical Equipment 0.8
Airlines 0.7
Pharmaceuticals 0.7
Auto Components 0.4
Health Care Equipment & Supplies 0.3
Multiline Retail 0.3
Semiconductors & Semiconductor
Equipment 0.3
Real Estate Management & Development 0.2
Automobiles 0.1
Wireless Telecommunication Services 0.1
Short-Term Investment 0.1
Liabilities in Excess of Other
Assets (0.2)
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2009 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Genworth Financial, Inc. Class A
2. Aspen Insurance Holdings, Ltd.
3. Kroger Co. (The)
4. CenturyTel, Inc.
5. American Eagle Outfitters, Inc.
6. Cablevision Systems Corp. Class A
7. PartnerRe, Ltd.
8. Constellation Brands, Inc. Class A
9. ConAgra Foods, Inc.
10. Spectra Energy Corp.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY MACKAY SHIELDS LLC (MACKAY SHIELDS), THE FUND'S FORMER
SUBADVISOR AND PORTFOLIO MANAGER TONY H. ELAVIA OF NEW YORK LIFE INVESTMENTS,
THE FUND'S MANAGER.(1)
HOW DID MAINSTAY MID CAP VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
For the 12 months ended October 31, 2009, MainStay Mid Cap Value Fund returned
17.21% for Investor Class shares, 17.36% for Class A shares and 16.34% for Class
B and Class C shares. Over the same period, the Fund's Class I shares returned
18.00%, Class R1 shares returned 17.73% and Class R2 shares returned 17.36%. All
share classes outperformed the 13.06% return of the average Lipper(2) multi-cap
value fund and the 14.52% return of the Russell Midcap(R) Value Index(3) for the
12 months ended October 31, 2009. 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.
WERE THERE ANY CHANGES IN THE FUND'S DAY-TO-DAY MANAGEMENT DURING THE REPORTING
PERIOD?
In connection with a larger initiative by MacKay Shields to reposition and
rationalize its investment capabilities, the Fund's Board of Trustees approved
the termination of MacKay Shields as the Subadvisor to the Fund effective June
29, 2009. For the period from November 1, 2008, to June 28, 2009, the Fund's
performance figures referenced above reflect the performance of the Fund while
it was managed by its former subadvisor, MacKay Shields.
On June 23, 2009, the Fund's Board of Trustees approved a reorganization of the
Fund with and into MainStay ICAP Select Equity Fund, which was approved by Fund
shareholders on November 16, 2009.
WHAT MAJOR FACTORS AFFECTED THE FUND DURING THE 12 MONTHS ENDED OCTOBER 31,
2009?
During the first few months of the reporting period, the stock market continued
to decline in response to the credit crisis and uncertainty about the
government's intervention plans. In the first quarter of 2009, the stock market
reversed course and rallied through the end of June.
During the last four months of the reporting period, the equity market continued
to strengthen as it became increasingly clear that an economic catastrophe had
been averted. A low beta--or a low level of risk relative to the market as a
whole--detracted from the Fund's performance relative to the Lipper multi-cap
value universe and the Russell Midcap(R) Value Index during the last four months
of the reporting period.
WHAT FACTORS HAD A POSITIVE IMPACT ON THE FUND'S RELATIVE PERFORMANCE DURING THE
REPORTING PERIOD?
During the first eight months of the reporting period, the Fund's performance
relative to the Russell Midcap(R) Value Index benefited from sector holdings in
financials, materials, information technology and industrials. During the last
four months of the reporting period, the Fund remained underweight relative to
the Russell Midcap(R) Value Index in consumer cyclicals and overweight in
industrials. Both positions had a positive impact on relative performance. At
the industry level, being overweight clothing stores--including TJX Cos., The
Gap and American Eagle Outfitters--and underweight among construction firms and
REITs also strengthened the Fund's results relative to the Russell Midcap(R)
Value Index. The Fund's bias toward securities that are inexpensively priced in
relation to historical, current and projected earnings also was a positive.
WHAT FACTORS DETRACTED FROM THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, positions in the consumer
staples and utilities sectors tended to detract from the Fund's performance
relative to the Russell Midcap(R) Value Index. At the end of June 2009, the Fund
had a very low beta. It was also biased away from securities that were trending
down in favor of those that enjoyed positive momentum.
During the last four months of the reporting period, an effort was made to raise
the Fund's beta without generating undesirably high levels of portfolio
- ----------
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 such 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.
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of large companies.
1. During the reporting period, New York Life Investments delegated day-to-day
portfolio management responsibilities to MacKay Shields from November 1,
2008, to June 29, 2009, and managed the Fund directly without the use of a
Subadvisor beginning on June 29, 2009. MacKay Shields is an affiliate of New
York Life Investments. "New York Life Investments" is a service mark used by
New York Life Investment Management.
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.
10 MainStay Mid Cap Value Fund
turnover. By the end of the reporting period, the Fund's beta, though somewhat
higher, remained below that of the Russell Midcap(R) Value Index. This
positioning detracted from the Fund's relative performance in a rapidly rising
market.
At the end of June, the Fund was significantly underweight in many of the
lowest-quality securities with higher volatility profiles. While these stocks
performed poorly during the market's decline, they tended to appreciate strongly
during the summer rally. As a result, the Fund's positioning detracted from its
results relative to the Russell Midcap(R) Value Index during the last four
months of the reporting period.
The Fund's underweight position in basic materials also detracted from
performance relative to the benchmark when commodities rallied in the last four
months of the reporting period.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG CONTRIBUTORS TO THE FUND'S
ABSOLUTE RETURN AND WHICH STOCKS WERE SIGNIFICANT DETRACTORS?
During the first eight months of the reporting period, Canadian gold producer
Yamana Gold was a positive contributor to the Fund's absolute performance as
investors sought tangible assets during the financial crisis. Apparel retailers
American Eagle Outfitters and The Gap also advanced during this portion of the
reporting period. Significant detractors included regional banks Marshall &
Isley and KeyCorp. Another detractor was Pepco Holdings, an electric utility
that primarily serves the Washington, D.C. area.
During the last four months of the reporting period, the three strongest
contributors to the Fund's absolute return were insurer Genworth Financial,
casino operator Las Vegas Sands and machinery manufacturer Ingersoll-Rand Ltd.
Among the largest detractors from the Fund's performance during the last four
months of the reporting period were commercial bank Wilmington Trust, steel
company Nucor and semiconductor company MEMC Electronic Materials.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the first eight months of the reporting period, significant purchases
included life insurance companies MetLife and Ameriprise Financial and electric
utilities Consolidated Edison and Excel Energy. Among the Fund's significant
sales during this portion of the reporting period were retailer Bed Bath and
Beyond, adhesives manufacturer Avery Dennison, banking company Fifth Third
Bancorp and health insurance company Humana.
During the last four months of the reporting period, portfolio turnover was kept
to a minimum. To increase beta, the Fund purchased chemical company Ashland,
insurer Genworth Financial and machinery manufacturer Joy Global. Large sales
included drug producer Teva Pharmaceutical Industries, Ltd., mining concern
Yamana Gold and specialty retailer Tractor Supply.
CAN YOU DESCRIBE THE FUND FROM AN INDUSTRY GROUP OR SECTOR PERSPECTIVE?
At the midpoint of the reporting period, the Fund was overweight relative to the
Russell Midcap(R) Value Index in industrials, energy, information technology and
consumer staples. At the same time, the Fund was underweight in the consumer
discretionary, utilities and financials sectors.
During the last four months of the reporting period, changes to industry and
sector exposures resulted from market movements, a strategy of increasing beta
and efforts to mitigate active risk. The greatest increases in relative exposure
were in the insurance and consumer services industry groups. The greatest
reductions came in retailing, where we unwound a large positive bias, and in the
health care sector, where we removed excess exposure relative to the benchmark.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2009, the Fund's most significantly overweight sector
positions relative to its benchmark were in consumer staples and information
technology. These exposures were roughly offset by underweight positions in
financials and energy. None of the Fund's sector or industry exposures were
large compared to the benchmark.
- ----------
The opinions expressed are those of the responders 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, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 99.1%+
- -----------------------------------------------------------
AEROSPACE & DEFENSE 1.6%
Raytheon Co. 51,700 $ 2,340,976
-------------
AIR FREIGHT & LOGISTICS 1.2%
FedEx Corp. 23,257 1,690,551
-------------
AIRLINES 0.7%
Southwest Airlines Co. 120,990 1,016,316
-------------
AUTO COMPONENTS 0.4%
TRW Automotive Holdings Corp.
(a) 33,612 526,028
-------------
AUTOMOBILES 0.1%
Thor Industries, Inc. 6,192 162,354
-------------
BEVERAGES 2.0%
V Constellation Brands, Inc.
