================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-04847
ECLIPSE FUNDS
(Exact name of Registrant as specified in charter)
51 Madison Avenue, New York, NY 10010
(Address of principal executive offices) (Zip code)
Marguerite E. H. Morrison, Esq.
169 Lackawanna Avenue
Parsippany, New Jersey 07054
(Name and address of agent for service)
Registrant's telephone number, including area code: (973) 394-4437
Date of fiscal year end: October 31
Date of reporting period: October 31, 2009
================================================================================
ITEM 1. REPORTS TO STOCKHOLDERS.
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
BALANCED 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
BALANCED 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 22
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 30
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 39
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 40
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 44
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 44
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 44
- ---------------------------------------------
BOARD MEMBERS AND OFFICERS 45
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 8.95% 0.64% 4.55%
Excluding sales charges 15.30 1.78 5.14
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 9450 10000 10000 10000 10000
10/31/00 10280 11185 10652 11000 12373
10/31/01 10821 11031 12169 11542 10143
10/31/02 11029 10703 12892 11664 9329
10/31/03 13216 14286 13560 14201 12677
10/31/04 14279 17106 14132 16099 14589
10/31/05 15557 20442 14183 17977 17228
10/31/06 17167 24635 14845 20491 20228
10/31/07 18256 27031 15678 22169 23309
10/31/08 13530 16536 15737 16715 13829
10/31/09 15599 18937 17666 19196 16422
</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 9.17% 0.69% 4.57%
Excluding sales charges 15.52 1.84 5.17
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 23625 25000 25000 25000 25000
10/31/00 25699 27962 26630 27500 30932
10/31/01 27052 27577 30422 28854 25358
10/31/02 27572 26757 32231 29159 23323
10/31/03 33039 35715 33900 35502 31692
10/31/04 35697 42765 35330 40248 36473
10/31/05 38894 51105 35459 44943 43071
10/31/06 42919 61588 37112 51227 50569
10/31/07 45639 67579 39194 55423 58274
10/31/08 33847 41340 39342 41788 34574
10/31/09 39101 47343 44166 47989 41055
</Table>
CLASS B SHARES(3)--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 9.42% 0.68% 4.36%
Excluding sales charges 14.42 1.02 4.36
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 10000 10000 10000 10000 10000
10799 11185 10652 11000 12373
11280 11031 12169 11542 10143
11410 10703 12892 11664 9329
13573 14286 13560 14201 12677
14567 17106 14132 16099 14589
15760 20442 14183 17977 17228
17255 24635 14845 20491 20228
18214 27031 15678 22169 23309
13393 16536 15737 16715 13829
10/31/09 15324 18937 17666 19196 16422
</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 R2 shares are available only through
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(4)--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges 13.43% 1.01% 4.36%
Excluding sales charges 14.43 1.01 4.36
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED
FUND CLASS RUSSELL MIDCAP ML CORP BALANCED COMPOSITE RUSSELL MIDCAP
C VALUE INDEX GOVT 1-10 INDEX INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 10000 10000 10000 10000 10000
10800 11185 10652 11000 12373
11282 11031 12169 11542 10143
11411 10703 12892 11664 9329
13581 14286 13560 14201 12677
14572 17106 14132 16099 14589
15760 20442 14183 17977 17228
17256 24635 14845 20491 20228
18215 27031 15678 22169 23309
13393 16536 15737 16715 13829
10/31/09 15324 18937 17666 19196 16422
</Table>
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
15.89% 2.23% 5.52%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED
FUND CLASS RUSSELL MIDCAP ML CORP BALANCED COMPOSITE RUSSELL MIDCAP
I VALUE INDEX GOVT 1-10 INDEX INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 10000 10000 10000 10000 10000
10906 11185 10652 11000 12373
11509 11031 12169 11542 10143
11760 10703 12892 11664 9329
14126 14286 13560 14201 12677
15320 17106 14132 16099 14589
16770 20442 14183 17977 17228
18589 24635 14845 20491 20228
19847 27031 15678 22169 23309
14763 16536 15737 16715 13829
10/31/09 17108 18937 17666 19196 16422
</Table>
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
15.80% 2.12% 5.41%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED
FUND CLASS RUSSELL MIDCAP ML CORP BALANCED COMPOSITE RUSSELL MIDCAP
R1 VALUE INDEX GOVT 1-10 INDEX INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 10000 10000 10000 10000 10000
10895 11185 10652 11000 12373
11485 11031 12169 11542 10143
11723 10703 12892 11664 9329
14068 14286 13560 14201 12677
15242 17106 14132 16099 14589
16664 20442 14183 17977 17228
18447 24635 14845 20491 20228
19673 27031 15678 22169 23309
14620 16536 15737 16715 13829
10/31/09 16929 18937 17666 19196 16422
</Table>
corporate-sponsored retirement programs, which include certain minimum
program requirements. Class R3 shares are sold with no initial sales charge
or CDSC, have an annual 12b-1 fee of 0.50%, and are available in certain
individual retirement accounts or in certain retirement plans. Performance
figures reflect certain fee waivers and/or expense limitations, without which
total returns may have been lower. These fee waivers and/or expense
limitations are contractual and may be modified or terminated only with the
approval of the Board of Trustees. The Manager may recoup the amount of
certain management fee waivers or expense reimbursements from the Fund
pursuant to the 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.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class A, B, R1 and R2 shares, first offered on
January 2, 2004, include the historical performance of Class I shares through
January 1, 2004, adjusted for differences in certain contractual expenses and
fees. Unadjusted, the performance shown for Class A, B, R1 and R2 shares
might have been lower.
4. Performance figures for Class C shares, first offered on January 2, 2004,
include the historical performance of L Class shares (which were redesignated
as Class C shares on January 2, 2004) through January 1, 2004, and the
historical performance of Class I shares through December 29, 2002, adjusted
for differences in certain contractual expenses and fees. Unadjusted, the
performance shown for Class C shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE FOLLOWING PAGE ARE AN INTEGRAL PART
OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Balanced Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
15.45% 1.87% 5.14%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 10000 10000 10000 10000 10000
10872 11185 10652 11000 12373
11433 11031 12169 11542 10143
11642 10703 12892 11664 9329
13936 14286 13560 14201 12677
15054 17106 14132 16099 14589
16417 20442 14183 17977 17228
18131 24635 14845 20491 20228
19292 27031 15678 22169 23309
14303 16536 15737 16715 13829
10/31/09 16514 18937 17666 19196 16422
</Table>
CLASS R3 SHARES(5)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
15.17% 1.62% 4.88%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY BALANCED RUSSELL MIDCAP ML CORP RUSSELL MIDCAP
FUND VALUE INDEX GOVT 1-10 BALANCED COMPOSITE INDEX
----------------- -------------- --------- ------------------ --------------
10/31/99 10000 10000 10000 10000 10000
10841 11185 10652 11000 12373
11371 11031 12169 11542 10143
11550 10703 12892 11664 9329
13791 14286 13560 14201 12677
14867 17106 14132 16099 14589
16177 20442 14183 17977 17228
17822 24635 14845 20491 20228
18909 27031 15678 22169 23309
13988 16536 15737 16715 13829
10/31/09 16111 18937 17666 19196 16422
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ----------------------------------------------------------------------------------------------
Russell Midcap(R) Value Index(6) 14.52% 2.05% 6.59%
Balanced Composite Index(7) 14.84 3.58 6.74
Merrill Lynch Corporate & Government 1-10 Years Bond Index(8) 12.26 4.57 5.86
Russell Midcap(R) Index(9) 18.75 2.40 5.09
Average Lipper mixed-asset target allocation growth fund(10) 15.96 2.05 2.02
</Table>
5. Performance figures for Class R3 shares, first offered to the public on
April 28, 2006, include the historical performance of Class I shares through
April 27, 2006, adjusted for differences in certain contractual expenses and
fees. Unadjusted, the performance shown for Class R3 shares might have been
lower.
6. The Russell Midcap(R) Value Index 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.
7. The Balanced Composite Index is comprised of the Russell Midcap(R) Value
Index and the Merrill Lynch Corporate and Government 1-10 Years Bond Index
weighted 60%/40%, respectively. The Russell Midcap(R) Value Index measures
the performance of those Russell Midcap 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 Merrill Lynch Corporate and Government 1-10
Years Bond Index is a market capitalization-weighted index including U.S.
Government and fixed coupon domestic investment grade corporate bonds with
at least $100 million par amount outstanding. Total returns assume
reinvestment of all income and capital gains. An investment cannot be made
directly in an index.
8. The Merrill Lynch Corporate and Government 1-10 Years Bond Index is a market
capitalization-weighted index including U.S. Government and fixed coupon
domestic investment grade corporate bonds with at least $100 million par
amount outstanding. Total returns assume reinvestment of all income and
capital gains. An investment cannot be made directly in an index.
9. The Russell Midcap(R) Index measures the performance of the 800 smallest
companies in the Russell 1000(R) Index, and represents approximately 31% of
the total market capitalization of the Russell 1000(R) Index. Total returns
assume reinvestment of all dividends and capital gains. An investment cannot
be made directly in an index.
10. 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 remainder 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 BALANCED 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 $1,155.50 $ 7.99 $1,017.80 $ 7.48
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,156.60 $ 6.85 $1,018.90 $ 6.41
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,151.10 $12.04 $1,014.00 $11.27
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,150.60 $12.03 $1,014.00 $11.27
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,158.10 $ 5.28 $1,020.30 $ 4.94
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,157.70 $ 5.82 $1,019.80 $ 5.45
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,155.90 $ 7.17 $1,018.60 $ 6.72
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,154.40 $ 8.53 $1,017.30 $ 7.98
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.47% for Investor Class, 1.26% for Class A, 2.22% for Class B and Class C,
0.97% for Class I, 1.07% for Class R1, 1.32% for Class R2 and 1.57% 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 Balanced Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2009 (UNAUDITED)
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 58.6
U.S. Government & Federal Agencies 22.5
Corporate Bonds 14.2
Yankee Bonds 2.5
Exchange Traded Fund 0.9
Mortgage-Backed Securities 0.5
Asset-Backed Securities 0.3
Foreign Government Bond 0.3
Short-Term Investments 0.3
Convertible Bond 0.0
Liabilities in Excess of Cash and Other
Assets (0.1)
</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
INVESTMENTS)
<Table>
1 United States Treasury Notes, 0.875%-4.125%, due
1/31/11-8/15/19
2 Federal Home Loan Mortgage Corporation,
1.50%-5.125%, due 11/23/10-5/29/13
3 Federal National Mortgage Association,
3.625%-5.50%, due 2/15/11-5/18/12
4 S&P 500 Index--SPDR Trust Series 1
5 ENSCO International, Inc.
6 Annaly Capital Management, Inc.
7 BlackRock, Inc.
8 Sempra Energy, 6.50%, due 6/1/16
9 Cliffs Natural Resources, Inc.
10 Federal Home Loan Bank, 4.50%-5.50%, due
9/16/13-8/13/14
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS TONY H. ELAVIA OF MADISON SQUARE
INVESTORS LLC, THE FUND'S SUBADVISOR, AND THOMAS J. GIRARD OF NEW YORK LIFE
INVESTMENTS,(1) THE FUND'S MANAGER.
HOW DID MAINSTAY BALANCED FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12 MONTHS ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay Balanced Fund returned 15.30% for Investor
Class shares, 15.52% for Class A shares, 14.42% for Class B shares and 14.43%
for Class C shares for the 12 months ended October 31, 2009. Over the same
period, Class I shares returned 15.89%, Class R1 shares returned 15.80%, Class
R2 shares returned 15.45% and Class R3 shares returned 15.17%. All share classes
underperformed the 15.96% return of the average Lipper(2) mixed-asset target
allocation 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
14.52% return of the Russell Midcap(R) Value Index(3) and the 14.84% return of
the Fund's Balanced Composite Index(4) for the 12 months ended October 31, 2009.
The Russell Midcap(R) Value Index is the Fund's broad-based securities-market
index. The Balanced Composite Index is a secondary benchmark of the Fund. See
pages 5 and 6 for Fund returns with sales charges.
WHAT FACTORS WERE RESPONSIBLE FOR THE FUND'S PERFORMANCE DURING THE REPORTING
PERIOD?
The equity portion of the Fund maintained a "core-like" posture that helped the
Fund's performance relative to the Russell Midcap(R) Value Index. The Fund owned
growth stocks, which significantly outperformed value stocks during the
reporting period. The equity portion of the Fund was also biased toward
securities that we believed to be inexpensive in terms of historical, current
and projected earnings. As a group, these stocks performed well during the
reporting period. The equity portion of the Fund further benefited from its tilt
away from companies that employ significant leverage.
In a period when mid-cap stocks tended to outperform large- and small-cap
stocks, the Fund's decision to maintain a significant allocation to large-cap
stocks hurt the Fund's equity results relative to the Russell Midcap(R) Value
Index. The equity portion of the Fund is typically biased against securities
that have been trending down in favor of those with positive momentum. As a
result, by the spring of 2009, the equity portion of the Fund was significantly
underweight in many of the lowest-quality securities with high volatility
profiles. Although these issues had fallen precipitously during the first few
months of the reporting period, they tended to appreciate the most during the
rally that lasted from April through September.
The fixed-income portion of the Fund outperformed the Merrill Lynch Corporate &
Government 1-10 Years Bond Index(5) during the reporting period. Overweight
sector positions in residential mortgage-backed securities and commercial
mortgage-backed securities were the strongest contributors to the outperformance
in this portion of the Fund.
Relative to its peers, the Fund benefited by maintaining a focus on mid-cap
stocks, the best-performing segment of the equity market during the reporting
period. This benefit, however, was offset by the absence of foreign stock
holdings; an emphasis on high-quality bonds over higher-yielding, lower-quality
bonds; and disappointing security selection within the equity portion of the
Fund.
DURING THE REPORTING PERIOD, WHICH EQUITY SECTORS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH EQUITY SECTORS WERE THE WEAKEST
CONTRIBUTORS?
The equity portion of the Fund utilizes a proprietary quantitative investment
process that focuses on a combination of valuation, growth and momentum
- ----------
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. The Fund invests in mid-cap stocks, which may be more volatile and
less liquid than the securities of larger companies. The values of debt
securities fluctuate depending on various factors, including interest rates,
issuer creditworthiness, market conditions and maturities. The Fund invests in
foreign securities, which may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. 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.
1. "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) Value
Index.
4. See footnote on page 7 for more information on the Fund's Balanced Composite
Index.
5. See footnote on page 7 for more information on the Merrill Lynch Corporate &
Government 1-10 Years Bond Index.
10 MainStay Balanced Fund
factors. Sector holdings are a residual of the Fund's investment process and are
not a product of top-down, macroeconomic analysis.
That said, the Fund's significantly underweight position in financials,
particularly banks and real estate investment trusts (REITs), contributed
positively to the Fund's performance relative to the Russell Midcap(R) Value
Index, as the financials sector struggled during the reporting period. An
underweight position in the stronger utilities sector detracted from the Fund's
performance.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE
FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCKS WERE THE WEAKEST?
In the equity portion of the Fund, the strongest individual contributors to
absolute performance were SL Green Realty, a REIT focused on owning and
operating office buildings in New York City and Prudential Financial, a firm
providing financial services globally. Also during the reporting period, the
Fund sold its entire position in Liberty Entertainment a subsidiary of Liberty
Media Corp. During the reporting period, Liberty Media Corp. announced plans to
split off Liberty Entertainment and combine it with The DIRECT TV Group. Other
sales during the reporting period included bank holding company Goldman Sachs,
software provider Oracle and residential developer Pulte Homes.
The stocks that detracted most from the Fund's absolute performance included
financial companies Wells Fargo and JPMorgan Chase and oil refiner Sunoco.
DID THE EQUITY PORTION OF THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES
DURING THE REPORTING PERIOD?
The equity portion of the Fund is broadly diversified, so individual purchases
and sales tend to have little impact on overall results. The Fund selects
securities using a proprietary investment process that seeks stocks with
attractive relative valuations, strong operating results and positive price
trends.
Among the stocks that fit the Fund's purchase criteria during the reporting
period were regional bank Zions Bancorp; iron and coal miner Cliffs Natural
Resources; power producer Mirant; and oil and gas company Plains Exploration &
Production.
Stocks sold during the reporting period included entertainment complex Liberty
Media Entertainment, bank holding company Goldman Sachs; software provider
Oracle; and residential developer Pulte Homes.
HOW DID SECTOR WEIGHTINGS CHANGE IN THE EQUITY PORTION OF THE FUND DURING THE
REPORTING PERIOD?
Weighting changes in the equity portion of the Fund result from a combination of
stock performance and the Fund's proprietary quantitative security-selection
process. Changes in sector weightings during the reporting period were also the
byproduct of more closely aligning the Fund's style exposure with that
of the Russell Midcap(R) Value Index.
During the reporting period, we increased the Fund's weightings in materials,
utilities and financials, especially REITs, banks and insurance carriers, but
maintained underweight positions in each of these equity segments relative to
the Russell Midcap(R) Value Index. We also increased the Fund's weighting in the
consumer discretionary sector, bringing it from an underweight to a modestly
overweight position. We significantly reduced the Fund's exposure to the
information technology, health care and industrials sectors.
HOW WAS THE EQUITY PORTION OF THE FUND POSITIONED AT THE END OF THE REPORTING
PERIOD?
As of October 31, 2009, the equity portion of the Fund was overweight relative
to the Russell Midcap(R) Value Index in information technology, industrials,
health care and telecommunication services. As of the same date, the equity
portion of the Fund was underweight relative to the benchmark in financials,
utilities and materials.
WHAT FACTORS AFFECTED THE FIXED-INCOME PORTION OF THE FUND DURING THE REPORTING
PERIOD?
The most significant factor that influenced the fixed-income markets during the
reporting period was the ongoing financial turmoil ignited by the correction in
home prices. As the reporting period began, the U.S. economy was severely
weakened following the mid-September 2008 collapse of Lehman Brothers. The
fallout from this bankruptcy and the resulting deleveraging caused significant
disruptions to the global financial markets and the global economy.
The Federal Reserve continued its easing policy
by lowering the federal funds target rate to a range
of 0% to 0.25% in December 2008. In the ensuing months, many new programs were
put in place seeking to provide liquidity to the financial system. For example,
in March 2009, the Federal Reserve announced it would begin a formal program of
buying U.S. Treasury securities as well as agency debentures and agency
mortgage-backed securities. Additional programs were introduced to spur buying
of "troubled" or illiquid securities by private investors.
mainstayinvestments.com 11
To cushion the effects of the economic turmoil on the real economy, the new U.S.
administration passed a large stimulus package that significantly increased the
budget deficit but helped offset some of the near-term decline in consumer
spending.
Gross domestic product (GDP) growth in the U.S. contracted dramatically until
some stabilization appeared in the quarter ended June 30, 2009. After four
consecutive quarters of negative economic growth, the third quarter of 2009
finally saw positive GDP growth. Still, many questioned the sustainability of
such growth, as much of the improvement in economic activity seemed to be the
result of the heavy contribution from the federal stimulus package.
As the reporting period unfolded, financial concerns subsided and a rally began
in fixed-income asset classes with higher risk than U.S. Treasurys. Cheap
valuations, investors' willingness to increase risk, and massive amounts of
liquidity caused spreads(6) on non-Treasury securities to tighten dramatically.
HOW DID THE FIXED-INCOME PORTION OF THE FUND RESPOND TO THESE MARKET FORCES?
In the fixed-income portion of the Fund, we made significant purchases of
residential mortgage-backed and commercial mortgage-backed securities, as
spreads on these non-Treasury sectors tightened dramatically. As mentioned
above, the Fund's allocations to these sectors added to performance relative to
the Merrill Lynch Corporate & Government 1-10 Years Bond Index.
- ----------
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 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.
12 MainStay Balanced Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2009
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 40.3%+
ASSET-BACKED SECURITIES 0.3%
- ----------------------------------------------------------------
AUTOMOBILE 0.2%
Mercedes-Benz Auto
Receivables Trust
Series 2009-1, Class A3
1.67%, due 1/15/14 $ 1,250,000 $ 1,252,327
-------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATION) 0.1%
Greenwich Capital Commercial
Funding Corp.
Series 2007-GG9, Class A4
5.444%, due 3/10/39 1,000,000 892,342
-------------
Total Asset-Backed Securities
(Cost $2,152,554) 2,144,669
-------------
CONVERTIBLE BOND 0.0%++
- ----------------------------------------------------------------
INTERNET 0.0%++
At Home Corp.
4.75%, due 12/31/49
(a)(b)(c)(d) 177,810 18
-------------
Total Convertible Bond
(Cost $13,325) 18
-------------
CORPORATE BONDS 14.2%
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 1.0%
Boeing Co.
4.875%, due 2/15/20 1,430,000 1,465,324
L-3 Communications Corp.
5.20%, due 10/15/19 (e) 900,000 908,885
Northrop Grumman Corp.
5.05%, due 8/1/19 480,000 504,652
United Technologies Corp.
7.125%, due 11/15/10 3,130,000 3,324,961
-------------
6,203,822
-------------
BANKS 2.8%
American Express Bank FSB
6.00%, due 9/13/17 2,000,000 2,103,120
Bank of America Corp.
5.65%, due 5/1/18 1,300,000 1,313,950
5.75%, due 12/1/17 1,000,000 1,016,808
7.80%, due 2/15/10 1,500,000 1,525,604
7.80%, due 9/15/16 1,500,000 1,642,688
BB&T Corp.
3.375%, due 9/25/13 2,000,000 2,015,312
Fifth Third Bancorp
8.25%, due 3/1/38 210,000 202,199
HSBC Bank USA N.A.
5.875%, due 11/1/34 1,000,000 1,025,850
Keycorp
6.50%, due 5/14/13 400,000 416,246
Mellon Funding Corp.
6.375%, due 2/15/10 1,960,000 1,985,602
Morgan Stanley
5.625%, due 9/23/19 1,100,000 1,106,907
PNC Bank N.A.
6.875%, due 4/1/18 1,230,000 1,313,550
Wells Fargo & Co.
3.75%, due 10/1/14 2,500,000 2,499,182
-------------
18,167,018
-------------
BEVERAGES 0.4%
Anheuser-Busch Cos., Inc.
7.50%, due 3/15/12 1,500,000 1,674,103
Anheuser-Busch InBev
Worldwide, Inc.
3.00%, due 10/15/12 (e) 1,000,000 1,008,656
-------------
2,682,759
-------------
CHEMICALS 0.3%
Eastman Chemical Co.
5.50%, due 11/15/19 550,000 556,749
Monsanto Co.
7.375%, due 8/15/12 1,000,000 1,148,184
-------------
1,704,933
-------------
DIVERSIFIED FINANCIAL SERVICES 2.1%
Bear Stearns Cos., Inc. (The)
5.30%, due 10/30/15 2,000,000 2,137,290
Capital One Bank USA N.A.
8.80%, due 7/15/19 1,250,000 1,480,525
Citigroup, Inc.
5.85%, due 8/2/16 1,500,000 1,505,205
6.50%, due 1/18/11 500,000 524,046
General Electric Capital
Corp. (MTN)
6.00%, due 8/7/19 2,500,000 2,627,722
Goldman Sachs Group, Inc.
(The)
5.95%, due 1/18/18 1,375,000 1,448,795
HSBC Finance Corp.
6.375%, due 11/27/12 1,000,000 1,087,080
JPMorgan Chase & Co.
2.625%, due 12/1/10 (f) 2,000,000 2,040,748
5.25%, due 5/1/15 1,000,000 1,066,150
-------------
13,917,561
-------------
</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
CORPORATE BONDS (CONTINUED)
ELECTRIC 1.3%
CenterPoint Energy Houston
Electric LLC
7.00%, due 3/1/14 $ 1,250,000 $ 1,408,644
Consolidated Edison Co. of
New York
7.50%, due 9/1/10 3,000,000 3,163,842
Duke Energy Ohio, Inc.
5.45%, due 4/1/19 1,000,000 1,076,784
Kansas City Power & Light Co.
7.15%, due 4/1/19 1,000,000 1,176,844
Peco Energy Co.
5.00%, due 10/1/14 1,225,000 1,327,922
-------------
8,154,036
-------------
ENVIRONMENTAL CONTROLS 0.2%
Republic Services, Inc.
5.50%, due 9/15/19 (e) 1,000,000 1,031,263
-------------
FINANCE--OTHER SERVICES 0.3%
National Rural Utilities
Cooperative
Finance Corp.
2.625%, due 9/16/12 2,100,000 2,118,215
-------------
FOOD 0.7%
Campbell Soup Co.
6.75%, due 2/15/11 1,500,000 1,606,791
ConAgra Foods, Inc.
7.00%, due 4/15/19 600,000 699,794
Kellogg Co.
Series B
6.60%, due 4/1/11 2,000,000 2,151,086
Safeway, Inc.
5.00%, due 8/15/19 400,000 405,527
-------------
4,863,198
-------------
GAS 0.1%
V Sempra Energy
6.50%, due 6/1/16 750,000 823,700
-------------
HEALTH CARE--SERVICES 0.3%
Roche Holdings, Inc.
5.00%, due 3/1/14 (e) 1,500,000 1,624,575
-------------
HOUSEHOLD PRODUCTS & WARES 0.5%
Kimberly-Clark Corp.
5.00%, due 8/15/13 3,000,000 3,275,982
-------------
INSURANCE 0.7%
Allstate Corp. (The)
7.20%, due 12/1/09 1,900,000 1,907,748
MetLife Global Funding I
5.125%, due 6/10/14 (e) 1,500,000 1,593,586
MetLife, Inc.
6.75%, due 6/1/16 500,000 559,122
Principal Financial Group,
Inc.
8.875%, due 5/15/19 450,000 522,065
-------------
4,582,521
-------------
MACHINERY--DIVERSIFIED 0.5%
Deere & Co.
5.375%, due 10/16/29 650,000 667,261
7.85%, due 5/15/10 2,308,000 2,395,838
-------------
3,063,099
-------------
MEDIA 0.5%
COX Communications, Inc.
8.375%, due 3/1/39 (e) 575,000 689,347
DirecTV Holdings LLC
4.75%, due 10/1/14 (e) 1,300,000 1,326,225
Time Warner Cable, Inc.
6.75%, due 7/1/18 250,000 275,216
8.25%, due 4/1/19 710,000 854,069
-------------
3,144,857
-------------
MISCELLANEOUS--MANUFACTURING 0.3%
ITT Corp.
4.90%, due 5/1/14 1,130,000 1,198,119
6.125%, due 5/1/19 400,000 441,308
-------------
1,639,427
-------------
PACKAGING & CONTAINERS 0.1%
Bemis Co., Inc.