Class A (a) 186,537 2,951,015
-------------
CAPITAL MARKETS 3.1%
Ameriprise Financial, Inc. 67,151 2,328,125
Investment Technology Group,
Inc. (a) 101,475 2,188,816
Northern Trust Corp. 1,425 71,606
-------------
4,588,547
-------------
CHEMICALS 3.2%
Arch Chemicals, Inc. 20,836 576,949
Ashland, Inc. 77,001 2,659,615
Huntsman Corp. 44,431 353,226
Olin Corp. 46,365 707,994
Terra Industries, Inc. 9,994 317,509
-------------
4,615,293
-------------
COMMERCIAL BANKS 2.1%
CapitalSource, Inc. 20,056 71,400
Marshall & Ilsley Corp. 259,929 1,382,822
Wilmington Trust Corp. 134,783 1,624,135
-------------
3,078,357
-------------
COMMERCIAL SERVICES & SUPPLIES 1.3%
Pitney Bowes, Inc. 77,042 1,887,529
-------------
CONSUMER FINANCE 1.4%
Capital One Financial Corp. 57,848 2,117,237
-------------
CONTAINERS & PACKAGING 1.7%
Ball Corp. 51,272 2,529,248
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.2%
V CenturyTel, Inc. 99,468 3,228,731
-------------
ELECTRIC UTILITIES 4.0%
Edison International 72,551 2,308,573
Pepco Holdings, Inc. 148,738 2,220,658
Progress Energy, Inc. 36,409 1,366,430
-------------
5,895,661
-------------
ELECTRICAL EQUIPMENT 0.8%
Rockwell Automation, Inc. 26,786 1,096,887
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 4.7%
Avnet, Inc. (a) 87,628 2,171,422
Ingram Micro, Inc. Class A
(a) 107,784 1,902,388
Jabil Circuit, Inc. 89,424 1,196,493
Molex, Inc. Class A 98,104 1,623,621
-------------
6,893,924
-------------
ENERGY EQUIPMENT & SERVICES 3.1%
Atwood Oceanics, Inc. (a) 9,213 326,969
Baker Hughes, Inc. 17,030 716,452
Diamond Offshore Drilling,
Inc. 12,724 1,211,961
Helix Energy Solutions Group,
Inc. (a) 15,791 216,810
Rowan Cos., Inc. 25,266 587,435
Tidewater, Inc. 36,570 1,523,872
-------------
4,583,499
-------------
FOOD & STAPLES RETAILING 2.3%
V Kroger Co. (The) 144,653 3,345,824
-------------
FOOD PRODUCTS 5.4%
V ConAgra Foods, Inc. 138,847 2,915,787
Corn Products International,
Inc. 89,285 2,516,051
J.M. Smucker Co. (The) 46,942 2,475,252
-------------
7,907,090
-------------
GAS UTILITIES 1.5%
AGL Resources, Inc. 61,858 2,162,556
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.3%
CareFusion Corp. (a) 17,825 398,745
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2009, excluding
short-term investment. May be subject to change daily.
12 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES 2.9%
Cardinal Health, Inc. 35,151 $ 996,180
Coventry Health Care, Inc.
(a) 67,205 1,332,675
Quest Diagnostics, Inc. 34,484 1,928,690
-------------
4,257,545
-------------
HOTELS, RESTAURANTS & LEISURE 1.6%
Las Vegas Sands Corp. (a) 131,819 1,989,149
Wyndham Worldwide Corp. 19,359 330,071
-------------
2,319,220
-------------
INSURANCE 11.4%
American International Group,
Inc. (a) 14,969 503,258
V Aspen Insurance Holdings,
Ltd. 137,804 3,555,343
V Genworth Financial, Inc.
Class A (a) 341,919 3,631,180
HCC Insurance Holdings, Inc. 88,163 2,326,621
Lincoln National Corp. 69,504 1,656,280
MetLife, Inc. 41,007 1,395,468
OneBeacon Insurance Group,
Ltd. Class A 1,880 22,410
V PartnerRe, Ltd. 38,762 2,964,518
Protective Life Corp. 33,749 649,668
-------------
16,704,746
-------------
IT SERVICES 3.1%
Affiliated Computer Services,
Inc. Class A (a) 35,500 1,849,195
Computer Sciences Corp. (a) 53,411 2,708,472
-------------
4,557,667
-------------
MACHINERY 3.9%
Bucyrus International, Inc. 26,626 1,182,727
Joy Global, Inc. 47,962 2,417,764
Pentair, Inc. 5,542 161,272
SPX Corp. 21,332 1,125,903
Timken Co. (The) 35,493 781,911
-------------
5,669,577
-------------
MEDIA 3.2%
V Cablevision Systems Corp.
Class A 134,837 3,095,857
Clear Channel Outdoor
Holdings, Inc. Class A (a) 2,574 17,555
DISH Network Corp. Class A
(a) 33,537 583,544
Gannett Co., Inc. 93,214 915,361
-------------
4,612,317
-------------
METALS & MINING 2.7%
AK Steel Holding Corp. 43,175 685,187
Freeport-McMoRan Copper &
Gold, Inc. (a) 19,942 1,462,945
Nucor Corp. 36,463 1,453,051
Reliance Steel & Aluminum Co. 7,888 287,754
-------------
3,888,937
-------------
MULTI-UTILITIES 5.8%
Ameren Corp. 68,755 1,673,497
CenterPoint Energy, Inc. 136,601 1,721,173
Consolidated Edison, Inc. 28,015 1,139,650
PG&E Corp. 35,657 1,458,015
Sempra Energy 27,641 1,422,129
Xcel Energy, Inc. 56,993 1,074,888
-------------
8,489,352
-------------
MULTILINE RETAIL 0.3%
Big Lots, Inc. (a) 20,037 501,927
-------------
OFFICE ELECTRONICS 1.8%
Xerox Corp. 340,781 2,562,673
-------------
OIL, GAS & CONSUMABLE FUELS 4.2%
Frontier Oil Corp. 101,047 1,400,512
Hess Corp. 35,795 1,959,418
V Spectra Energy Corp. 146,492 2,800,927
-------------
6,160,857
-------------
PHARMACEUTICALS 0.7%
Watson Pharmaceuticals, Inc.
(a) 29,352 1,010,296
-------------
REAL ESTATE INVESTMENT TRUSTS 5.2%
Corporate Office Properties
Trust 23,450 778,305
Equity Residential 17,137 494,917
HCP, Inc. 43,787 1,295,657
Health Care REIT, Inc. 28,176 1,250,169
Highwoods Properties, Inc. 39,109 1,076,280
HRPT Properties Trust 94,991 667,787
Macerich Co. (The) 22,236 662,633
Public Storage 9,974 734,086
Realty Income Corp. 29,976 694,844
-------------
7,654,678
-------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.2%
CB Richard Ellis Group, Inc.
Class A (a) 33,438 346,083
-------------
ROAD & RAIL 1.0%
CSX Corp. 22,973 969,001
Werner Enterprises, Inc. 29,091 545,456
-------------
1,514,457
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.3%
Fairchild Semiconductor
International, Inc. (a) 18,557 138,806
MEMC Electronic Materials,
Inc. (a) 27,270 338,694
-------------
477,500
-------------
</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, 2009 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
SPECIALTY RETAIL 4.9%
V American Eagle Outfitters,
Inc. 182,566 $ 3,193,079
Gap, Inc. (The) 58,854 1,255,945
TJX Cos., Inc. 46,821 1,748,764
Tractor Supply Co. (a) 22,089 987,378
-------------
7,185,166
-------------
THRIFTS & MORTGAGE FINANCE 1.7%
NewAlliance Bancshares, Inc. 220,414 2,442,187
-------------
TRADING COMPANIES & DISTRIBUTORS 1.0%
WESCO International, Inc. (a) 55,520 1,419,091
-------------
WIRELESS TELECOMMUNICATION SERVICES 0.1%
Sprint Nextel Corp. (a) 55,571 164,490
-------------
Total Common Stocks
(Cost $149,395,341) 144,955,134
-------------
EXCHANGE TRADED FUND 1.0% (B)
- -----------------------------------------------------------
iShares Russell Midcap Value
Index Fund 46,129 1,551,780
-------------
Total Exchange Traded Fund
(Cost $1,556,134) 1,551,780
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 0.1%
- -----------------------------------------------------------
REPURCHASE AGREEMENT 0.1%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$121,981
(Collateralized by a United
States Treasury Bill with a
0.105% and a maturity
date of 3/18/10, with a
Principal Amount
of $125,000 and a Market
Value of $124,950) $121,981 $ 121,981
-------------
Total Short-Term Investment
(Cost $121,981) 121,981
-------------
Total Investments
(Cost $151,073,456) (c) 100.2% 146,628,895
-------------
Liabilities in Excess of
Other Assets (0.2) (343,830)
----- ------------
Net Assets 100.0% $ 146,285,065
===== ============
-------------
</Table>
<Table>
(a) Non-income producing security.
(b) Exchange Traded Fund--represents a
basket of securities that is traded on
an exchange.
(c) At October 31, 2009, cost is
$151,135,405 for federal income tax
purposes and net unrealized depreciation
is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 19,187,533
Gross unrealized depreciation (23,694,043)
------------
Net unrealized depreciation $ (4,506,510)
============
</Table>
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2009, for valuing the Fund's assets.
ASSET VALUATION INPUTS
<Table>
<Caption>
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
Investments in Securities
Common Stocks $144,955,134 $ -- $ -- $144,955,134
Exchange Traded Fund 1,551,780 -- -- 1,551,780
Short-Term Investment
Repurchase Agreement -- 121,981 -- 121,981
------------ -------- ----- ------------
Total Investments in Securities $146,506,914 $121,981 $-- $146,628,895
============ ======== ===== ============
</Table>
At October 31, 2009, the Portfolio did not hold any investments with
significant unobservable inputs (Level 3).