5.65%, due 8/1/14 900,000 954,716
-------------
PHARMACEUTICALS 0.1%
GlaxoSmithKline Capital, Inc.
4.85%, due 5/15/13 800,000 862,739
-------------
PIPELINES 0.3%
Energy Transfer Partners,
L.P.
9.00%, due 4/15/19 950,000 1,147,854
Plains All American Pipeline,
L.P.
8.75%, due 5/1/19 800,000 971,060
-------------
2,118,914
-------------
REAL ESTATE INVESTMENT TRUSTS 0.2%
AvalonBay Communities, Inc.
6.10%, due 3/15/20 500,000 518,717
ERP Operating, L.P.
5.25%, due 9/15/14 922,000 940,298
-------------
1,459,015
-------------
TELECOMMUNICATIONS 1.3%
Harris Corp.
6.375%, due 6/15/19 650,000 714,910
Southwestern Bell Telephone
Corp.
7.00%, due 7/1/15 3,000,000 3,453,297
Verizon Communications, Inc.
6.10%, due 4/15/18 1,950,000 2,118,363
</Table>
14 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Verizon Wireless Capital LLC
5.55%, due 2/1/14 (e) $ 2,000,000 $ 2,179,214
-------------
8,465,784
-------------
TRANSPORTATION 0.2%
Burlington Northern Santa Fe
Corp.
4.70%, due 10/1/19 500,000 502,727
FedEx Corp.
8.00%, due 1/15/19 750,000 908,626
-------------
1,411,353
-------------
Total Corporate Bonds
(Cost $87,708,702) 92,269,487
-------------
FOREIGN GOVERNMENT BOND 0.3%
- ----------------------------------------------------------------
FOREIGN SOVEREIGN 0.3%
Province of Ontario
4.00%, due 10/7/19 1,900,000 1,870,579
-------------
Total Foreign Government Bond
(Cost $1,896,750) 1,870,579
-------------
MORTGAGE-BACKED SECURITIES 0.5%
- ----------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 0.5%
Bear Stearns Commercial
Mortgage Securities
Series 2007-PW16, Class A4
5.719%, due 6/11/40 900,000 856,727
Citigroup Commercial
Mortgage Trust
Series 2006-C5, Class A4
5.431%, due 10/15/49 1,000,000 930,323
Commercial Mortgage
Pass-Through Certificates
Series 2006-C8, Class A4
5.306%, due 12/10/46 900,000 818,045
Morgan Stanley Capital I
Series 2007-HQ11, Class A4
5.447%, due 2/12/44 750,000 671,166
-------------
Total Mortgage-Backed
Securities
(Cost $3,262,496) 3,276,261
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 22.5%
- ----------------------------------------------------------------
V FEDERAL HOME LOAN BANK 0.8%
4.50%, due 9/16/13 2,500,000 2,725,882
5.50%, due 8/13/14 2,000,000 2,273,524
-------------
4,999,406
-------------
V FEDERAL HOME LOAN MORTGAGE CORPORATION 2.9%
1.50%, due 1/7/11 2,500,000 2,526,378
2.875%, due 11/23/10 2,150,000 2,202,333
3.25%, due 2/25/11 2,000,000 2,064,368
3.50%, due 5/29/13 2,000,000 2,111,442
3.875%, due 6/29/11 5,500,000 5,780,351
4.75%, due 1/18/11 2,000,000 2,099,668
5.125%, due 4/18/11 2,000,000 2,128,220
-------------
18,912,760
-------------
V FEDERAL NATIONAL MORTGAGE ASSOCIATION 1.3%
3.625%, due 8/15/11 2,000,000 2,097,444
4.50%, due 2/15/11 2,000,000 2,101,688
4.875%, due 5/18/12 2,000,000 2,174,150
5.50%, due 3/15/11 2,000,000 2,131,566
-------------
8,504,848
-------------
TENNESSEE VALLEY AUTHORITY 0.1%
5.25%, due 9/15/39 600,000 614,245
-------------
UNITED STATES TREASURY BOND 0.2%
4.25%, due 5/15/39 1,640,000 1,643,844
-------------
V UNITED STATES TREASURY NOTES 17.2%
0.875%, due 1/31/11 6,015,000 6,043,667
0.875%, due 2/28/11 7,400,000 7,433,818
0.875%, due 3/31/11 6,100,000 6,127,163
0.875%, due 4/30/11 1,050,000 1,054,348
0.875%, due 5/31/11 10,475,000 10,515,507
1.00%, due 7/31/11 800,000 803,813
1.00%, due 8/31/11 2,500,000 2,509,278
1.125%, due 6/30/11 185,000 186,351
1.125%, due 12/15/11 4,500,000 4,513,360
1.375%, due 4/15/12 3,000,000 3,015,234
1.375%, due 5/15/12 14,064,000 14,125,530
1.375%, due 9/15/12 5,875,000 5,875,458
1.50%, due 7/15/12 1,800,000 1,811,531
1.875%, due 2/28/14 130,000 129,086
2.00%, due 11/30/13 12,205,000 12,240,285
2.375%, due 8/31/14 1,700,000 1,708,633
2.375%, due 9/30/14 3,170,000 3,182,617
2.625%, due 6/30/14 4,435,000 4,519,890
2.625%, due 7/31/14 1,075,000 1,094,317
2.75%, due 10/31/13 5,185,000 5,353,108
3.00%, due 8/31/16 4,325,000 4,343,922
3.25%, due 5/31/16 275,000 281,295
3.25%, due 6/30/16 7,600,000 7,773,371
3.25%, due 7/31/16 750,000 766,465
3.625%, due 8/15/19 5,275,000 5,376,380
4.125%, due 5/15/15 1,200,000 1,300,781
-------------
112,085,208
-------------
Total U.S. Government &
Federal Agencies
(Cost $145,286,772) 146,760,311
-------------
</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
YANKEE BONDS 2.5% (G)
- ----------------------------------------------------------------
BANKS 0.5%
Barclays Bank PLC
5.00%, due 9/22/16 $ 725,000 $ 740,930
Commonwealth Bank of
Australia
3.75%, due 10/15/14 (e) 775,000 782,701
5.00%, due 10/15/19 (e) 775,000 778,477
Credit Suisse/New York NY
5.30%, due 8/13/19 1,000,000 1,034,234
-------------
3,336,342
-------------
MINING 0.3%
Rio Tinto Finance USA, Ltd.
8.95%, due 5/1/14 1,800,000 2,127,370
-------------
OIL & GAS 0.7%
Petroleos Mexicanos
4.875%, due 3/15/15 (e) 1,000,000 985,100
Shell International Finance
B.V.
4.00%, due 3/21/14 1,500,000 1,576,278
4.30%, due 9/22/19 2,150,000 2,158,170
-------------
4,719,548
-------------
PHARMACEUTICALS 0.2%
Novartis Securities
Investment, Ltd.
5.125%, due 2/10/19 900,000 958,181
-------------
SOVEREIGN 0.3%
Svensk Exportkredit AB
3.25%, due 9/16/14 2,000,000 2,022,528
-------------
TELECOMMUNICATIONS 0.5%
Deutsche Telekom
International
Finance B.V.
6.00%, due 7/8/19 1,500,000 1,614,808
Vodafone Group PLC
5.625%, due 2/27/17 1,300,000 1,386,692
-------------
3,001,500
-------------
Total Yankee Bonds
(Cost $15,332,471) 16,165,469
-------------
Total Long-Term Bonds
(Cost $255,653,070) 262,486,794
-------------
<Caption>
SHARES
COMMON STOCKS 58.6%
- ----------------------------------------------------------------
ADVERTISING 0.1%
Clear Channel Outdoor
Holdings, Inc. Class A (h) 70,621 481,635
-------------
AEROSPACE & DEFENSE 1.2%
General Dynamics Corp. 18,784 1,177,757
L-3 Communications Holdings,
Inc. 7,710 557,356
Lockheed Martin Corp. 39,384 2,709,225
Northrop Grumman Corp. 69,168 3,467,392
-------------
7,911,730
-------------
AGRICULTURE 1.5%
Altria Group, Inc. 108,651 1,967,670
Archer-Daniels-Midland Co. 54,335 1,636,570
Lorillard, Inc. 56,321 4,377,268
Philip Morris International,
Inc. 34,008 1,610,619
-------------
9,592,127
-------------
AIRLINES 0.3%
Copa Holdings S.A. Class A 26,696 1,127,372
Nationwide Health Properties,
Inc. 24,824 800,574
-------------
1,927,946
-------------
APPAREL 1.1%
Coach, Inc. 134,706 4,441,257
NIKE, Inc. Class B 5,710 355,048
Polo Ralph Lauren Corp. 29,686 2,209,232
-------------
7,005,537
-------------
AUTO PARTS & EQUIPMENT 0.1%
WABCO Holdings, Inc. 24,203 574,095
-------------
BANKS 1.9%
BancorpSouth, Inc. 78,745 1,778,062
Capital One Financial Corp. 92,539 3,386,928
Fulton Financial Corp. 33,867 279,742
Marshall & Ilsley Corp. 192,973 1,026,616
Popular, Inc. 467,499 1,009,798
Regions Financial Corp. 4,623 22,375
Synovus Financial Corp. 65,620 145,676
Valley National Bancorp 21,569 286,436
Whitney Holding Corp. 16,373 131,475
Wilmington Trust Corp. 69,776 840,801
Zions Bancorp 255,958 3,624,365
-------------
12,532,274
-------------
BEVERAGES 0.2%
Central European Distribution
Corp. (h) 28,421 884,177
Constellation Brands, Inc.
Class A (h) 13,047 206,404
-------------
1,090,581
-------------
BIOTECHNOLOGY 0.6%
Amgen, Inc. (h) 23,569 1,266,362
Illumina, Inc. (h) 52,194 1,675,428
OSI Pharmaceuticals, Inc. (h) 35,288 1,136,979
-------------
4,078,769
-------------
BUILDING MATERIALS 0.1%
Armstrong World Industries,
Inc. (h) 21,893 815,514
-------------
</Table>
16 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
CHEMICALS 1.2%
Ashland, Inc. 116,101 $ 4,010,129
Cabot Corp. 74,327 1,629,991
Cytec Industries, Inc. 6,248 207,246
Encore Acquisition Co. (h) 10,704 396,797
Huntsman Corp. 68,035 540,878
Lubrizol Corp. (The) 10,524 700,478
RPM International, Inc. 13,493 237,747
Sherwin-Williams Co. (The) 2,385 136,040
-------------
7,859,306
-------------
COMMERCIAL SERVICES 1.1%
Apollo Group, Inc. Class A
(h) 2,445 139,609
Brinks Home Security
Holdings, Inc. (h) 26,096 808,454
H&R Block, Inc. 52,861 969,471
Hillenbrand, Inc. 6,362 127,113
ITT Educational Services,
Inc. (h) 13,576 1,226,592
Moody's Corp. 1,848 43,761
Pharmaceutical Product
Development, Inc. 20,471 441,150
R.R. Donnelley & Sons Co. 103,595 2,080,188
SAIC, Inc. (h) 30,547 540,987
Washington Post Co. Class B 2,038 880,416
Weight Watchers
International, Inc. 5,399 143,127
-------------
7,400,868
-------------
COMPUTERS 1.6%
Affiliated Computer Services,
Inc.
Class A (h) 17,986 936,891
Dell, Inc. (h) 15,435 223,653
Hewlett-Packard Co. 98,794 4,688,763
International Business
Machines Corp. 11,578 1,396,423
Lexmark International, Inc.
Class A (h) 24,187 616,768
NCR Corp. (h) 7,111 72,177
Western Digital Corp. (h) 70,529 2,375,417
-------------
10,310,092
-------------
COSMETICS & PERSONAL CARE 1.2%
Colgate-Palmolive Co. 47,787 3,757,492
Procter & Gamble Co. (The) 70,762 4,104,196
-------------
7,861,688
-------------
DISTRIBUTION & WHOLESALE 0.3%
Tech Data Corp. (h) 56,994 2,190,279
-------------
DIVERSIFIED FINANCIAL SERVICES 2.6%
AmeriCredit Corp. (h) 48,519 856,360
Ameriprise Financial, Inc. 26,547 920,385
V BlackRock, Inc. 23,722 5,135,576
Discover Financial Services 273,530 3,867,714
Interactive Brokers Group,
Inc. (h) 45,650 730,857
Investment Technology Group,
Inc. (h) 8,974 193,569
T. Rowe Price Group, Inc. 48,417 2,359,360
TD Ameritrade Holding Corp.
(h) 162,827 3,142,561
-------------
17,206,382
-------------
ELECTRIC 3.5%
AES Corp. (The) (h) 234,096 3,059,635
Alliant Energy Corp. 74,598 1,981,323
American Electric Power Co.,
Inc. 119,093 3,598,990
DPL, Inc. 13,143 333,044
DTE Energy Corp. 74,088 2,739,774
FirstEnergy Corp. 31,459 1,361,546
FPL Group, Inc. 5,164 253,552
Great Plains Energy, Inc. 20,514 354,892
Hawaiian Electric Industries,
Inc. 55,628 992,960
Integrys Energy Group, Inc. 7,926 274,240
Mirant Corp. (h) 252,339 3,527,699
PG&E Corp. 70,623 2,887,774
Pinnacle West Capital Corp. 28,555 894,343
Westar Energy, Inc. 30,532 584,688
-------------
22,844,460
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.4%
Emerson Electric Co. 66,919 2,526,192
Hubbel, Inc. Class B 8,370 355,976
-------------
2,882,168
-------------
ELECTRONICS 0.3%
Dolby Laboratories, Inc.
Class A (h) 13,675 573,529
FLIR Systems, Inc. (h) 7,761 215,833
Garmin, Ltd. 37,352 1,130,272
Jabil Circuit, Inc. 1,273 17,033
-------------
1,936,667
-------------
ENGINEERING & CONSTRUCTION 0.5%
Fluor Corp. 36,033 1,600,586
Shaw Group, Inc. (The) (h) 62,724 1,609,498
-------------
3,210,084
-------------
ENTERTAINMENT 0.0%++
International Speedway Corp.
Class A 5,171 131,912
-------------
ENVIRONMENTAL CONTROLS 0.1%
Waste Connections, Inc. (h) 27,791 873,471
-------------
FOOD 1.1%
H.J. Heinz Co. 64,366 2,590,088
Safeway, Inc. 136,892 3,056,798
SUPERVALU, Inc. 85,739 1,360,678
-------------
7,007,564
-------------
FOREST PRODUCTS & PAPER 0.3%
International Paper Co. 99,400 2,217,614
-------------
GAS 1.2%
Energen Corp. 39,982 1,754,410
NiSource, Inc. 135,756 1,753,968
</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>
SHARES VALUE
COMMON STOCKS (CONTINUED)
GAS (CONTINUED)
V Sempra Energy 83,265 $ 4,283,984
-------------
7,792,362
-------------
HEALTH CARE--PRODUCTS 0.5%
Gen-Probe, Inc. (h) 11,154 465,345
Hill-Rom Holdings, Inc. 18,834 368,958
Johnson & Johnson 36,457 2,152,786
-------------
2,987,089
-------------
HEALTH CARE--SERVICES 0.9%
CIGNA Corp. 166,793 4,643,517
Humana, Inc. (h) 6,068 228,036
LifePoint Hospitals, Inc. (h) 22,071 625,271
Lincare Holdings, Inc. (h) 15,072 473,412
-------------
5,970,236
-------------
HOME BUILDERS 0.1%
Thor Industries, Inc. 27,562 722,676
-------------
HOUSEWARES 0.0%++
Toro Co. (The) 5,942 219,973
-------------
INSURANCE 5.3%
Aflac, Inc. 86,729 3,598,386
Allied World Assurance
Holdings, Ltd./Bermuda 37,013 1,656,702
American Financial Group,
Inc. 115,336 2,837,266
Arch Capital Group, Ltd. (h) 41,905 2,823,140
Aspen Insurance Holdings,
Ltd. 6,971 179,852
Assurant, Inc. 90,042 2,694,957
Axis Capital Holdings, Ltd. 118,713 3,429,619
Chubb Corp. (The) 1,616 78,408
Endurance Specialty Holdings,
Ltd. 41,744 1,502,366
Genworth Financial, Inc.
Class A (h) 111,387 1,182,930
Mercury General Corp. 2,395 87,322
MetLife, Inc. 104,564 3,558,313
Oil States International,
Inc. (h) 6,673 229,818
Old Republic International
Corp. 16,752 178,911
OneBeacon Insurance Group,
Ltd. 23,421 279,178
PartnerRe, Ltd. 7,194 550,197
Principal Financial Group,
Inc. 45,065 1,128,428
Protective Life Corp. 70,096 1,349,348
Prudential Financial, Inc. 17,423 788,042
Reinsurance Group of America,
Inc. Class B 1,506 69,427
Torchmark Corp. 6,199 251,679
Transatlantic Holdings, Inc. 16,642 840,421
Unitrin, Inc. 31,605 619,458
Unum Group 227,696 4,542,535
Wesco Financial Corp. 55 18,040
-------------
34,474,743
-------------
INTERNET 1.3%
eBay, Inc. (h) 116,003 2,583,387
Google, Inc. Class A (h) 7,518 4,030,550
IAC/InterActiveCorp (h) 24,320 460,621
Liberty Media Corp.
Interactive Class A (h) 125,258 1,420,426
WebMD Health Corp. Class A
(h) 7,207 245,470
-------------
8,740,454
-------------
IRON & STEEL 1.8%
AK Steel Holding Corp. 206,059 3,270,156
V Cliffs Natural Resources,
Inc. 142,969 5,085,407
Reliance Steel & Aluminum
Co. 69,671 2,541,598
Schnitzer Steel Industries,
Inc. Class A 20,057 867,265
-------------
11,764,426
-------------
MACHINERY--DIVERSIFIED 0.8%
Cummins, Inc. 98,977 4,261,949
Manitowoc Co., Inc. (The) 43,762 399,985
Wabtec Corp. 19,038 699,837
-------------
5,361,771
-------------
MEDIA 2.0%
Comcast Corp. Class A 239,200 3,468,400
Gannett Co., Inc. 91,540 898,923
Meredith Corp. 34,220 925,993
Time Warner Cable, Inc. 24,351 960,404
Time Warner, Inc. 100,450 3,025,554
Walt Disney Co. (The) 135,995 3,722,183
-------------
13,001,457
-------------
METAL FABRICATE & HARDWARE 0.6%
Precision Castparts Corp. 40,097 3,830,466
-------------
MISCELLANEOUS--MANUFACTURING 2.6%
Brink's Co. (The) 17,625 418,241
Carlisle Cos., Inc. 39,503 1,226,173
Dover Corp. 15,772 594,289
General Electric Co. 319,341 4,553,803
Honeywell International,
Inc. 16,802 603,024
ITT Corp. 81,596 4,136,917
John Bean Technologies Corp. 20,138 330,666
Leggett & Platt, Inc. 27,173 525,254
Parker Hannifin Corp. 56,559 2,995,365
Trinity Industries, Inc. 89,959 1,518,508
-------------
16,902,240
-------------
OIL & GAS 5.2%
Cimarex Energy Co. 17,801 697,087
Comstock Resources, Inc. (h) 21,276 874,231
ConocoPhillips 42,916 2,153,525
V ENSCO International, Inc. 120,078 5,498,372
Forest Oil Corp. (h) 114,335 2,240,966
Marathon Oil Corp. 74,838 2,392,571
Murphy Oil Corp. 66,020 4,036,463
</Table>
18 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
OIL & GAS (CONTINUED)
Occidental Petroleum Corp. 60,582 $ 4,596,962
Patterson-UTI Energy, Inc. 56,646 882,545
Pioneer Natural Resources
Co. 28,101 1,155,232
Plains Exploration &
Production Co. (h) 135,877 3,600,740
Questar Corp. 868 34,581
Rowan Cos., Inc. 47,622 1,107,211
St. Mary Land & Exploration
Co. 10,425 355,492
Tesoro Corp. 61,726 872,806
Unit Corp. (h) 80,857 3,159,892
-------------
33,658,676
-------------
OIL & GAS SERVICES 0.5%
Exterran Holdings, Inc. (h) 26,223 535,736
Helix Energy Solutions Group,
Inc. (h) 137,838 1,892,516
SEACOR Holdings, Inc. (h) 9,102 739,719
-------------
3,167,971
-------------
PACKAGING & CONTAINERS 0.2%
Crown Holdings, Inc. (h) 26,493 706,038
Sonoco Products Co. 10,229 273,626
-------------
979,664
-------------
PHARMACEUTICALS 1.3%
Abbott Laboratories 30,242 1,529,338
AmerisourceBergen Corp. 107,657 2,384,602
Endo Pharmaceuticals
Holdings, Inc. (h) 27,199 609,258
Forest Laboratories, Inc. (h) 35,018 968,948
Herbalife, Ltd. 560 18,844
King Pharmaceuticals, Inc.
(h) 123,397 1,250,012
SunPower Corp. Class A (h) 52,489 1,302,252
Watson Pharmaceuticals, Inc.
(h) 4,608 158,607
-------------
8,221,861
-------------
REAL ESTATE INVESTMENT TRUSTS 3.5%
Alexandria Real Estate
Equities, Inc. 20,510 1,111,027
V Annaly Capital Management,
Inc. 317,336 5,366,152
Brandywine Realty Trust 28,230 269,879
BRE Properties, Inc. 21,839 594,676
CapitalSource, Inc. 227,224 808,917
Douglas Emmett, Inc. 23,370 275,766
Duke Realty Corp. 163,296 1,835,447
HRPT Properties Trust 192,349 1,352,213
Macerich Co. (The) 100,535 2,995,943
Mack-Cali Realty Corp. 18,722 579,446
ProLogis 222,154 2,517,005
Public Storage 1,630 119,968
Senior Housing Properties
Trust 33,286 641,754
SL Green Realty Corp. 113,343 4,393,175
-------------
22,861,368
-------------
RETAIL 3.5%
Barnes & Noble, Inc. 101,789 1,690,715
Big Lots, Inc. (h) 117,499 2,943,350
BJ's Wholesale Club, Inc. (h) 100,652 3,525,839
Chipotle Mexican Grill, Inc.
Class A (h) 8,444 688,102
Foot Locker, Inc. 126,152 1,322,073
Gap, Inc. (The) 135,849 2,899,018
Office Depot, Inc. (h) 141,457 855,815
RadioShack Corp. 173,110 2,923,828
Ross Stores, Inc. 72,795 3,203,708
Wal-Mart Stores, Inc. 38,318 1,903,638
Williams-Sonoma, Inc. 28,790 540,676
-------------
22,496,762
-------------
SAVINGS & LOANS 0.1%
New York Community Bancorp,
Inc. 44,082 475,645
-------------
SEMICONDUCTORS 1.4%
Cypress Semiconductor Corp.
(h) 144,513 1,218,245
Integrated Device Technology,
Inc. (h) 281,897 1,657,554
Intel Corp. 230,540 4,405,619
Silicon Laboratories, Inc.
(h) 50,502 2,116,034
-------------
9,397,452
-------------
SOFTWARE 0.2%
Compuware Corp. (h) 56,961 402,144
IMS Health, Inc. 36,853 604,021
-------------
1,006,165
-------------
TELECOMMUNICATIONS 2.6%
Amdocs, Ltd. (h) 57,565 1,450,638
AT&T, Inc. 145,546 3,736,166
CenturyTel, Inc. 125,818 4,084,052
Cisco Systems, Inc. (h) 120,928 2,763,205
EchoStar Corp. (h) 4,097 74,402
Sprint Nextel Corp. (h) 658,563 1,949,346
Verizon Communications, Inc. 86,870 2,570,483
-------------
16,628,292
-------------
TOYS, GAMES & HOBBIES 0.3%
Hasbro, Inc. 70,841 1,931,834
-------------
TRANSPORTATION 1.4%
Expeditors International of
Washington, Inc. 74,829 2,410,990
Frontline, Ltd. 45,833 1,069,284
Overseas Shipholding Group,
Inc. 63,737 2,501,677
Ryder System, Inc. 15,396 624,308
Teekay Corp. 7,650 158,738
Tidewater, Inc. 19,070 794,647
Union Pacific Corp. 24,546 1,353,466
-------------
8,913,110
-------------
Total Common Stocks
(Cost $362,954,194) 381,449,456
-------------
</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>
SHARES VALUE
EXCHANGE TRADED FUND 0.9% (I)
- ----------------------------------------------------------------
V S&P 500 Index--SPDR Trust
Series 1 53,946 $ 5,586,648
-------------
Total Exchange Traded Fund
(Cost $5,565,239) 5,586,648
-------------
<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
$2,286,024
(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
$2,335,000 and a Market
Value of $2,334,533) $ 2,286,022 2,286,022
-------------
Total Short-Term Investment
(Cost $2,286,022) 2,286,022
-------------
Total Investments
(Cost $626,458,525) (j) 100.1% 651,808,920
Liabilities in Excess of
Cash and Other Assets (0.1) (841,918)
----- ------------
Net Assets 100.0% $ 650,967,002
===== ============
</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) Illiquid security. The total market
value of this security at October 31,
2009 is $18, which represents less than
one-tenth of a percent of the Fund's net
assets.
(b) Issue in default.
(c) Restricted security.
(d) Fair valued security. The total market
value of this security at October 31,
2009 is $18, 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) 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.
(g) Yankee Bond - dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(h) Non-income producing security.
(i) Exchange Traded Fund - represents a
basket of securities that is traded on an
exchange.