14 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $151,073,456) $146,628,895
Receivables:
Dividends and interest 159,364
Fund shares sold 33,110
Investment securities sold 31,689
Other assets 22,670
------------
Total assets 146,875,728
------------
LIABILITIES:
Payables:
Fund shares redeemed 221,465
Transfer agent (See Note 3) 124,736
Shareholder communication 111,792
NYLIFE Distributors (See Note 3) 73,582
Professional fees 46,266
Manager (See Note 3) 5,480
Custodian 2,471
Trustees 437
Accrued expenses 4,434
------------
Total liabilities 590,663
------------
Net assets $146,285,065
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 141,767
Additional paid-in capital 191,866,344
------------
192,008,111
Accumulated undistributed net
investment income 1,202,889
Accumulated net realized loss on
investments (42,481,374)
Net unrealized depreciation on
investments (4,444,561)
------------
Net assets $146,285,065
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 33,817,385
============
Shares of beneficial interest
outstanding 3,204,677
============
Net asset value per share
outstanding $ 10.55
Maximum sales charge (5.50% of
offering price) 0.61
------------
Maximum offering price per share
outstanding $ 11.16
============
CLASS A
Net assets applicable to
outstanding shares $ 51,464,505
============
Shares of beneficial interest
outstanding 4,868,943
============
Net asset value per share
outstanding $ 10.57
Maximum sales charge (5.50% of
offering price) 0.62
------------
Maximum offering price per share
outstanding $ 11.19
============
CLASS B
Net assets applicable to
outstanding shares $ 49,258,428
============
Shares of beneficial interest
outstanding 4,930,225
============
Net asset value and offering price
per share outstanding $ 9.99
============
CLASS C
Net assets applicable to
outstanding shares $ 11,331,496
============
Shares of beneficial interest
outstanding 1,134,307
============
Net asset value and offering price
per share outstanding $ 9.99
============
CLASS I
Net assets applicable to
outstanding shares $ 264,357
============
Shares of beneficial interest
outstanding 24,564
============
Net asset value and offering price
per share outstanding $ 10.76
============
CLASS R1
Net assets applicable to
outstanding shares $ 16,704
============
Shares of beneficial interest
outstanding 1,547
============
Net asset value and offering price
per share outstanding $ 10.80
============
CLASS R2
Net assets applicable to
outstanding shares $ 132,190
============
Shares of beneficial interest
outstanding 12,447
============
Net asset value and offering price
per share outstanding $ 10.62
============
</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
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 3,771,178
Interest 3,809
------------
Total income 3,774,987
------------
EXPENSES:
Manager (See Note 3) 1,010,263
Transfer agent--Investor Class
(See Note 3) 175,894
Transfer agent--Class A (See Note
3) 128,770
Transfer agent--Class B and C
(See Note 3) 370,010
Transfer agent--Classes I, R1 and
R2 (See Note 3) 965
Distribution--Class B (See Note
3) 379,594
Distribution--Class C (See Note
3) 90,361
Distribution/Service--Investor
Class (See Note 3) 74,442
Distribution/Service--Class A
(See Note 3) 114,387
Service--Class B (See Note 3) 126,531
Service--Class C (See Note 3) 30,120
Distribution/Service--Class R2
(See Note 3) 229
Shareholder communication 186,802
Professional fees 102,223
Registration 90,851
Custodian 9,306
Trustees 6,397
Shareholder service--Class R1
(See Note 3) 20
Shareholder service--Class R2
(See Note 3) 91
Miscellaneous 18,884
------------
Total expenses before waiver 2,916,140
Expense waiver from Manager (See
Note 3) (554,233)
------------
Net expenses 2,361,907
------------
Net investment income 1,413,080
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investments (22,753,767)
Net change in unrealized
depreciation on investments 41,949,648
------------
Net realized and unrealized gain on
investments 19,195,881
------------
Net increase in net assets
resulting from operations $ 20,608,961
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $7,365.
16 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2009 AND OCTOBER 31, 2008
<Table>
<Caption>
2009 2008
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 1,413,080 $ 1,857,718
Net realized loss on
investments and written
option transactions (22,753,767) (20,186,503)
Net change in unrealized
appreciation (depreciation)
on investments 41,949,648 (82,861,778)
----------------------------
Net increase (decrease) in
net assets resulting from
operations 20,608,961 (101,190,563)
----------------------------
Dividends and distributions
to shareholders:
From net investment income:
Investor Class (483,734) --
Class A (847,372) (664,756)
Class B (374,654) --
Class C (93,239) --
Class I (5,410) (12,595)
Class R1 (51) (19)
Class R2 (1,339) (155)
----------------------------
(1,805,799) (677,525)
----------------------------
From net realized gain on investments:
Class A -- (23,805,494)
Class B -- (21,191,594)
Class C -- (5,308,932)
Class I -- (191,114)
Class R1 -- (326)
Class R2 -- (3,674)
----------------------------
-- (50,501,134)
----------------------------
Total dividends and
distributions to
shareholders (1,805,799) (51,178,659)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 11,499,956 31,529,820
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 1,688,414 47,102,319
Cost of shares redeemed (37,128,934) (109,650,790)
----------------------------
Decrease in net assets
derived from capital
share transactions (23,940,564) (31,018,651)
----------------------------
Net decrease in net
assets (5,137,402) (183,387,873)
NET ASSETS:
Beginning of year 151,422,467 334,810,340
----------------------------
End of year $146,285,065 $ 151,422,467
============================
Accumulated undistributed net
investment income at end of
year $ 1,202,889 $ 1,766,262
============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
-----------------------------
FEBRUARY 28,
YEAR ENDED 2008**
OCTOBER 31, THROUGH
OCTOBER 31,
-----------------------------
2009 2008
Net asset value at
beginning of period $ 9.17 $ 13.27
------- -------
Net investment income (a) 0.12 0.09
Net realized and
unrealized gain (loss)
on investments 1.42 (4.19)
------- -------
Total from investment
operations 1.54 (4.10)
------- -------
Less dividends and
distributions:
From net investment
income (0.16) --
From net realized gain
on investments -- --
------- -------
Total dividends and
distributions -- --
------- -------
Net asset value at end of
period $ 10.55 $ 9.17
======= =======
Total investment
return (b) 17.21% (30.90%)(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.29% 1.08% ++
Net expenses 1.40% 1.40% ++
Expenses (before
waiver/reimbursement) 1.87% 1.54% ++
Portfolio turnover rate 43% 50%
Net assets at end of
period (in 000's) $33,817 $28,174
</Table>
<Table>
<Caption>
CLASS B
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 8.65 $ 16.53 $ 17.77 $ 16.59 $ 15.41
------- ------- -------- -------- --------
Net investment income
(loss) (a) 0.05 (a) 0.04 (a) (0.02)(a) (0.03)(a) (0.10)
Net realized and
unrealized gain (loss)
on investments 1.35 (5.30) 1.33 2.38 1.52
------- ------- -------- -------- --------
Total from investment
operations 1.40 (5.26) 1.31 2.35 1.42
------- ------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.06) -- -- -- --
From net realized gain
on investments -- (2.62) (2.55) (1.17) (0.24)
------- ------- -------- -------- --------
Total dividends and
distributions (0.06) (2.62) (2.55) (1.17) (0.24)
------- ------- -------- -------- --------
Net asset value at end of
period $ 9.99 $ 8.65 $ 16.53 $ 17.77 $ 16.59
======= ======= ======== ======== ========
Total investment return
(b) 16.34% (37.45%) 7.82% 14.82% 9.27%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 0.60% 0.35% (0.10%) (0.17%) (0.58%)
Net expenses 2.15% 2.10% 2.05% 2.09% 2.10%
Expenses (before
waiver/reimbursement) 2.62% 2.23% 2.10% 2.18% 2.17%
Portfolio turnover rate 43% 50% 54% 44% 49%
Net assets at end of
period (in 000's) $49,258 $58,429 $135,958 $156,043 $207,348
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumed the
reinvestment of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Total return is not annualized.