(j) At October 31, 2009, cost is $626,850,571
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 54,179,736
Gross unrealized depreciation (29,221,387)
------------
Net unrealized appreciation $ 24,958,349
============
</Table>
20 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
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 Securities $ -- $ 2,144,669 $ -- $ 2,144,669
Convertible Bond -- -- 18 18
Corporate Bonds -- 92,269,487 -- 92,269,487
Foreign Government Bond -- 1,870,579 -- 1,870,579
Mortgage-Backed Securities -- 3,276,261 -- 3,276,261
U.S. Government & Federal Agencies -- 146,760,311 -- 146,760,311
Yankee Bonds -- 16,165,469 -- 16,165,469
------------ ------------ ------------- ------------
Total Long-Term Bonds -- 262,486,776 18 262,486,794
------------ ------------ ------------- ------------
Common Stocks 381,449,456 -- -- 381,449,456
Exchange Traded Fund 5,586,648 -- -- 5,586,648
------------ ------------ ------------- ------------
Short-Term Investment
Repurchase Agreement -- 2,286,022 -- 2,286,022
------------ ------------ ------------- ------------
Total Investments in Securities $387,036,104 $264,772,798 $18 $651,808,920
============ ============ ============= ============
</Table>
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 IN OCTOBER 31, DISCOUNTS GAIN APPRECIATION NET NET IN TO OUT OF
SECURITIES 2008 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3
Convertible Bond $18 $-- $-- $-- $-- $-- $-- $--
--- --- --- --- --- --- --- ---
TOTAL $18 $-- $-- $-- $-- $-- $-- $--
=== === === === === === === ===
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
INVESTMENTS
BALANCE STILL
AS OF HELD AT
INVESTMENTS IN OCTOBER 31, OCTOBER 31,
SECURITIES 2009 2009
Convertible Bond $18 $--
--- ---
TOTAL $18 $--
=== ===
</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
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2009
<Table>
ASSETS:
Investment in securities, at value
(identified cost $626,458,525) $ 651,808,920
Cash 8,831
Receivables:
Dividends and interest 2,845,033
Investment securities sold 2,502,679
Fund shares sold 592,437
Other assets 60,572
-------------
Total assets 657,818,472
-------------
LIABILITIES:
Payables:
Investment securities purchased 4,927,407
Fund shares redeemed 825,517
Manager (See Note 3) 399,273
Transfer agent (See Note 3) 328,839
NYLIFE Distributors (See Note 3) 178,429
Shareholder communication 109,860
Professional fees 56,417
Custodian 12,488
Trustees 1,942
Accrued expenses 11,298
-------------
Total liabilities 6,851,470
-------------
Net assets $ 650,967,002
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share) 1
billion shares authorized $ 294,774
Additional paid-in capital 787,956,009
-------------
788,250,783
Accumulated undistributed net
investment income 295,420
Accumulated net realized loss on
investments and futures
transactions (162,929,596)
Net unrealized appreciation on
investments 25,350,395
-------------
Net assets $ 650,967,002
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 54,955,773
=============
Shares of beneficial interest
outstanding 2,487,647
=============
Net asset value per share
outstanding $ 22.09
Maximum sales charge (5.50% of
offering price) 1.29
-------------
Maximum offering price per share
outstanding $ 23.38
=============
CLASS A
Net assets applicable to
outstanding shares $ 154,727,901
=============
Shares of beneficial interest
outstanding 7,005,980
=============
Net asset value per share
outstanding $ 22.09
Maximum sales charge (5.50% of
offering price) 1.29
-------------
Maximum offering price per share
outstanding $ 23.38
=============
CLASS B
Net assets applicable to
outstanding shares $ 74,932,179
=============
Shares of beneficial interest
outstanding 3,402,734
=============
Net asset value and offering price
per share outstanding $ 22.02
=============
CLASS C
Net assets applicable to
outstanding shares $ 66,406,831
=============
Shares of beneficial interest
outstanding 3,016,702
=============
Net asset value and offering price
per share outstanding $ 22.01
=============
CLASS I
Net assets applicable to
outstanding shares $ 208,392,775
=============
Shares of beneficial interest
outstanding 9,419,309
=============
Net asset value and offering price
per share outstanding $ 22.12
=============
CLASS R1
Net assets applicable to
outstanding shares $ 31,038,690
=============
Shares of beneficial interest
outstanding 1,404,500
=============
Net asset value and offering price
per share outstanding $ 22.10
=============
CLASS R2
Net assets applicable to
outstanding shares $ 60,424,915
=============
Shares of beneficial interest
outstanding 2,736,547
=============
Net asset value and offering price
per share outstanding $ 22.08
=============
CLASS R3
Net assets applicable to
outstanding shares $ 87,938
=============
Shares of beneficial interest
outstanding 3,982
=============
Net asset value and offering price
per share outstanding $ 22.08
=============
</Table>
22 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2009
<Table>
INVESTMENT INCOME:
INCOME:
Interest (a) $ 7,988,493
Dividends 7,972,665
Income from securities
loaned--net 154
------------
Total income 15,961,312
------------
EXPENSES:
Manager (See Note 3) 4,265,583
Transfer agent--Investor Class
(See Note 3) 240,325
Transfer agent--Class A (See Note
3) 373,590
Transfer agent--Classes B and C
(See Note 3) 664,143
Transfer agent--Classes I, R1, R2
and R3 (See Note 3) 672,461
Distribution--Class B (See Note
3) 549,654
Distribution--Class C (See Note
3) 498,299
Distribution--Class R3 (See Note
3) 155
Distribution/Service--Investor
Class (See Note 3) 127,146
Distribution/Service--Class A
(See Note 3) 370,604
Service--Class B (See Note 3) 182,933
Service--Class C (See Note 3) 165,701
Distribution/Service--Class R2
(See Note 3) 134,337
Distribution/Service--Class R3
(See Note 3) 155
Shareholder communication 230,834
Professional fees 154,385
Registration 144,136
Shareholder service--Class R1
(See Note 3) 26,239
Shareholder service--Class R2
(See Note 3) 53,784
Shareholder service--Class R3
(See Note 3) 62
Custodian 30,607
Trustees 28,345
Miscellaneous 92,867
------------
Total expenses before waiver 9,006,345
Expense waiver from Manager (See
Note 3) (436,605)
------------
Net expenses 8,569,740
------------
Net investment income 7,391,572
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on:
Security transactions $(96,972,751)
Futures transactions 4,060,079
------------
Net realized loss on investments
and futures transactions (92,912,672)
------------
Net change in unrealized
appreciation (depreciation) on:
Investments 170,665,167
Futures contracts (680,239)
------------
Net change in unrealized
depreciation on investments and
futures contracts 169,984,928
------------
Net realized and unrealized gain on
investments and futures
transactions 77,072,256
------------
Net increase in net assets
resulting from operations $ 84,463,828
============
</Table>
(a) Interest recorded net of foreign withholding taxes in the amount of $9,268.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
23
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 $ 7,391,572 $ 17,976,215
Net realized loss on
investments and futures
transactions (92,912,672) (69,482,537)
Net change in unrealized
appreciation
(depreciation) on
investments and futures
contracts 169,984,928 (213,177,248)
------------------------------
Net increase (decrease) in
net assets resulting from
operations 84,463,828 (264,683,570)
------------------------------
Dividends and distributions to
shareholders:
From net investment
income:
Investor Class (650,339) (603,646)
Class A (2,199,504) (5,418,133)
Class B (386,496) (1,193,014)
Class C (353,938) (1,241,955)
Class I (3,424,277) (6,524,922)
Class R1 (444,011) (1,171,162)
Class R2 (791,195) (1,521,875)
Class R3 (709) (738)
------------------------------
(8,250,469) (17,675,445)
------------------------------
From net realized gain on investments:
Class A -- (24,077,693)
Class B -- (8,794,284)
Class C -- (9,531,313)
Class I -- (24,773,850)
Class R1 -- (4,242,231)
Class R2 -- (6,428,934)
Class R3 -- (2,379)
------------------------------
-- (77,850,684)
------------------------------
Total dividends and
distributions to
shareholders (8,250,469) (95,526,129)
------------------------------
Capital share transactions:
Net proceeds from sale of
shares 85,747,780 175,720,920
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 7,853,390 88,742,803
Cost of shares redeemed (182,278,015) (538,782,912)
------------------------------
Decrease in net assets
derived from capital
share transactions (88,676,845) (274,319,189)
------------------------------
Net decrease in net
assets (12,463,486) (634,528,888)
NET ASSETS:
Beginning of year 663,430,488 1,297,959,376
------------------------------
End of year $ 650,967,002 $ 663,430,488
==============================
Accumulated undistributed
net investment income at
end of year $ 295,420 $ 1,192,272
==============================
</Table>
24 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 25
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 $ 19.41 $ 25.29
------- -------
Net investment income 0.22 (a) 0.29 (a)
Net realized and unrealized gain
(loss) on investments 2.71 (5.82)
------- -------
Total from investment operations 2.93 (5.53)
------- -------
Less dividends and distributions:
From net investment income (0.25) (0.35)
From net realized gain on
investments -- --
------- -------
Total dividends and distributions (0.25) (0.35)
------- -------
Net asset value at end of period $ 22.09 $ 19.41
======= =======
Total investment return (b) 15.30% (22.12%)(c)
Ratios (to average net assets)/
Supplemental Data:
Net investment income 1.11% 1.81% ++
Net expenses 1.48% 1.38% ++
Expenses (before waiver) 1.53% 1.38% ++
Portfolio turnover rate 162% 69%
Net assets at end of period (in
000's) $54,956 $49,971
</Table>
<Table>
<Caption>
CLASS B
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 19.35 $ 28.34 $ 27.84 $ 26.84 $ 25.37
------- ------- -------- -------- --------
Net investment income 0.08 (a) 0.26 (a) 0.28 (a) 0.23 0.18
Net realized and
unrealized gain (loss)
on investments 2.69 (7.25) 1.24 2.22 1.89
------- ------- -------- -------- --------
Total from investment
operations 2.77 (6.99) 1.52 2.45 2.07
------- ------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.10) (0.25) (0.29) (0.20) (0.14)
From net realized gain
on investments -- (1.75) (0.73) (1.25) (0.46)
------- ------- -------- -------- --------
Total dividends and
distributions (0.10) (2.00) (1.02) (1.45) (0.60)
------- ------- -------- -------- --------
Net asset value at end of
period $ 22.02 $ 19.35 $ 28.34 $ 27.84 $ 26.84
======= ======= ======== ======== ========
Total investment return
(b) 14.42% (26.47%) 5.56% 9.49% 8.19%
Ratios (to average net
assets)/ Supplemental
Data:
Net investment income 0.39% 1.06% 0.99% 0.94% 0.57%
Net expenses 2.23% 2.10% 2.03% 2.07% 2.07%
Expenses (before
waiver) 2.28% 2.10% 2.03% 2.07% 2.07%
Portfolio turnover rate 162% 69% 68% 55% 93%
Net assets at end of
period (in 000's) $74,932 $81,144 $145,919 $156,284 $206,074
</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, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(c) Total return is not annualized.
</Table>
26 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
- --------------------------------------------------------------
YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------
2009 2008 2007 2006 2005
$ 19.41 $ 28.42 $ 27.92 $ 26.90 $ 25.41
-------- -------- -------- -------- --------
0.27 (a) 0.46 (a) 0.49 (a) 0.44 0.35
2.70 (7.26) 1.25 2.23 1.91
-------- -------- -------- -------- --------
2.97 (6.80) 1.74 2.67 2.26
-------- -------- -------- -------- --------
(0.29) (0.46) (0.51) (0.40) (0.31)
-- (1.75) (0.73) (1.25) (0.46)
-------- -------- -------- -------- --------
(0.29) (2.21) (1.24) (1.65) (0.77)
-------- -------- -------- -------- --------
$ 22.09 $ 19.41 $ 28.42 $ 27.92 $ 26.90
======== ======== ======== ======== ========
15.52% (25.84%) 6.34% 10.35% 8.96%
1.36% 1.87% 1.74% 1.63% 1.32%
1.27% 1.29% 1.28% 1.32% 1.32%
1.31% 1.29% 1.28% 1.32% 1.32%
162% 69% 68% 55% 93%
$154,728 $173,834 $405,912 $420,694 $307,538
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
2009 2008 2007 2006 2005
$ 19.34 $ 28.33 $ 27.83 $ 26.83 $ 25.37
------- ------- -------- -------- --------
0.08 (a) 0.26 (a) 0.28 (a) 0.24 0.17
2.69 (7.25) 1.24 2.21 1.89
------- ------- -------- -------- --------
2.77 (6.99) 1.52 2.45 2.06
------- ------- -------- -------- --------
(0.10) (0.25) (0.29) (0.20) (0.14)
-- (1.75) (0.73) (1.25) (0.46)
------- ------- -------- -------- --------
(0.10) (2.00) (1.02) (1.45) (0.60)
------- ------- -------- -------- --------
$ 22.01 $ 19.34 $ 28.33 $ 27.83 $ 26.83
======= ======= ======== ======== ========
14.43% (26.48%) 5.56% 9.49% 8.15%
0.40% 1.06% 0.99% 0.89% 0.57%
2.23% 2.10% 2.03% 2.07% 2.07%
2.28% 2.10% 2.03% 2.07% 2.07%
162% 69% 68% 55% 93%
$66,407 $79,423 $161,163 $169,609 $141,279
</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
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 $ 19.44 $ 28.47 $ 27.96 $ 26.94 $ 25.43
-------- -------- -------- -------- --------
Net investment income 0.33(a) 0.55 (a) 0.60 (a) 0.53 0.45
Net realized and
unrealized gain (loss)
on investments 2.71 (7.28) 1.25 2.27 1.94
-------- -------- -------- -------- --------
Total from investment
operations 3.04 (6.73) 1.85 2.80 2.39
-------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.36) (0.55) (0.61) (0.53) (0.42)
From net realized gain
on investments -- (1.75) (0.73) (1.25) (0.46)
-------- -------- -------- -------- --------
Total dividends and
distributions (0.36) (2.30) (1.34) (1.78) (0.88)
-------- -------- -------- -------- --------
Net asset value at end of
period $ 22.12 $ 19.44 $ 28.47 $ 27.96 $ 26.94
======== ======== ======== ======== ========
Total investment return
(b) 15.89% (25.62)% 6.77% 10.84% 9.46%
Ratios (to average net
assets)/ Supplemental
Data:
Net investment income 1.65% 2.22% 2.10% 2.11% 1.77%
Net expenses 0.96% 0.94% 0.91% 0.85% 0.86%
Expenses (before waiver) 1.06% 1.01% 0.95% 0.85% 0.86%
Portfolio turnover rate 162% 69% 68% 55% 93%
Net assets at end of
period (in 000's) $208,393 $199,126 $410,355 $376,763 $269,652
</Table>
<Table>
<Caption>
CLASS R2
----------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 19.41 $ 28.42 $ 27.91 $ 26.90 25.41
------- ------- -------- -------- ------
Net investment income 0.26 (a) 0.46 (a) 0.50 (a) 0.46 0.39
Net realized and
unrealized gain (loss)
on investments 2.70 (7.26) 1.25 2.23 1.90
------- ------- -------- -------- ------
Total from investment
operations 2.96 (6.80) 1.75 2.69 2.29
------- ------- -------- -------- ------
Less dividends and
distributions:
From net investment
income (0.29) (0.46) (0.51) (0.43) (0.34)
From net realized gain
on investments -- (1.75) (0.73) (1.25) (0.46)
------- ------- -------- -------- ------
Total dividends and
distributions (0.29) (2.21) (1.24) (1.68) (0.80)
------- ------- -------- -------- ------
Net asset value at end of
period $ 22.08 $ 19.41 $ 28.42 $ 27.91 26.90
======= ======= ======== ======== ======
Total investment return
(b) 15.45% (25.86)% 6.40% 10.44% 9.05%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.30% 1.87% 1.76% 1.75% 1.43%
Net expenses 1.31% 1.29% 1.26% 1.20% 1.21%
Expenses (before waiver) 1.41% 1.36% 1.30% 1.20% 1.21%
Portfolio turnover rate 162% 69% 68% 55% 93%
Net assets at end of
period (in 000's) $60,425 $54,849 $105,100 $109,637 70,872
</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, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(c) Total return is not annualized.