</Table>
18 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
Class A
- ------------------------------------------------------------
Year ended October 31,
------------------------------------------------------
2009 2008 2007 2006 2005
$ 9.18 $ 17.31 $ 18.43 $ 17.04 $ 15.71
------- ------- -------- -------- --------
0.13 (a) 0.15 (a) 0.11 (a) 0.09 (a) 0.03
1.42 (5.60) 1.37 2.47 1.54
------- ------- -------- -------- --------
1.55 (5.45) 1.48 2.56 1.57
------- ------- -------- -------- --------
(0.16) (0.06) (0.05) -- --
-- (2.62) (2.55) (1.17) (0.24)
------- ------- -------- -------- --------
(0.16) (2.68) (2.60) (1.17) (0.24)
------- ------- -------- -------- --------
$ 10.57 $ 9.18 $ 17.31 $ 18.43 $ 17.04
======= ======= ======== ======== ========
17.36% (36.93%) 8.61% 15.70% 10.06%
1.41% 1.16% 0.64% 0.54% 0.17%
1.30% 1.29% 1.30% 1.34% 1.35%
1.56% 1.40% 1.35% 1.43% 1.42%
43% 50% 54% 44% 49%
$51,465 $49,730 $162,745 $171,908 $127,680
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
$ 8.65 $ 16.52 $ 17.77 $ 16.59 $ 15.41
------- ------- ------- ------- -------
0.05 (a) 0.04 (a) (0.02)(a) (0.03)(a) (0.10)
1.35 (5.29) 1.32 2.38 1.52
------- ------- ------- ------- -------
1.40 (5.25) 1.30 2.35 1.42
------- ------- ------- ------- -------
(0.06) -- -- -- --
-- (2.62) (2.55) (1.17) (0.24)
------- ------- ------- ------- -------
(0.06) (2.62) (2.55) (1.17) (0.24)
------- ------- ------- ------- -------
$ 9.99 $ 8.65 $ 16.52 $ 17.77 $ 16.59
======= ======= ======= ======= =======
16.34% (37.41%) 7.75% 14.82% 9.27%
0.61% 0.35% (0.10%) (0.19%) (0.58%)
2.15% 2.10% 2.05% 2.09% 2.10%
2.62% 2.23% 2.10% 2.18% 2.17%
43% 50% 54% 44% 49%
$11,331 $14,509 $34,799 $39,899 $42,654
</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>
CLASS I
-----------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 9.35 $ 17.60 $18.63 $17.16 $15.76
------ ------- ------ ------ ------
Net investment income (a) 0.18 (a) 0.22 (a) 0.21 (a) 0.16 (a) 0.04
Net realized and
unrealized gain (loss)
on investments 1.44 (5.70) 1.39 2.48 1.60
------ ------- ------ ------ ------
Total from investment
operations 1.62 (5.48) 1.60 2.64 1.64
------ ------- ------ ------ ------
Less dividends and
distributions:
From net investment
income (0.21) (0.15) (0.08) -- --
From net realized gain
on investments -- (2.62) (2.55) (1.17) (0.24)
------ ------- ------ ------ ------
Total dividends and
distributions (0.21) (2.77) (2.63) (1.17) (0.24)
------ ------- ------ ------ ------
Net asset value at end of
period $10.76 $ 9.35 $17.60 $18.63 $17.16
====== ======= ====== ====== ======
Total investment return
(b) 18.00% (36.65%) 9.24% 16.08% 10.48%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.92% 1.62% 1.16% 0.09% 0.37%
Net expenses 0.78% 0.78% 0.77% 0.99% 0.99%
Expenses (before
waiver/reimbursement) 1.31% 0.93% 0.81% 1.09% 1.06%
Portfolio turnover rate 43% 50% 54% 44% 49%
Net assets at end of year
(in 000's) $ 264 $ 216 $1,283 $ 682 $ 584
</Table>
<Table>
<Caption>
CLASS R2
-----------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 9.24 $ 17.42 $18.44 $17.04 $15.71
------ ------- ------ ------ ------
Net investment income (a) 0.15 (a) 0.20 (a) 0.15 (a) 0.13 (a) 0.01
Net realized and
unrealized gain (loss)
on investments 1.41 (5.67) 1.38 2.44 1.56
------ ------- ------ ------ ------
Total from investment
operations 1.56 (5.47) 1.53 2.57 1.57
------ ------- ------ ------ ------
Less dividends and
distributions:
From net investment
income (0.18) (0.09) -- -- --
From net realized gain
on investments -- (2.62) (2.55) (1.17) (0.24)
------ ------- ------ ------ ------
Total dividends and
distributions (0.18) (2.71) (2.55) (1.17) (0.24)
------ ------- ------ ------ ------
Net asset value at end of
period $10.62 $ 9.24 $17.42 $18.44 $17.04
====== ======= ====== ====== ======
Total investment return
(b) 17.36% (36.82%) 8.84% 15.77% 10.06%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.61% 1.79% 0.84% 0.77% 0.09%
Net expenses 1.13% 1.13% 1.12% 1.23% 1.34%
Expenses (before
waiver/reimbursement) 1.66% 1.43% 1.16% 1.28% 1.41%
Portfolio turnover rate 43% 50% 54% 44% 49%
Net assets at end of year
(in 000's) $ 132 $ 361 $ 24 $ 13 $3,564
</Table>
<Table>
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumed the
reinvestment of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Total return is not annualized.
</Table>
20 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
-----------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2009 2008 2007 2006 2005
$ 9.37 $ 17.64 $18.61 $17.14 $15.76
------ ------- ------ ------ ------
0.16 (a) 0.21 (a) 0.19 (a) 0.19 (a) 0.07
1.46 (5.73) 1.39 2.45 1.55
------ ------- ------ ------ ------
1.62 (5.52) 1.58 2.64 1.62
------ ------- ------ ------ ------
(0.19) (0.13) -- -- --
-- (2.62) (2.55) (1.17) (0.24)
------ ------- ------ ------ ------
(0.19) (2.75) (2.55) (1.17) (0.24)
------ ------- ------ ------ ------
$10.80 $ 9.37 $17.64 $18.61 $17.14
====== ======= ====== ====== ======
17.73% (36.64%) 9.06% 16.11% 10.35%
1.72% 1.60% 1.06% 1.11% 0.43%
0.88% 0.88% 0.87% 0.95% 1.09%
1.41% 1.10% 0.92% 1.01% 1.16%
43% 50% 54% 44% 49%
$ 17 $ 2 $ 2 $ 1 $1,170
</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:
The MainStay Funds (the "Trust") was organized on January 9, 1986, as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of fourteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to the
MainStay Mid Cap Value Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares and Class B
shares commenced operations on June 1, 1998. Class C shares commenced operations
on September 1, 1998. Class I shares, Class R1 shares and Class R2 shares
commenced operations on January 2, 2004. Investor Class shares commenced
operations on February 28, 2008. Investor Class and Class A shares are offered
at net asset value ("NAV") 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 at NAV 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 1.00% contingent deferred sales charge may be imposed on
redemptions made within one year of purchase of Class C shares. Class I, Class
R1 and Class R2 are offered at NAV and 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 seven 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 and service fee
rates than Investor Class, Class A and Class R2 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 and Class R2 shares are
authorized to pay a shareholder service fee 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 R1 or Class R2 shares.
Effective prior to the opening of the U.S. financial markets on June 29, 2009,
the Fund's Board of Trustees terminated the Subadvisory Agreement with MacKay
Shields LLC.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital appreciation and income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). 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. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in other mutual funds are
valued at their NAVs as of the close of the New York Stock Exchange on the
valuation date.
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 ("short-term investments") 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, under
normal conditions, it would be open. At October 31, 2009, the Fund did not hold
securities that were valued in such a manner.
"Fair Value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a
22 MainStay Mid Cap Value Fund
three-tier hierarchy which maximizes the use of observable market data and
minimizes the use of unobservable inputs to establish classification of fair
value measurements for disclosure purposes. "Inputs" refer broadly to the
assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk, such as the risk inherent in a
particular valuation technique used to measure fair value using a pricing model
and/or the risk inherent in the inputs for the valuation technique. Inputs may
be observable or unobservable. Observable inputs are inputs that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of the
reporting entity. Unobservable inputs are inputs that reflect the reporting
entity's own assumptions about the assumptions market participants would use in
pricing the asset or liability developed based on the information available in
the circumstances. The inputs or methodology used for valuing securities may not
be an indication of the risks associated with investing in those securities. The
three-tier hierarchy of inputs is summarized in the three broad Levels listed
below.
- - Level 1--quoted prices in active markets for identical investments
- - Level 2--other significant observable inputs (including quoted prices for
similar investments in active markets, interest rates and yield curves,
prepayment speeds, credit risks, etc.)
- - Level 3--significant unobservable inputs (including the Fund's own assumptions
about the assumptions that market participants would use in determining the
fair value of investments)
The aggregate value by input level, as of October 31, 2009, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
The valuation techniques that may have been used by the Fund to measure fair
value during the year ended October 31, 2009, maximized the use of observable
inputs and minimized the use of unobservable inputs. The Fund may have utilized
some of the following fair value techniques: multi-dimensional relational
pricing models, option adjusted spread pricing and estimating the price that
would have prevailed in a liquid market for an international equity security
given information available at the time of evaluation, when there are
significant events after the close of local foreign markets. For the year ended
October 31, 2009, there have been no changes to the fair value methodologies.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(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 NAV, 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 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
investments 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.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 NAV
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. The Fund may enter into repurchase agreements to
earn income. The Fund may enter into repurchase agreements only with financial
institutions that are deemed by the Manager or Subadvisor, if any, to be
creditworthy, pursuant to guidelines established by the Fund's Board of
Trustees. Repurchase agreements are considered under the 1940 Act to be
collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund.
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 and possible
realized loss to the Fund.
(H) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(I) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the 1940
Act, and relevant guidance by the staff of the Securities and Exchange
Commission. 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"). State Street will manage the Fund's cash collateral in accordance with
the Lending Agreement between the Fund and State Street, and indemnify the
Fund's portfolio against counterparty risk. The loans will be 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 will receive compensation for
lending its securities in the form of fees or retain a portion of interest on
the investment of any cash received as collateral. The Fund also will continue
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.
Although the Fund and New York Life Investments have temporarily suspended
securities lending, the Fund and New York Life Investments 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
24 MainStay Mid Cap Value Fund
be made against the Fund that have not yet occurred. Based on experience,
management is of the view that the risk of loss in connection with these
potential indemnification obligations is remote. However, there can be no
assurance that material liabilities related to such obligations will not arise
in the future, which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" 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,
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required to be maintained by the Fund and is
responsible for the day-to-day portfolio management of 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.
Effective prior to the opening of the U.S. financial markets on June 29, 2009,
the Fund's Board of Trustees terminated MacKay Shields LLC as subadvisor. From
June 29, 2009 until the merger with MainStay ICAP Select Equity Fund, the Fund
was managed solely by New York Life Investments.
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 $500 million and 0.65% on assets in excess of $500
million, plus a fee for fund accounting services previously provided by New York
Life Investments under a separate fund accounting agreement.
Effective August 1, 2009, New York Life Investments entered into a written
expense limitation agreement under which it 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, 1.40%; Class A, 1.30%; Class B, 2.15%; Class C, 2.15%;
Class I, 0.78%; Class R1, 0.88% and Class R2, 1.13%.
Prior to August 1, 2009, New York Investments had written expense limitation
agreements that set the expense limitations for Investor Class, Class A, Class
B, Class C and Class I shares at the same levels as the August 1, 2009
agreement.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $1,010,263 and waived its fees in the amount of
$554,233.
State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-
administration and sub-accounting services to the Fund pursuant to an agreement
with New York Life Investments. These services include calculating the daily
NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the
calculation of the Fund's respective NAVs, and assisting New York Life
Investments in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, State Street is
compensated by New York Life Investments.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC
(the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The
Fund 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 Investor Class, Class A and Class
R2 shares at an annual rate of 0.25% of the average daily net assets of the
Investor Class, Class A and Class R2 shares for distribution or service
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, Class B and Class C shares of the Fund pay the Distributor a monthly
distribution fee at an 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 an annual rate of 0.25%
of the average daily NAV of the Class B and Class C shares of the Fund. Class I
and Class R1 shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1 and Class R2
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 and Class R2 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 and Class R2 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
sales of Investor Class and Class A shares were $12,786 and $4,095,
respectively, for the year ended October 31, 2009. 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 $87, $109, $56,969 and
$507, respectively, for the year ended October 31, 2009.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("MainStay Investments"), an affiliate of New York Life
Investments, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. MainStay Investments has entered into an agreement with Boston
Financial Data Services, Inc. pursuant to which it performs certain services for
which MainStay Investments is responsible. Transfer agent expenses incurred by
the Fund for the year ended October 31, 2009, amounted to $675,639.
(E) MINIMUM BALANCE FEE. 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 minimum balance on certain
types of accounts.
Shareholders with an account balance of less than $1,000 are charged an annual
per account fee of $20. These fees are included in transfer agent fees shown on
the Statement of Operations.
(F) CAPITAL. At October 31, 2009, 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 $ 323 0.0%++
- -------------------------------------------------
Class C 168 0.0++
- -------------------------------------------------
Class I 1,114 0.4
- -------------------------------------------------
Class R1 1,109 6.6
- -------------------------------------------------
Class R2 1,091 0.8
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2009, these fees, which are included in professional fees shown on the Statement
of Operations, were $6,421.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2009, the components of accumulated gain(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,202,891 $(42,419,427) $-- $(4,506,510) $(45,723,046)
- --------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals and real estate investment trust ("REIT")
adjustments.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(170,654) $170,655 $(1)
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to distributions from
REITs, distribution redesignations and prior year REITs adjustments.
At October 31, 2009 for federal income tax purposes, capital loss carryforwards
of $42,419,427 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. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $19,221
2017 23,198
- -------------------------------------------------
Total $42,419
- -------------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2009
and October 31, 2008, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2009 2008
Distributions paid from:
Ordinary Income $1,805,799 $ 564,124
Long-Term Capital Gains -- 50,614,535
- -----------------------------------------------------
Total $1,805,799 $51,178,659
- -----------------------------------------------------
</Table>
26 MainStay Mid Cap Value Fund
NOTE 5--CUSTODIAN:
State Street is the custodian of the cash and the 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 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 2, 2009, the line of credit was reduced from $160,000,000 to
$125,000,000 and the commitment fee rate was increased from an annual rate of
0.08% to an annual rate of 0.10% of the average commitment amount, plus a 0.04%
up-front payment payable, regardless of usage, to The Bank of New York Mellon,
which serves as agent to the syndicate. The commitment fee and upfront payment
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 or the one month LIBOR rate, whichever is higher. There were no borrowings
made or outstanding with respect to the Fund on the line of credit during the
year ended October 31, 2009.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2009, purchases and sales of securities, other
than short-term securities, were $58,961 and $72,970, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 281,628 $ 2,538,467
Shares issued to
shareholders in
reinvestment of dividends 58,091 481,578
Shares redeemed (640,027) (5,745,864)
-------------------------
Net decrease in shares
outstanding before
conversion (300,308) (2,725,819)
Shares converted into
Investor Class (See Note
1) 662,368 5,714,775
Shares converted from
Investor Class (See Note
1) (229,366) (2,450,111)
-------------------------
Net increase 132,694 $ 538,845
=========================
Period ended October 31,
2008 (a):
Shares sold 915,410 $ 12,339,950
Shares redeemed (586,520) (7,231,437)
-------------------------
Net increase in shares
outstanding before
conversion 328,890 5,108,513
Shares converted into
Investor Class (See Note
1) 2,998,476 38,193,047
Shares converted from
Investor Class (See Note
1) (255,383) (3,136,537)
-------------------------
Net increase 3,071,983 $ 40,165,023
=========================
(a) Investor Class shares were first offered on
February 28, 2008.
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 526,122 $ 4,793,839
Shares issued to
shareholders in
reinvestment of dividends 93,423 775,424
Shares redeemed (1,493,236) (13,317,214)
-------------------------
Net decrease in shares
outstanding before
conversion (873,691) (7,747,951)
Shares converted into Class
A (See Note 1) 594,601 5,879,053
Shares converted from Class
A (See Note 1) (270,015) (2,209,886)
-------------------------
Net decrease (549,105) $ (4,078,784)
=========================
Year ended October 31, 2008:
Shares sold 795,052 $ 10,349,426
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,622,581 23,038,078
Shares redeemed (4,445,180) (58,510,767)
-------------------------
Net decrease in shares
outstanding before
conversion (2,027,547) (25,123,263)
Shares converted into Class
A (See Note 1) 808,274 10,469,438
Shares converted from Class
A (See Note 1) (2,761,879) (35,147,882)
-------------------------
Net decrease (3,981,152) $(49,801,707)
=========================
</Table>
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 382,752 $ 3,256,483
Shares issued to
shareholders in
reinvestment of dividends 44,195 349,178
Shares redeemed (1,452,738) (12,309,156)
-------------------------
Net decrease in shares
outstanding before
conversion (1,025,791) (8,703,495)
Shares converted from Class
B (See Note 1) (800,192) (6,933,831)
-------------------------
Net decrease (1,825,983) $(15,637,326)
=========================
Year ended October 31, 2008:
Shares sold 505,782 $ 6,239,126
Shares issued to
shareholders in
reinvestment of
distributions 1,456,621 19,562,217
Shares redeemed (2,598,995) (31,706,864)
-------------------------
Net decrease in shares
outstanding before
conversion (636,592) (5,905,521)
Shares converted from Class
B (See Note 1) (834,201) (10,378,066)
-------------------------
Net decrease (1,470,793) $(16,283,587)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 85,871 $ 758,786
Shares issued to
shareholders in
reinvestment of dividends 9,548 75,434
Shares redeemed (639,067) (5,404,822)
-------------------------
Net decrease (543,648) $ (4,570,602)
=========================
Year ended October 31, 2008:
Shares sold 161,511 $ 2,035,077
Shares issued to
shareholders in
reinvestment of
distributions 319,743 4,294,141
Shares redeemed (909,402) (11,277,201)
-------------------------
Net decrease (428,148) $ (4,947,983)
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 4,003 $ 35,314
Shares issued to
shareholders in
reinvestment of dividends 643 5,410
Shares redeemed (3,167) (26,058)
-------------------------
Net increase 1,479 $ 14,666
=========================
Year ended October 31, 2008:
Shares sold 5,115 $ 71,086
Shares issued to
shareholders in
reinvestment of dividends
and distributions 14,080 203,709
Shares redeemed (68,963) (917,537)
-------------------------
Net decrease (49,768) $ (642,742)
=========================
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 6,175 $ 56,516
Shares issued to
shareholders in
reinvestment of dividends 5 51
Shares redeemed (4,870) (48,363)
-------------------------
Net increase 1,310 $ 8,204
=========================
Year ended October 31, 2008:
Shares sold 95 $ 1,187
Shares issued to
shareholders in
reinvestment of dividends
and distributions 24 345
Shares redeemed (1) (10)
-------------------------
Net increase 118 $ 1,522
=========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 6,369 $ 60,551
Shares issued to
shareholders in
reinvestment of dividends 160 1,339
Shares redeemed (33,213) (277,457)
-------------------------
Net decrease (26,684) $ (215,567)
=========================
Year ended October 31, 2008:
Shares sold 38,016 $ 493,968
Shares issued to
shareholders in
reinvestment of dividends
and distributions 268 3,829
Shares redeemed (512) (6,974)
-------------------------
Net increase 37,772 $ 490,823
=========================
</Table>
NOTE 9--OTHER MATTERS:
On May 27, 2009, New York Life Investments settled charges by the Securities and
Exchange Commission ("SEC") relating to the MainStay Equity Index Fund (the
"Equity Index Fund"), an S&P 500 index fund created in 1990 and sold through
January 1, 2002, at which time it was closed to new investors and new
investments. The Equity Index Fund is a series of the Trust and is managed by
New York Life Investments. The settlement relates to the period from March 12,
2002 through June 30, 2004, during which time the SEC alleged that New York Life
Investments failed to provide the Equity Index Fund's board with information
necessary to evaluate the cost of a guarantee provided to shareholders of the
Equity Index Fund, and that prospectus and other disclosures misrepresented that
there was no charge to the Equity Index Fund or its shareholders for the
guarantee. New York Life Investments, without admitting or denying the
allegations, consented to the entry of an administrative cease and desist order
finding violations of Sections 15(c) and 34(b) of the 1940 Act, Section 206(2)
of the Investment Advisers Act of 1940, as amended, and requiring a civil
penalty of $800,000, disgorgement of $3,950,075 (which represents a portion of
its
28 MainStay Mid Cap Value Fund
management fees relating to the Equity Index Fund for the relevant period) as
well as interest of $1,350,709. These amounts, totaling approximately $6.101
million, are being distributed to shareholders who held shares of the Equity
Index Fund between March 2002 and June 2004, without any material financial
impact to New York Life Investments.