</Table>
28 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
----------------------------------------------------
YEAR ENDED OCTOBER 31,
- ----------------------------------------------------------
2009 2008 2007 2006 2005
$ 19.42 $ 28.44 $ 27.94 $ 26.93 $ 25.43
------- ------- ------- -------- -------
0.30 (a) 0.53 (a) 0.57 (a) 0.53 0.43
2.72 (7.28) 1.25 2.23 1.93
------- ------- ------- -------- -------
3.02 (6.75) 1.82 2.76 2.36
------- ------- ------- -------- -------
(0.34) (0.52) (0.59) (0.50) (0.40)
-- (1.75) (0.73) (1.25) (0.46)
------- ------- ------- -------- -------
(0.34) (2.27) (1.32) (1.75) (0.86)
------- ------- ------- -------- -------
$ 22.10 $ 19.42 $ 28.44 $ 27.94 $ 26.93
======= ======= ======= ======== =======
15.80% (25.69%) 6.64% 10.70% 9.33%
1.53% 2.13% 2.02% 1.99% 1.68%
1.06% 1.04% 1.01% 0.95% 0.96%
1.16% 1.11% 1.05% 0.95% 0.96%
162% 69% 68% 55% 93%
$31,039 $25,038 $69,474 $108,739 $77,397
</Table>
<Table>
<Caption>
Class R3
------------------------------------------
April 28,
2006**
through
Year ended October 31, October 31,
------------------------------------------
2009 2008 2007 2006
$19.41 $ 28.41 $27.91 $27.25
------ ------- ------ ------
0.20 (a) 0.40 (a) 0.41 (a) 0.20
2.71 (7.26) 1.26 0.66
------ ------- ------ ------
2.91 (6.86) 1.67 0.86
------ ------- ------ ------
(0.24) (0.39) (0.44) (0.20)
-- (1.75) (0.73) --
------ ------- ------ ------
(0.24) (2.14) (1.17) (0.20)
------ ------- ------ ------
$22.08 $ 19.41 $28.41 $27.91
====== ======= ====== ======
15.17% (26.02%) 6.10% 3.18% (c)
0.98% 1.62% 1.46% 1.36% ++
1.56% 1.54% 1.52% 1.48% ++
1.65% 1.61% 1.56% 1.48% ++
162% 69% 68% 55%
$ 88 $ 45 $ 37 $ 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
29
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
Eclipse Funds (the "Trust") was organized on July 30, 1986, as a Massachusetts
business trust. The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company,
and is comprised of two funds (collectively referred to as the "Funds"). These
financial statements and notes relate only to the MainStay Balanced Fund (the
"Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class I shares commenced
operations on May 1, 1989. Class C shares commenced operations on December 30,
2002. Class A shares, Class B 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 seek high total return.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. 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. 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.
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,
30 MainStay Balanced Fund
2009, the Fund held securities with a value of $18 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.)
- - 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
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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) 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) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject
32 MainStay Balanced Fund
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) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 5.)
(K) 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.
<Table>
<Caption>
STATEMENT OF
OPERATIONS EQUITY
LOCATION CONTRACTS RISK TOTAL
REALIZED GAIN (LOSS)
Futures Contracts Net realized
gain (loss)
on futures
transactions $4,060,079 $4,060,079
---------------------------
Total Realized
Gain (Loss) $4,060,079 $4,060,079
===========================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
STATEMENT OF
OPERATIONS EQUITY
LOCATION CONTRACTS RISK TOTAL
Futures Contracts Net change in
unrealized
appreciation
(depreciation)
on futures
contracts $(680,239) $(680,239)
--------------------------
Total Change in
Appreciation
(Depreciation) $(680,239) $(680,239)
==========================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
EQUITY
CONTRACTS RISK TOTAL
Futures Contracts (2) 216 216
</Table>
(1) Amount disclosed represents 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"
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 fixed-
income portion of the Fund is advised by New York Life Investments directly,
without a subadvisor. As of January 1, 2009, 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 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
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 $1 billion, 0.65% on assets from $1 billion to $2 billion
and 0.60% on assets in excess of $2 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 1.28% 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 daily net assets: Investor Class, 1.50%;
Class A, 1.28%; Class B, 2.25%; Class C, 2.25%; Class I, 0.94%; Class R1, 1.04%;
Class R2, 1.29%; and Class R3, 1.54%.
For the year ended October 31, 2009, New York Life Investments earned fees from
the Fund in the amount of $4,265,583 and waived its fees in the amount of
$436,605.
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
34 MainStay Balanced Fund
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
$24,557 and $8,965, 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 $644, $167,049 and
$2,768, 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 $1,950,519.
(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 $1,375 0.0%++
- --------------------------------------------------
Class B 1,093 0.0++
- --------------------------------------------------
Class C 1,469 0.0++
- --------------------------------------------------
Class R1 1,158 0.0++
- --------------------------------------------------
Class R2 1,143 0.0++
- --------------------------------------------------
Class R3 9,327 10.6
- --------------------------------------------------
</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 $42,672.
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)
$295,420 $(162,537,550) $-- $24,958,349 $(137,283,781)
- --------------------------------------------------------------------------------
</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 arising from permanent differences; net assets at October
31, 2009 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED NET
UNDISTRIBUTED NET REALIZED GAIN
INVESTMENT INCOME (LOSS) ON ADDITIONAL
(LOSS) INVESTMENTS PAID-IN CAPITAL
$(37,955) $37,955 $--
- -------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydown gain (loss),
reclassifications of distributions and Real Estate Investment Trust ("REIT")
gain (loss).
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $162,537,550 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 AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $ 67,354
2017 95,184
- ---------------------------------
Total $162,538
- ---------------------------------
</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 $8,250,469 $31,529,550
Long-Term Capital Gains -- 63,996,579
- ------------------------------------------------------
Total $8,250,469 $95,526,129
- ------------------------------------------------------
</Table>
mainstayinvestments.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $177,810 $13,325 $18 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 U.S. Government
securities were $314,190 and $237,625, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $674,556 and $797,257, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 224,107 $ 4,373,824
Shares issued to
shareholders in
reinvestment of dividends 33,512 645,645
Shares redeemed (453,376) (8,757,870)
--------------------------
Net decrease in shares
outstanding before
conversion (195,757) (3,738,401)
Shares converted into
Investor Class (See Note
1) 275,972 5,144,758
Shares converted from
Investor Class (See Note
1) (166,478) (3,653,609)
--------------------------
Net decrease (86,263) $ (2,247,252)
==========================
Period ended October 31,
2008 (a):
Shares sold 561,659 $ 14,100,622
Shares issued to
shareholders in
reinvestment of dividends 25,309 599,017
Shares redeemed (423,337) (10,030,595)
--------------------------
Net increase in shares
outstanding before
conversion 163,631 4,669,044
Shares converted into
Investor Class (See Note
1) 2,608,564 63,301,198
Shares converted from
Investor Class (See Note
1) (198,285) (4,567,256)
--------------------------
Net increase 2,573,910 $ 63,402,986
==========================
(a) Investor Class shares were first offered on February
28, 2008.
</Table>
36 MainStay Balanced Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 480,855 $ 9,384,382
Shares issued to
shareholders in
reinvestment of dividends 101,775 1,962,498
Shares redeemed (2,646,009) (50,495,231)
--------------------------
Net decrease in shares
outstanding before
conversion (2,063,379) (39,148,351)
Shares converted into Class
A
(See Note 1) 253,284 5,342,659
Shares converted from Class
A (See Note 1) (142,085) (2,614,756)
--------------------------
Net decrease (1,952,180) $ (36,420,448)
==========================
Year ended October 31, 2008:
Shares sold 1,090,955 $ 27,182,393
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,017,956 26,715,124
Shares redeemed (5,344,353) (132,030,445)
--------------------------
Net decrease in shares
outstanding before
conversion (3,235,442) (78,132,928)
Shares converted into Class
A
(See Note 1) 423,364 10,227,745
Shares converted from Class
A (See Note 1) (2,511,567) (60,910,587)
--------------------------
Net decrease (5,323,645) $(128,815,770)
==========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 271,760 $ 5,281,597
Shares issued to
shareholders in
reinvestment of dividends 18,573 344,161
Shares redeemed (859,439) (16,475,970)
--------------------------
Net decrease in shares
outstanding before
conversion (569,106) (10,850,212)
Shares converted from Class
B (See Note 1) (221,563) (4,219,052)
--------------------------
Net decrease (790,669) $ (15,069,264)
==========================
Year ended October 31, 2008:
Shares sold 377,899 $ 9,335,509
Shares issued to
shareholders in
reinvestment of dividends
and distributions 338,374 8,885,377
Shares redeemed (1,347,198) (33,052,656)
--------------------------
Net decrease in shares
outstanding before
conversion (630,925) (14,831,770)
Shares converted from Class
B (See Note 1) (324,289) (8,051,100)
--------------------------
Net decrease (955,214) $ (22,882,870)
==========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 245,889 $ 4,747,176
Shares issued to
shareholders in
reinvestment of dividends 14,237 263,638
Shares redeemed (1,349,419) (25,514,731)
--------------------------
Net decrease (1,089,293) $ (20,503,917)
==========================
Year ended October 31, 2008:
Shares sold 467,635 $ 11,651,098
Shares issued to
shareholders in
reinvestment of dividends
and distributions 307,778 8,086,388
Shares redeemed (2,357,820) (58,125,152)
--------------------------
Net decrease (1,582,407) $ (38,387,666)
==========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 1,816,150 $ 35,594,202
Shares issued to
shareholders in
reinvestment of dividends 175,382 3,402,416
Shares redeemed (2,814,473) (54,060,892)
--------------------------
Net decrease (822,941) $ (15,064,274)
==========================
Year ended October 31, 2008:
Shares sold 3,090,704 $ 77,224,830
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,184,298 31,075,554
Shares redeemed (8,447,165) (211,368,875)
--------------------------
Net decrease (4,172,163) $(103,068,491)
==========================
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 365,340 $ 7,204,418
Shares issued to
shareholders in
reinvestment of dividends 22,820 444,011
Shares redeemed (272,821) (5,261,657)
--------------------------
Net increase 115,339 $ 2,386,772
==========================
Year ended October 31, 2008:
Shares sold 328,889 $ 8,186,925
Shares issued to
shareholders in
reinvestment of dividends
and distributions 206,769 5,413,394
Shares redeemed (1,689,076) (37,479,589)
--------------------------
Net decrease (1,153,418) $ (23,879,270)
==========================
</Table>
mainstayinvestments.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 992,150 $ 19,106,857
Shares issued to
shareholders in
reinvestment of dividends 40,982 790,312
Shares redeemed (1,122,559) (21,688,189)
-------------------------
Net decrease (89,427) $ (1,791,020)
=========================
Year ended October 31, 2008:
Shares sold 1,130,921 $ 28,002,672
Shares issued to
shareholders in
reinvestment of dividends
and distributions 303,929 7,964,832
Shares redeemed (2,307,239) (56,682,663)
-------------------------
Net decrease (872,389) $(20,715,159)
=========================
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 2,724 $ 55,324
Shares issued to
shareholders in
reinvestment of dividends 36 709
Shares redeemed (1,116) (23,475)
-------------------------
Net increase 1,644 $ 32,558
=========================
Year ended October 31, 2008:
Shares sold 1,511 $ 36,871
Shares issued to
shareholders in
reinvestment of dividends
and distributions 120 3,117
Shares redeemed (588) (12,937)
-------------------------
Net increase 1,043 $ 27,051
=========================
</Table>
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 MainStay Funds, a separate
registrant in the MainStay Group of Funds, 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.
The Equity Index Fund is not a portfolio of the Trust.