NOTE 10--SUBSEQUENT EVENTS:
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2009, events and transactions
subsequent to October 31, 2009 through December 23, 2009, the date the financial
statements were issued, have been evaluated by the Fund's management for
possible adjustment and/or disclosure. No subsequent events requiring financial
statement adjustment or disclosure have been identified, except for the
following:
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of the Fund was held on
November 16, 2009, at the offices of New York Life Investment Management LLC in
Parsippany, New Jersey. The purpose of the meeting was to approve the
reorganization of the Fund with and into MainStay ICAP Select Equity Fund.
No other business came before the special meeting.
The proposal was approved by the shareholders of the Fund by the vote tally
shown below:
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTENTIONS TOTAL
6,967,003 229,242 462,296 7,658,541
- ------------------------------------------------------
</Table>
Effective as of the close of business on November 24, 2009, the Fund merged with
and into MainStay ICAP Select Equity Fund and was subsequently liquidated.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Value Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2009, 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, 2009, by correspondence with the custodian
and brokers or by 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 Mid Cap Value Fund of The MainStay Funds as of October 31, 2009, 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 23, 2009
30 MainStay Mid Cap Value Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS (UNAUDITED)
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 agreements. At its June 17-18, 2009 meeting, the Board of
Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved
the Management Agreement between the MainStay Mid Cap Value Fund ("Fund") and
New York Life Investment Management LLC ("New York Life Investments"), and the
Subadvisory Agreement between New York Life Investments and MacKay Shields LLC
("MacKay Shields") on behalf of the Fund.
Separately, on June 23, 2009, the Board approved New York Life Investments'
proposals to reorganize the Fund with and into the MainStay ICAP Select Equity
Fund and to terminate the Subadvisory Agreement with MacKay Shields. At the same
meeting, the Board also approved the appointment of Tony Elavia as portfolio
manager of the Fund, in his position as an officer of New York Life Investments,
effective upon the termination of MacKay Shields. In determining to approve
these actions, the Board took several factors into account, including the fact
that the actions would be part of a larger initiative designed to reposition,
rationalize and streamline the MainStay Group of Funds to reduce duplication
among funds, strengthen the overall fund lineup, and offer funds with more
significant asset levels.
In reaching its decisions to approve the Agreements set forth above (the
"Agreements"), the Board considered information prepared specifically in
connection with the contract review process that took place at various meetings
between December 2008 and June 2009, as well as information furnished to it
throughout the year at regular and special Board meetings. Information requested
by and provided to the Board specifically in connection with the contract review
process included, among other things, reports 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 and subadvisory
fees and ordinary operating expenses. The Board also requested and received
information on the profitability of the Fund to New York Life Investments and
its affiliates, including MacKay Shields as subadviser to the Fund, and
responses to several comprehensive lists of questions encompassing a variety of
topics prepared on behalf of the Board by independent legal counsel to the
Board. 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 Investments. 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 legal and compliance matters, portfolio turnover, and sales
and marketing activity.
In determining to approve the Agreements, the members of the Board reviewed and
evaluated all of the 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 New York Life Investments and MacKay
Shields; (ii) the investment performance of the Fund, New York Life Investments
and MacKay Shields; (iii) the costs of the services to be provided, and profits
to be realized, by New York Life Investments and its affiliates, including
MacKay Shields as subadviser to the Fund, from their 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 and subadvisory fee levels and
overall total ordinary operating expenses, particularly as compared to similar
funds and portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decisions to approve the Agreements were based on a
comprehensive consideration of all the information provided to the Board,
including information provided to the Board throughout the year and specifically
in connection with the contract review processes. The Board's conclusions with
respect to the Agreements also were based, in part, on the Board's consideration
of the Agreements 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, and that the Fund's
shareholders, having had the opportunity to consider alternative investment
products and services, have chosen to invest in the Fund. A more detailed
discussion of the factors that figured prominently in the Board's decisions to
approve the Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments proposed to
provide to the Fund. The Board evaluated New York Life Investments' experience
in serving as manager of the Fund, noting that New York Life Investments manages
other mutual funds, serves a variety of other investment advisory clients,
including other pooled investment vehicles, and has experience
mainstayinvestments.com 31
with overseeing affiliated and non-affiliated subadvisers. The Board considered
the experience of senior personnel at New York Life Investments providing
management and administrative services to the Fund, as well as New York Life
Investments' reputation and financial condition. The Board considered New York
Life Investments' performance in fulfilling its responsibilities for overseeing
the Fund's legal and compliance environment, for overseeing MacKay Shields'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. In addition, the Board
noted that New York Life Investments also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board also considered the
benefits to shareholders of being part of the MainStay Group 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.
As part of its considerations, the Board acknowledged New York Life Investments'
recent settlement with the Securities and Exchange Commission ("SEC") concerning
matters relating to the MainStay Equity Index Fund, including materials provided
to the Board of Trustees of The MainStay Funds in 2002-2004 in connection with
the annual review of that fund's management fee. The Board noted that, since
this matter was first brought to the Board's attention in 2003, New York Life
Investments had taken a number of steps to enhance the quality and completeness
of information provided to the Board in connection with the Board's
consideration of the MainStay Group of Funds' investment advisory contracts. The
Board believes that New York Life Investments has taken appropriate actions in
response to this matter.
The Board also examined the nature, extent and quality of the services that
MacKay Shields proposed to provide to the Fund. The Board evaluated MacKay
Shields' experience in serving as subadviser to the Fund and managing other
portfolios. It examined MacKay Shields' track record and experience in providing
investment advisory services, the experience of investment advisory, senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and the
method for compensating portfolio managers.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund likely would
continue to benefit from the nature, extent and quality of these services as a
result of New York Life Investments' and MacKay Shields' 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 New York Life Investments'
Investment Consulting Group on the Fund throughout the year. These reports,
which were prepared by New York Life Investments 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 New York Life Investments
concerning the Fund's 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 also considered any
specific actions that New York Life Investments had taken, or had agreed with
the Board to take, to enhance Fund investment performance, and the results of
those actions. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about investment performance in the Portfolio Management Discussion and
Analysis, Investment and Performance Comparison 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 NEW YORK LIFE
INVESTMENTS AND MACKAY SHIELDS
The Board considered the costs of the services provided by New York Life
Investments and MacKay Shields under the Agreements, and the profits expected to
be realized by New York Life Investments and its affiliates due to their
relationships with the Fund. Because MacKay Shields is an affiliate of New York
Life Investments whose subadvisory fees are paid directly by New York Life
Investments, the Board considered cost and profitability information for New
York Life Investments and MacKay Shields in the aggregate.
32 MainStay Mid Cap Value Fund
In evaluating the costs and profits of New York Life Investments and its
affiliates, including MacKay Shields, due to their relationships with the Fund,
the Board considered, among other things, each party's investments in personnel,
systems, equipment and other resources necessary to manage the Fund, and the
fact that New York Life Investments is responsible for paying the subadvisory
fees for the Fund. The Board acknowledged that New York Life Investments and
MacKay Shields must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that New York Life Investments'
ability to maintain a strong financial position is important in order for New
York Life Investments to continue to provide high-quality ongoing services to
the Fund. The Board noted, for example, increased costs borne by New York Life
Investments and its affiliates due to new and ongoing regulatory and compliance
requirements. The Board also noted that the Fund benefits from the allocation of
certain fixed costs across the MainStay Group of Funds.
The Board also reviewed information from New York Life Investments and its
affiliates regarding their estimated profitability due to their overall
relationships with the Fund. For New York Life Investments and MacKay Shields,
the Board considered information illustrating the revenues and expenses
allocated to the Fund.
The Board noted 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 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 New York Life
Investments 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 New York Life
Investments and its affiliates due to their relationships with the Fund. The
Board recognized, for example, the benefits to MacKay Shields from legally
permitted "soft-dollar" arrangements by which brokers provide research and other
services to MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities.
The Board further considered that, in addition to fees earned by New York Life
Investments for managing the Fund, New York Life Investments' affiliates also
earn revenues from serving the Fund in various other capacities, including as
the Fund's transfer agent and distributor. The information provided to the Board
indicated that the profitability to New York Life Investments 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 New
York Life Investments and its affiliates as part of the annual contract review
process, when considering the reasonableness of the fees to be paid to New York
Life Investments and its affiliates under the Agreements, the Board considered
the profitability of New York Life Investments' 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 Agreements, that
the profits to be realized by New York Life Investments and its affiliates
(including MacKay Shields) due to their relationships with the Fund are 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 New York Life Investments and Strategic Insight showing how the
Fund's management fee hypothetically would compare with fees paid for similar
services by peer funds at varying asset levels. The Board noted the extent to
which the Fund benefits from breakpoints, expense waivers or reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily subjective, the Board considered the extent to which New York Life
Investments and MacKay Shields may realize a larger profit margin as the Fund's
assets grow over time.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, 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 grows over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's expected total ordinary operating expenses. The Board
primarily considered the reasonableness of the overall management fees paid by
the Fund to New York Life Investments, since the fees to be paid to MacKay
Shields are paid by New York Life Investments, not the Fund. The Board also
considered the impact of the Fund's expense limitation arrangements pursuant to
which New York Life Investments has agreed to limit the Fund's total ordinary
operating expenses.
In assessing the reasonableness of the Fund's fees and expenses, the Board
primarily considered comparative data provided by Strategic Insight on the fees
and expenses
mainstayinvestments.com 33
charged by similar mutual funds managed by other investment advisers. The Board
noted the impact of the recent economic crisis on the MainStay Group of Funds
and, consistent with statements from SEC staff members and with published advice
from Strategic Insight, the Board reviewed supplemental peer data that reflected
more recent peer groupings based on relatively smaller asset sizes. In addition,
the Board considered information provided by New York Life Investments and
MacKay Shields on fees charged 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 explanations
from New York Life Investments and MacKay Shields about the different scope of
services provided to retail mutual funds as compared with other investment
advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
agent fees are charged to the Fund based on the number of shareholder accounts
(a "per-account" fee) as compared with certain other fees (e.g., management
fees), which are charged based on the Fund's average net assets. The Board took
into account information from New York Life Investments showing that the Fund's
transfer agent fee schedule is reasonable, including industry data showing that
the per-account fees that NYLIM Service Company ("NSC"), the Fund's transfer
agent, charges the Fund are within the range of per-account fees charged by
transfer agents to other mutual funds. In addition, the Board particularly
considered representations from New York Life Investments that the MainStay
Group of Funds' transfer agent fee structure is designed to allow NSC to provide
transfer agent services to the Funds essentially "at cost," and that NSC
historically has realized only very modest profitability from providing transfer
agent services to the Funds.
The Board observed that, because the Fund's transfer agent fees are billed on a
per-account basis, the impact of transfer agent fees on a share class's expense
ratio may be more significant in cases where the share class has a high number
of accounts with limited assets (i.e., small accounts). The Board noted that
transfer agent fees are a significant portion of total expenses of many funds in
the MainStay Group of Funds. The impact of transfer agent fees on the expense
ratios of these MainStay Funds tends to be greater than for other open-end
retail funds because the MainStay Group of Funds generally has a significant
number of small accounts relative to competitor funds. The Board noted the role
that the MainStay Group of Funds historically has played in serving the
investment needs of New York Life Insurance Company ("New York Life")
policyholders, who often maintain smaller account balances than other fund
investors. The Board discussed measures that it and New York Life Investments
have taken in recent years to mitigate the effect of small accounts on the
expense ratios of Fund share classes, including: (i) encouraging New York Life
agents to consolidate multiple small accounts held by the same investor into one
MainStay Asset Allocation Fund account; (ii) increasing investment minimums from
$500 to $1,000 in 2003; (iii) closing small accounts with balances below $500;
(iv) since 2007, charging an annual $20.00 small account fee on accounts with
balances below $1,000; (v) modifying the approach for billing transfer agent
expenses to reduce the degree of subsidization by large accounts of smaller
accounts; and (vi) introducing Investor Class shares for certain MainStay Funds
in early 2008 to consolidate smaller account investors.
After considering all of the factors outlined above, the Board concluded that
the Fund's management and subadvisory fees and total ordinary operating expenses
were within a range that is competitive and, within the context of the Board's
overall conclusions regarding the Agreements, support a conclusion that these
fees and expenses are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
34 MainStay Mid Cap Value Fund
FEDERAL INCOME TAX
INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$3,183,616 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, 2009,
should be multiplied by 100.0% to arrive at the amount eligible for the
corporate dividends received deduction.
In February 2010, 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 2009. 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, 2009.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that New York Life Investments 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 SEC's 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 Funds' 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
MainStay Investments at 800-MAINSTAY (624-6782).You can also 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
BOARD MEMBERS AND OFFICERS (UNAUDITED)
The Board Members oversee the MainStay Group of Funds (which is comprised of
Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc.,
ICAP Funds, Inc. MainStay Funds Trust, and MainStay VP Series Fund, Inc.)
(collectively, the "Fund Complex"), the Manager and when applicable, the
Subadvisor(s). Each Board member 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 Board Member shall tender his or her resignation upon
reaching age 72. A Board Member reaching the age of 72 may continue for
additional one-year periods with the approval of the Board's Nominating and
Governance Committee.
Officers serve a term of one year and are elected annually by the Board Members.
The business address of each Board Member 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 Board Members and is available without charge,
upon request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBER*
JOHN Y. KIM Indefinite; Member of the Board of 65 None
9/24/60 ECLIPSE TRUST: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (21 funds); Management LLC and New York
ICAP FUNDS, INC.: Director Life Investment Management
since 2008 (4 funds); Holdings LLC; Member of the
MAINSTAY TRUST: Trustee since Board of Managers, MacKay
2008 (14 funds); Shields LLC (since 2008);
MAINSTAY FUNDS TRUST: Trustee Chairman of the Board,
since April 2009 (4 funds); Institutional Capital LLC,
and Madison Capital LLC, McMorgan
MAINSTAY VP SERIES FUND, INC.: & Company LLC, Chairman and
Director since 2008 (20 Chief Executive Officer,
portfolios). NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager, LLC
(since 2008); President,
Prudential Retirement, a
business unit of Prudential
Financial, Inc. (2002 to 2007)
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* This Board Member is considered to be an "interested person" of the
MainStay Group of Funds within the meaning of the 1940 Act because of his
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
entitled "Principal Occupation(s) During the Past Five Years."
36 MainStay Mid Cap Value Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
SUSAN B. KERLEY Indefinite; President, Strategic 65 Trustee, Legg Mason
8/12/51 ECLIPSE TRUST: Chairman since Management Advisors LLC (since Partners Funds, Inc.,
2005, and Trustee since 2000 1990) since 1991 (59 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990 (21 funds);
ICAP FUNDS, INC.: Chairman
and Director since 2006 (4
funds);
MAINSTAY TRUST: Chairman and
Board Member since 2007;
MAINSTAY FUNDS TRUST: Chairman
and Trustee since April 2009
(4 funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 65 Trustee, State Farm
3/27/51 ECLIPSE TRUST: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts
Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios);
Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual
ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15
and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee,
Expert since 2007 (21 funds); 2006) State Farm Variable
ICAP FUNDS, INC.: Director Product Trust since 2005
and Audit Committee Financial (9 portfolios)
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since April 2009 (4
funds); and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
PETER MEENAN Indefinite; Independent Consultant; 65 None
12/5/41 ECLIPSE TRUST: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (21 funds); (2000 to 2004); Independent
ICAP FUNDS, INC.: Director Consultant (1999 to 2000);
since 2006 (4 funds); Head of Global Funds, Citicorp
MAINSTAY TRUST: Trustee since (1995 to 1999)
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 65 None
NOLAN, JR. ECLIPSE TRUST: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (21 funds); (1994 to 2004)
ICAP FUNDS, INC.: Director
since 2007 (4 funds);
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 65 None
TRUTANIC ECLIPSE TRUST: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (21 funds); Director The Carlyle Group
ICAP FUNDS, INC.: Director (private investment firm)
since 2007 (4 funds); (2002 to 2004); Senior
MAINSTAY TRUST: Trustee since Managing Director, Partner and
1994 (14 funds); Board Member, Groupe Arnault
MAINSTAY FUNDS TRUST: Trustee S.A. (private investment firm)
since April 2009 (4 funds); (1999 to 2002)
and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Mid Cap Value Fund
<Table>
<Caption>
NUMBER OF
TERM OF OFFICE, FUNDS IN FUND OTHER
POSITION(S) HELD COMPLEX DIRECTORSHIPS
NAME AND WITH THE FUND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER
---------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED BOARD MEMBERS
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 65 None
5/22/40 ECLIPSE TRUST: Emeritus of Accounting,
Trustee and Audit Committee Chicago Booth School of
Financial Expert since 2007 (2 Business, University of
funds); Chicago; President, Roman L.