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.
38 MainStay Balanced Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
Eclipse Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Balanced Fund ("the Fund"), one of
the funds constituting Eclipse Funds as of October 31, 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 Balanced Fund of Eclipse 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 39
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 Balanced 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 equity component of 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 and investment advisory services to the
fixed income component of 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 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
40 MainStay Balanced Fund
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 MSI
proposed to provide to the equity component of 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
mainstayinvestments.com 41
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 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. 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.
42 MainStay Balanced 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.
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.
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 43
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$7,281,585 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 45.0% to arrive at the amount eligible for qualified
interest income and 88.2% 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 Funds's website at mainstayinvestments.com;
and (ii) on the Securities and Exchange Commission's ("SEC") website at
www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request by calling 800-MAINSTAY (624-6782);
visiting the Funds' website at mainstayinvestments.com; or on the SEC's website
at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
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 Funds' 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).
44 MainStay Balanced 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 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
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>
46 MainStay Balanced 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 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
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>
48 MainStay Balanced 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 49
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
- -----------------------------------------------------------
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 Eclipse Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04847
NYLIM-AO17135 (RECYCLE LOGO) MS283-09 MSBL11-12/09
B7
(MAINSTAY LOGO)
MAINSTAY
U.S. SMALL CAP 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
U.S. SMALL CAP 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 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
NOTICE TO FORMER SHAREHOLDERS OF
MAINSTAY SMALL CAP GROWTH FUND
ON OCTOBER 30, 2009, MAINSTAY SMALL COMPANY VALUE FUND CHANGED ITS NAME TO
MAINSTAY U.S. SMALL CAP FUND. ON NOVEMBER 24, 2009, MAINSTAY SMALL CAP GROWTH
FUND REORGANIZED WITH AND INTO MAINSTAY U.S. SMALL CAP FUND. AN ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2009, FOR MAINSTAY SMALL 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 19.93% -1.02% 5.65%
Excluding sales charges 26.91 0.10 6.25
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY U.
S. SMALL RUSSELL 2500(TM) RUSSELL 2000(R)
CAP FUND INDEX VALUE INDEX
----------- ---------------- ---------------
10/31/99 9450 10000 10000
10/31/00 9605 12327 11730
10/31/01 9578 10828 12756
10/31/02 10120 9838 12434
10/31/03 14329 13940 17443
10/31/04 17237 15660 20582
10/31/05 21143 17994 23265
10/31/06 23510 21176 28592
10/31/07 22078 23867 29177
10/31/08 13652 14973 20267
10/31/09 17326 16958 20664
</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 20.06% -0.98% 5.67%
Excluding sales charges 27.05 0.15 6.27
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY U.
S. SMALL RUSSELL 2500(TM) RUSSELL 2000(R)
CAP FUND INDEX VALUE INDEX
----------- ---------------- ---------------
10/31/99 23625 25000 25000
10/31/00 24011 30818 29324
10/31/01 23946 27069 31891
10/31/02 25299 24596 31084
10/31/03 35822 34850 43608
10/31/04 43091 39151 51454
10/31/05 52857 44984 58163
10/31/06 58774 52940 71480
10/31/07 55195 59668 72943
10/31/08 34165 37432 50667
10/31/09 43406 42395 51660
</Table>
CLASS B SHARES(3)--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
With sales charges 20.99% -0.92% 5.46%
Excluding sales charges 25.99 -0.65 5.46
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY U.
S. SMALL RUSSELL 2500(TM) RUSSELL 2000(R)
CAP FUND INDEX VALUE INDEX
----------- ---------------- ---------------
10/31/99 10000 10000 10000
10/31/00 10080 12327 11730
10/31/01 9980 10828 12756
10/31/02 10463 9838 12434
10/31/03 14726 13940 17443
10/31/04 17576 15660 20582
10/31/05 21371 17994 23265
10/31/06 23577 21176 28592
10/31/07 21972 23867 29177
10/31/08 13500 14973 20267
10/31/09 17009 16958 20664
</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 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.
Effective February 13, 2009, MainStay Small Cap Opportunity Fund changed its
name to MainStay Small Company Value Fund. Effective October 30, 2009,
MainStay Small Company Value Fund changed its name to MainStay U.S. Small Cap
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(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 25.00% -0.64% 5.46%
Excluding sales charges 26.00 -0.64 5.46
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY U.S.
SMALL CAP RUSSELL 2000(R) RUSSELL 2500(TM)
FUND VALUE INDEX INDEX
------------- --------------- ----------------
10/31/99 10000 10000 10000
10/31/00 10081 12327 11730
10/31/01 9971 10828 12756
10/31/02 10463 9838 12434
10/31/03 14740 13940 17443
10/31/04 17583 15660 20582
10/31/05 21403 17994 23265
10/31/06 23611 21176 28592
10/31/07 22005 23867 29177
10/31/08 13512 14973 20267
10/31/09 17024 16958 20664
</Table>
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
27.57% 0.59% 6.65%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MainStay U.S.
Small Russell 2000(R) Russell 2500(TM)
Cap Fund Value Index Index
------------- --------------- ----------------
10/31/99 10000 10000 10000
10/31/00 10186 12327 11730
10/31/01 10186 10828 12756
10/31/02 10782 9838 12434
10/31/03 15314 13940 17443
10/31/04 18488 15660 20582
10/31/05 22768 17994 23265
10/31/06 25439 21176 28592
10/31/07 23992 23867 29177
10/31/08 14921 14973 20267
10/31/09 19036 16958 20664
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell 2500(TM) Index(5) 13.26% 1.61% 5.42%
Russell 2000(R) Value Index(6) 1.96 0.08 7.53
Average Lipper small-cap core fund(7) 11.82 0.82 6.19
</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 A and B shares, first offered on January 1,
2004, include the historical performance of Class I shares through December
31, 2003, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class A and Class B shares might have
been lower.
4. Performance figures for Class C shares, first offered on January 2, 2004,
include the historical performance of L Class shares (which were redesignated
as Class C shares on January 2, 2004) from December 30, 2002, through
December 31, 2003, and the historical performance of Class I shares through
December 29, 2002, adjusted for differences in certain contractual expenses
and fees. Unadjusted, the performance shown for Class C shares might have
been lower.
5. The Russell 2500(TM) Index is a broad index featuring 2,500 stocks that cover
the small and mid cap market capitalizations. The Russell 2500(TM) Index is a
market cap weighted index that includes the smallest 2,500 companies covered
in the Russell 3000 universe of United States-based listed equities.
Effective August 14, 2009, the Fund selected the Russell 2500(TM) Index as
its primary benchmark, in replacement of the Russell 2000(R) Value Index, in
connection with a change in subadvisor. The Russell 2500(TM) 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 2000(R) Value Index measures the performance of those Russell
2000 companies with lower price-to-book ratios and lower forecasted growth
values. 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. Total returns assume reinvestment of all dividends and
capital gains. An investment cannot be made directly in an index.
7. The average Lipper small-cap core 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 core 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 SmallCap 600 Index.
This average 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 U.S. Small Cap Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY U.S. SMALL CAP 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 $1,316.50 $ 9.52 $1,017.00 $ 8.29
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,316.80 $ 8.93 $1,017.50 $ 7.78
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,312.20 $13.87 $1,013.20 $12.08
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,311.10 $13.86 $1,013.20 $12.08
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,319.50 $ 6.84 $1,019.30 $5.95
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.63% for Investor Class, 1.53% for Class A, 2.38% for Class B and Class C
and 1.17% 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 8.2%
Thrifts & Mortgage Finance 6.3
Health Care Equipment & Supplies 5.4
Household Durables 5.0
Chemicals 4.8
Multi-Utilities 4.4
Electronic Equipment & Instruments 4.1
Capital Markets 4.0
Software 3.8
Commercial Banks 3.7
Aerospace & Defense 2.9
Building Products 2.9
Electric Utilities 2.8
Health Care Providers & Services 2.8
Communications Equipment 2.7
IT Services 2.7
Containers & Packaging 2.6
Machinery 2.6
Diversified Consumer Services 2.1
Pharmaceuticals 2.1
Real Estate Investment Trusts 2.1
Energy Equipment & Services 2.0
Gas Utilities 1.9
Distributors 1.7
Wireless Telecommunication Services 1.7
Computers & Peripherals 1.6
Specialty Retail 1.5
Household Products 1.2
Professional Services 1.1
Textiles, Apparel & Luxury Goods 1.1
Oil, Gas & Consumable Fuels 1.0
Food Products 0.9
Biotechnology 0.8
Semiconductors & Semiconductor
Equipment 0.7
Electrical Equipment 0.5
Auto Components 0.2
Hotels, Restaurants & Leisure 0.1
Short-Term Investment 2.8
Other Assets, Less Liabilities 1.2
-----
100.0%
=====
</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. Silgan Holdings, Inc.
2. Armstrong World Industries, Inc.
3. Washington Federal, Inc.
4. Sybase, Inc.
5. Tupperware Brands Corp.
6. Ventas, Inc.
7. Endo Pharmaceuticals Holdings, Inc.
8. Platinum Underwriters Holdings, Ltd.
9. Federated Investors, Inc. Class B
10. Waddell & Reed Financial, Inc. Class A
</Table>
8 MainStay U.S. Small Cap 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 U.S. SMALL CAP FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK FOR THE 12-MONTH REPORTING PERIOD ENDED OCTOBER 31, 2009?
Excluding all sales charges, MainStay U.S. Small Cap Fund returned 26.91% for
Investor Class shares, 27.05% for Class A shares, 25.99% for Class B shares and
26.00% for Class C shares for the 12 months ended October 31, 2009. Over the
same period, the Fund's Class I shares returned 27.57%. All share classes
outperformed the 11.82% return of the average Lipper(2) small-cap core fund and
the 13.26% return of the Russell 2500(TM) Index(3) for the 12 months ended
October 31, 2009. All share classes outperformed the 1.96% return of the Russell
2000(R) Value Index(4) during the reporting 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.
Effective August 14, 2009, the Fund amended its principal risks and changed its
primary benchmark index from the Russell 2000(R) Value Index to the Russell
2500(TM) Index. Effective September 8, 2009, the Fund changed its principal
investment strategy and investment process. Effective October 30, 2009, the Fund
changed its name from MainStay Small Company Value Fund to MainStay U.S. Small
Cap Fund.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE STRONG CONTRIBUTIONS TO THE
FUND'S PERFORMANCE AND WHICH SECTORS WERE WEAK CONTRIBUTORS?
During the first eight months of the reporting period, the Fund saw strong
contributions to performance relative to the Russell 2000(R) Value Index from
the information technology, financials and consumer discretionary sectors,
particularly during the market upturn. During the same portion of the reporting
period, the health care, telecommunication services and energy sectors detracted
from the Fund's performance relative to the Russell 2000(R) Value Index.
During the last four months of the reporting period, every sector with the
exception of utilities contributed positively to the Fund's performance in
relation to the Russell 2500(TM) Index. The most significant contributions to
relative performance came from the industrials, materials and information
technology sectors. The sectors that contributed the least to relative
performance were consumer staples, financials and health care.
Stock selection during the last four months of the reporting period in most
sectors was positive in relation to the Russell 2500(TM) Index, with significant
contributions from the industrials, materials and information technology
sectors. Stock selection within consumer staples and utilities detracted
slightly. These were the only two sectors in which the Fund did not have
positive contributions from stock selection relative to the Russell 2500(TM)
Index during the last four months of the reporting period.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG CONTRIBUTORS TO THE FUND'S
ABSOLUTE PERFORMANCE AND WHICH STOCKS DETRACTED?
During the first eight months of the reporting period, the Fund saw strong
contributions from its positions in STEC, a computer memory device manufacturer;
Vishay
- ----------
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 greater 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 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. 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 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)) Value
Index.
mainstayinvestments.com 9
Intertechnology, a semiconductor and electronic components manufacturer; and ADC
Telecommunications, a provider of broadband communications network
infrastructure products and related services. All three stocks saw better-than-
expected earnings during the first eight months of the reporting period.
Detractors during this portion of the reporting period included transportation
services company Pacer International, commercial bank National Penn Bancshares
and specialty chemical provider Cabot.
During the last four months of the reporting period, the three strongest
individual contributors to the Fund's absolute performance were footwear
manufacturer Skechers U.S.A., paper products company Buckeye Technologies and
building materials company Armstrong World Industries, all of which posted
positive returns for this portion of the reporting period. The largest
individual detractors during the last four months of the reporting period were
homebuilder KB Home, marine contractor Cal Dive International and semiconductor
manufacturer MEMC Electronics Materials, all of which generated negative
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 added apparel
retailer Childrens Place Retail Stores and investment bank Jefferies Group.
During the same portion of the reporting period, the Fund sold its position in
Emulex, a semiconductor component and integrated circuit supplier after a
takeover caused the company's stock price to rise. The Fund also sold its
position in Alaska Airlines when share appreciation suggested that other
opportunities might offer a better risk-adjusted return.
During the last four months of the reporting period, the Fund purchased
positions in asset managers Federated Investors and Waddell & Reed Financial, as
well as several 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.
Among the positions the Fund sold during the last four months of the reporting
period were retail companies Chico's FAS, Foot Locker and AnnTaylor Stores. Many
retailers had experienced a significant rebound in their stock prices, and the
Fund sought potential opportunities among other retailers and other segments of
the consumer discretionary sector.
WERE THERE ANY NOTABLE CHANGES IN THE FUND'S SECTOR WEIGHTINGS DURING THE
REPORTING PERIOD?