ECLIPSE FUNDS INC.: Director Weil Associates, Inc.
and Audit Committee Financial (consulting firm)
Expert since 2007 (21 funds);
ICAP FUNDS, INC.: Director
and Audit Committee Financial
Expert since 2007 (4 funds);
MAINSTAY TRUST: Trustee and
Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 65 Trustee, Direxion Funds
10/22/41 ECLIPSE TRUST: Salomon Brothers, Inc. (1971 (34 portfolios) and
Trustee since 2007 (2 funds); to 1995) Direxion Insurance Trust
ECLIPSE FUNDS INC.: Director (3 portfolios) since 2007;
since 2007 (21 funds); Trustee, Direxion Shares
ICAP FUNDS, INC.: Director ETF Trust, since 2008 (22
since 2007 (4 funds); portfolios)
MAINSTAY TRUST: Trustee since
2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since April 2009 (4 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
At a meeting of the Board Members held on June 18, 2009, the following
individuals were appointed to serve as Officers of the MainStay Group of
Funds.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND FUNDS
DATE OF AND 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, MainStay VP Series Fund, Inc. and
2007 ICAP Funds, Inc. (since 2007), and MainStay Funds
Trust (since April 2009); 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)
- ---------------------------------------------------------------------------------
JEFFREY Vice Managing Director, Compliance (since 2009), Director
A. President and and Associate General Counsel, New York Life
ENGELSMAN Chief Investment Management LLC (2005 to 2008); Assistant
9/28/67 Compliance Secretary, NYLIFE Distributors LLC (2006 to 2008);
Officer since Vice President and Chief Compliance Officer, ICAP
January 2009 Funds, Inc. (since January 2009), and MainStay Funds
Trust (since April 2009); Assistant Secretary, The
MainStay Funds and ICAP Funds, Inc. (2006 to 2008);
Assistant Secretary, Eclipse Funds, Eclipse Funds,
Inc., and MainStay VP Series Fund, Inc. (2005 to
2008); Director and Senior Counsel, Deutsche Asset
Management (1999 to 2005)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since 2008); Chairman of the Board,
2/22/59 NYLIM Service Company (since 2008); Senior Managing
Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Managing
Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, MainStay VP
Series Fund, Inc. and ICAP Funds, Inc. (since 2007),
and MainStay Funds Trust (since April 2009); Managing
Director, UBS Global Asset Management (1999 to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- Presiden- (including predecessor advisory organizations) (since
RINGTON t--Adminis- 2000); Executive Vice President, New York Life Trust
2/8/59 tration since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, MainStay VP
Series Fund, Inc. (since 2005), ICAP Funds, Inc.
(since 2006) and MainStay Funds Trust (since April
2009)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Vice President, Associate General Counsel and
ITE E. H. Officer since Assistant Secretary, New York Life Insurance Company
MORRISON 2008 and (since 2008); Managing Director, Associate General
3/26/56 Secretary Counsel and Assistant Secretary, New York Life
since 2004 Investment Management LLC (since 2004); Managing
Director and Secretary, NYLIFE Distributors LLC;
Secretary, NYLIM Service Company (since 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since 2008); Chief Legal
Officer (since 2008) and Secretary, MainStay VP Series
Fund, Inc. (since 2004), ICAP Funds, Inc. (since 2006)
and MainStay Funds Trust (since April 2009); Chief
Legal Officer--Mutual Funds and Vice President and
Corporate Counsel, The Prudential Insurance Company of
America (2000 to 2004)
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</Table>
* The Officers listed above are considered to be "interested persons" of the
MainStay Group of Funds within the meaning of the 1940 Act because of their
affiliation with New York Life Insurance Company. New York Life Investment
Management LLC, Madison Square Investors LLC, MacKay Shields LLC,
Institutional Capital LLC, Epoch Investment Partners, Inc., Markston
International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC
and/or NYLIFE Distributors LLC, as described in detail above in the column
captioned "Principal Occupation(s) During Past Five Years." Officers are
elected annually by the Boards to serve a one year term.
40 MainStay Mid Cap Value Fund
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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 COMMON STOCK FUND
MAINSTAY EPOCH U.S. ALL CAP FUND
MAINSTAY EPOCH U.S. EQUITY FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY U.S. SMALL CAP 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 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 BUILDER FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY EPOCH GLOBAL CHOICE FUND
MAINSTAY EPOCH GLOBAL EQUITY YIELD FUND
MAINSTAY EPOCH INTERNATIONAL SMALL CAP 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
EPOCH INVESTMENT PARTNERS, INC.
NEW YORK, NEW YORK
INSTITUTIONAL CAPITAL LLC(2)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(2)
NEW YORK, NEW YORK
MADISON SQUARE INVESTORS LLC(2)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 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. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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<Caption>
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Not FDIC/NCUA Insured Not a Deposit May Lose Value
</Table>
<Table>
<Caption>
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No Bank Guarantee Not Insured by Any Government Agency
- -------------------------------------------------------
</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 The MainStay Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO15883 (RECYCLE LOGO) MS283-09 MSMV11-12/09
19
FORM N-CSR
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the Registrant has adopted a
code of ethics (the "Code") that applies to the Registrant's principal executive
officer ("PEO") and principal financial officer ("PFO"). Schedule II of the Code
was amended during the period to designate a new Chief Compliance Officer. A
copy of the Code is filed herewith. The Registrant did not grant any waivers,
including implicit waivers, from any provisions of the Code to the PEO or PFO
during the period covered by this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees has determined that 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, 2009 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 $708,705.
The aggregate fees billed for the fiscal year ended October 31, 2008 for
professional services rendered by KPMG for the audit of the Registrant's annual
financial statements or services that are normally provided by KPMG in
connection with statutory and regulatory filings or engagements for that fiscal
year were $776,210.
(b) Audit-Related Fees
The aggregate fees billed for assurance and related services by KPMG that are
reasonably related to the performance of the audit of the Registrant's financial
statements and are not reported under paragraph (a) of this Item were: (i)
$40,000 for the fiscal year ended October 31, 2009, and (ii) $30,000 for the
fiscal year ended October 31, 2008. These audit-related services include review
of financial highlights for Registrant's registration statements and issuance of
consents to use the auditor's reports.
(c) Tax Fees
The aggregate fees billed for professional services rendered by KPMG for tax
compliance, tax advice, and tax planning were: (i) $88,100 during the fiscal
year ended October 31, 2009, and (ii) $112,100 during the fiscal year ended
October 31, 2008. These services primarily included preparation of federal,
state and local income tax returns and excise tax returns, as well as services
relating to excise tax distribution requirements.
(d) All Other Fees
The aggregate fees billed for products and services provided by KPMG, other than
the services reported in paragraphs (a) through (c) of this Item were: (i) $0
during the fiscal year ended October 31, 2009, and (ii) $0 during the fiscal
year ended October 31, 2008.
(e) Pre-Approval Policies and Procedures
(1) The Registrant's Audit and Compliance Committee has adopted
pre-approval policies and procedures (the "Procedures") to govern
the Committee's pre-approval of (i) all audit services and
permissible non-audit services to be provided to the Registrant by
its independent accountant, and (ii) all permissible non-audit
services to be provided by such independent accountant to the
Registrant's investment adviser and to any entity controlling,
controlled by or under common control with the investment adviser
that provides ongoing services to the Registrant (collectively, the
"Service Affiliates") if the services directly relate to the
Registrant's operations and financial reporting. In accordance with
the Procedures, the Audit and Compliance Committee is responsible
for the engagement of the independent accountant to certify the
Registrant's financial statements for each fiscal year. With respect
to the pre-approval of non-audit services provided to the Registrant
and its Service Affiliates, the Procedures provide that the Audit
and Compliance Committee may annually pre-approve a list of the
types of services that may be provided to the Registrant or its
Service Affiliates, or the Audit and Compliance Committee may
pre-approve such services on a project-by-project basis as they
arise. Unless a type of service has received general pre-approval,
it will require specific pre-approval by the Audit and Compliance
Committee if it is to be provided by the independent accountant. The
Procedures also permit the Audit and Compliance Committee to
delegate authority to one or more of its members to pre-approve any
proposed non-audit services that have not been previously
pre-approved by the Audit and Compliance Committee, subject to the
ratification by the full Audit and Compliance Committee no later
than its next scheduled meeting. To date, the Audit and Compliance
Committee has not delegated such authority.
(2) With respect to the services described in paragraphs (b) through (d)
of this Item 4, no amount was approved by the Audit and Compliance
Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
(f) There were no hours expended on KPMG's engagement to audit the Registrant's
financial statements for the most recent fiscal year attributable to work
performed by persons other than KPMG's full-time, permanent employees.
(g) All non-audit fees billed by KPMG for services rendered to the Registrant
for the fiscal years ended October 31, 2009 and October 31, 2008 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, 2009, and (ii) $0
for the fiscal year ended October 31, 2008. (h) The Registrant's Audit and
Compliance Committee has determined that the non-audit services rendered by KPMG
for the fiscal year ended October 31, 2009 to the Registrant's investment
adviser and any entity controlling, controlled by, or under common control with
the Registrant's investment adviser that provides ongoing services to the
Registrant that were not required to be pre-approved by the Audit and Compliance
Committee because they did not relate directly to the operations and financial
reporting of the registrant were compatible with maintaining the respective
independence of KPMG during the relevant time period.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments is included as part of Item 1 of this report.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Since the Registrant's last response to this Item, there have been no material
changes to the procedures by which shareholders may recommend nominees to the
Registrant's Board of Trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the 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.
THE MAINSTAY FUNDS
By: /s/ Stephen P. Fisher
------------------------------------
Stephen P. Fisher
President
Date: January 8, 2010
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
Date: January 8, 2010
By: /s/ Jack R. Benintende
------------------------------------
Jack R. Benintende
Treasurer and Principal Financial and Accounting Officer
Date: January 8, 2010
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.