During the first eight months of the reporting period, the Fund moderately
increased its weightings in the information technology and health care sectors
and decreased its weightings in the energy and consumer staples sectors.
During the last four months of the reporting period, the Fund increased its
weightings in the financials and utilities sectors from underweight to
overweight relative to the Russell 2500(TM) Index. The Fund reduced its exposure
to the industrials sector from overweight to underweight relative to the new
benchmark. The Fund reduced its information technology exposure from overweight
to approximately a neutral position in relation 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 had overweight positions relative to the
Russell 2500(TM) Index in the financials and utility sectors. As of the same
date, the Fund was underweight relative to the benchmark in the industrials
sector.
On the premise that business investment would tend toward creating efficiencies
rather than increasing capacity, the Fund remained very selective in its
industrial and technology investments. When focusing on the consumer, the Fund
emphasized value, whether it was in consumer staples, retailing or homebuilding.
The Fund continued to treat the health care sector as generally undervalued, and
pursued companies that the Subadvisor believed to be likely to fare well
whatever direction health care reform might take. The Fund sought companies
selling into emerging markets whose growth, spurred by strong stimulus programs,
might be higher than that in the United States. In energy, the Fund invested in
companies with reasonably stable prospects and strong backlogs from orders or
hedges.
Overall, the Fund was positioned in strong businesses that tended to generate a
high degree of reliable cash flow and that may be in a position to enhance
shareholder value.
- ----------
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 U.S. Small Cap Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2009
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 96.0%+
- --------------------------------------------------------------
AEROSPACE & DEFENSE 2.9%
Alliant Techsystems, Inc. (a) 52,050 $ 4,048,449
Curtiss-Wright Corp. 85,300 2,543,646
Hexcel Corp. (a) 163,700 1,800,700
-------------
8,392,795
-------------
AUTO COMPONENTS 0.2%
WABCO Holdings, Inc. 29,959 710,627
-------------
BIOTECHNOLOGY 0.8%
Alkermes, Inc. (a) 300,600 2,395,782
-------------
BUILDING PRODUCTS 2.9%
V Armstrong World
Industries, Inc. (a) 190,600 7,099,850
Masco Corp. 116,250 1,365,937
-------------
8,465,787
-------------
CAPITAL MARKETS 4.0%
V Federated Investors, Inc.
Class B 219,800 5,769,750
V Waddell & Reed Financial,
Inc. Class A 204,700 5,743,882
-------------
11,513,632
-------------
CHEMICALS 4.8%
International Flavors &
Fragrances, Inc. 78,150 2,976,734
Methanex Corp. 217,750 3,734,412
Nalco Holding Co. 176,350 3,729,802
Sensient Technologies Corp. 130,500 3,300,345
-------------
13,741,293
-------------
COMMERCIAL BANKS 3.7%
Investors Bancorp, Inc. (a) 305,302 3,309,474
Sterling Bancshares, Inc. 269,650 1,501,951
Texas Capital Bancshares,
Inc. (a) 114,750 1,671,907
UMB Financial Corp. 108,200 4,303,114
-------------
10,786,446
-------------
COMMUNICATIONS EQUIPMENT 2.7%
3Com Corp. (a) 809,501 4,160,835
ADC Telecommunications, Inc.
(a) 338,750 2,198,487
Harmonic, Inc. (a) 292,150 1,533,788
-------------
7,893,110
-------------
COMPUTERS & PERIPHERALS 1.6%
Electronics for Imaging, Inc.
(a) 235,732 2,748,635
STEC, Inc. (a) 89,750 1,913,470
-------------
4,662,105
-------------
CONTAINERS & PACKAGING 2.6%
V Silgan Holdings, Inc. 136,950 7,361,062
-------------
DISTRIBUTORS 1.7%
Genuine Parts Co. 140,750 4,924,843
-------------
DIVERSIFIED CONSUMER SERVICES 2.1%
Brinks Home Security
Holdings, Inc. (a) 81,500 2,524,870
Service Corp. International 522,900 3,592,323
-------------
6,117,193
-------------
ELECTRIC UTILITIES 2.8%
DPL, Inc. 143,200 3,628,688
Westar Energy, Inc. 237,350 4,545,252
-------------
8,173,940
-------------
ELECTRICAL EQUIPMENT 0.5%
Woodward Governor Co. 62,512 1,469,657
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 4.1%
DTS, Inc. (a) 156,349 4,416,859
Jabil Circuit, Inc. 207,650 2,778,357
Methode Electronics, Inc. 176,667 1,280,836
TTM Technologies, Inc. (a) 335,200 3,408,984
-------------
11,885,036
-------------
ENERGY EQUIPMENT & SERVICES 2.0%
Cal Dive International, Inc.
(a) 419,550 3,222,144
SEACOR Holdings, Inc. (a) 33,102 2,690,200
-------------
5,912,344
-------------
FOOD PRODUCTS 0.9%
Corn Products International,
Inc. 95,850 2,701,053
-------------
GAS UTILITIES 1.9%
ONEOK, Inc. 154,100 5,579,961
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 5.4%
Haemonetics Corp. (a) 59,250 3,051,375
Inverness Medical
Innovations, Inc. (a) 102,600 3,899,826
SonoSite, Inc. (a) 187,600 4,650,604
Teleflex, Inc. 81,800 4,069,550
-------------
15,671,355
-------------
HEALTH CARE PROVIDERS & SERVICES 2.8%
Bio-Reference Laboratories,
Inc. (a) 76,950 2,487,794
DaVita, Inc. (a) 104,250 5,528,377
-------------
8,016,171
-------------
HOTELS, RESTAURANTS & LEISURE 0.1%
Multimedia Games, Inc. (a) 36,370 178,577
-------------
</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)
HOUSEHOLD DURABLES 5.0%
KB Home 330,700 $ 4,689,326
Ryland Group, Inc. (The) 184,450 3,421,547
V Tupperware Brands Corp. 140,550 6,327,561
-------------
14,438,434
-------------
HOUSEHOLD PRODUCTS 1.2%
Church & Dwight Co., Inc. 60,500 3,441,240
-------------
INSURANCE 8.2%
Arthur J. Gallagher & Co. 206,200 4,600,322
Aspen Insurance Holdings,
Ltd. 118,271 3,051,392
Hanover Insurance Group, Inc.
(The) 105,550 4,440,489
V Platinum Underwriters
Holdings, Ltd. 163,398 5,844,746
Validus Holdings, Ltd. 222,630 5,632,539
-------------
23,569,488
-------------
IT SERVICES 2.7%
Acxiom Corp. (a) 279,187 3,205,067
NeuStar, Inc. Class A (a) 195,000 4,504,500
-------------
7,709,567
-------------
MACHINERY 2.6%
Kennametal, Inc. 136,400 3,213,584
Wabtec Corp. 113,800 4,183,288
-------------
7,396,872
-------------
MULTI-UTILITIES 4.4%
CMS Energy Corp. 261,200 3,473,960
NSTAR 128,000 3,961,600
Vectren Corp. 234,050 5,275,487
-------------
12,711,047
-------------
OIL, GAS & CONSUMABLE FUELS 1.0%
Southern Union Co. 143,100 2,800,467
-------------
PHARMACEUTICALS 2.1%
V Endo Pharmaceuticals
Holdings, Inc. (a) 265,300 5,942,720
-------------
PROFESSIONAL SERVICES 1.1%
IHS, Inc. Class A (a) 60,250 3,118,540
-------------
REAL ESTATE INVESTMENT TRUSTS 2.1%
V Ventas, Inc. 149,250 5,989,403
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.7%
MEMC Electronic Materials,
Inc. (a) 170,350 2,115,747
-------------
SOFTWARE 3.8%
Rovi Corp. (a) 91,100 2,509,805
V Sybase, Inc. (a) 171,750 6,794,430
THQ, Inc. (a) 299,300 1,565,339
-------------
10,869,574
-------------
SPECIALTY RETAIL 1.5%
GameStop Corp. Class A (a) 176,950 4,298,116
-------------
TEXTILES, APPAREL & LUXURY GOODS 1.1%
Warnaco Group, Inc. (The) (a) 76,300 3,092,439
-------------
THRIFTS & MORTGAGE FINANCE 6.3%
Bank Mutual Corp. 272,493 1,912,901
Brookline Bancorp, Inc. 266,000 2,604,140
First Niagara Financial
Group, Inc. 317,950 4,082,478
Hudson City Bancorp, Inc. 195,400 2,567,556
V Washington Federal, Inc. 411,450 7,056,367
-------------
18,223,442
-------------
WIRELESS TELECOMMUNICATION SERVICES 1.7%
Syniverse Holdings, Inc. (a) 283,150 4,850,360
-------------
Total Common Stocks
(Cost $270,516,723) 277,120,225
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 2.8%
- --------------------------------------------------------------
REPURCHASE AGREEMENT 2.8%
State Street Bank and Trust
Co.
0.01%, dated 10/30/09
due 11/2/09
Proceeds at Maturity
$7,928,836 (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 $8,090,000 and a
Market Value of $8,089,191) $7,928,830 7,928,830
-------------
Total Short-Term Investment
(Cost $7,928,830) 7,928,830
-------------
Total Investments
(Cost $278,445,553) (b) 98.8% 285,049,055
Other Assets,
Less Liabilities 1.2 3,514,730
----- ------------
Net Assets 100.0% $ 288,563,785
===== ============
</Table>
12 MainStay U.S. Small Cap Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
(a) Non-income producing security.
(b) At October 31, 2009, cost is $279,608,027
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 18,663,992
Gross unrealized depreciation (13,222,964)
------------
Net unrealized appreciation $ 5,441,028
============
</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 $277,120,225 $ -- $ -- $277,120,225
Short-Term Investment
Repurchase Agreement -- 7,928,830 -- 7,928,830
------------ ---------- -------- ------------
Total Investments in Securities $277,120,225 $7,928,830 $-- $285,049,055
============ ========== ======== ============
</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 $278,445,553) $ 285,049,055
Receivables:
Investment securities sold 5,655,322
Dividends and interest 182,948
Fund shares sold 173,834
Other assets 19,639
-------------
Total assets 291,080,798
-------------
LIABILITIES:
Payables:
Investment securities purchased 1,699,206
Fund shares redeemed 308,382
Transfer agent (See Note 3) 233,946
Manager (See Note 3) 151,912
NYLIFE Distributors (See Note 3) 56,882
Professional fees 29,736
Shareholder communication 27,662
Custodian 4,645
Trustees 840
Accrued expenses 3,802
-------------
Total liabilities 2,517,013
-------------
Net assets $ 288,563,785
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited number of shares
authorized $ 229,977
Additional paid-in capital 537,749,336
-------------
537,979,313
Accumulated net realized loss on
investments and futures
transactions (256,019,030)
Net unrealized appreciation on
investments 6,603,502
-------------
Net assets $ 288,563,785
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 25,831,999
=============
Shares of beneficial interest
outstanding 2,063,258
=============
Net asset value per share
outstanding $ 12.52
Maximum sales charge (5.50% of
offering price) 0.73
-------------
Maximum offering price per share
outstanding $ 13.25
=============
CLASS A
Net assets applicable to
outstanding shares $ 66,905,109
=============
Shares of beneficial interest
outstanding 5,349,187
=============
Net asset value per share
outstanding $ 12.51
Maximum sales charge (5.50% of
offering price) 0.73
-------------
Maximum offering price per share
outstanding $ 13.24
=============
CLASS B
Net assets applicable to
outstanding shares $ 23,353,823
=============
Shares of beneficial interest
outstanding 1,943,624
=============
Net asset value and offering price
per share outstanding $ 12.02
=============
CLASS C
Net assets applicable to
outstanding shares $ 17,047,849
=============
Shares of beneficial interest
outstanding 1,419,675
=============
Net asset value and offering price
per share outstanding $ 12.01
=============
CLASS I
Net assets applicable to
outstanding shares $ 155,425,005
=============
Shares of beneficial interest
outstanding 12,221,923
=============
Net asset value and offering price
per share outstanding $ 12.72
=============
</Table>
14 MainStay U.S. Small Cap 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) $ 3,153,501
Interest 1,860
------------
Total income 3,155,361
------------
EXPENSES:
Manager (See Note 3) 1,826,214
Transfer agent--Investor Class
(See Note 3) 118,060
Transfer agent--Class A (See Note
3) 278,088
Transfer agent--Classes B and C
(See Note 3) 208,607
Transfer agent--Class I (See Note
3) 516,107
Shareholder communication 324,119
Distribution/Service--Investor
Class (See Note 3) 47,547
Distribution/Service--Class A
(See Note 3) 137,056
Service--Class B (See Note 3) 45,700
Service--Class C (See Note 3) 35,911
Distribution--Class B (See Note
3) 137,099
Distribution--Class C (See Note
3) 107,732
Professional fees 90,449
Registration 81,268
Custodian 22,744
Trustees 6,819
Miscellaneous 37,669
------------
Total expenses before waiver 4,021,189
Expense waiver from Manager (See
Note 3) (914,740)
------------
Net expenses 3,106,449
------------
Net investment income 48,912
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on:
Security transactions (44,838,744)
Futures transactions (9,114)
------------
Net realized loss on investments
and futures transactions (44,847,858)
------------
Net change in unrealized
appreciation (depreciation) on:
Investments 95,304,878
Futures contracts (567,308)
------------
Net change in unrealized
depreciation on investments and
futures contracts 94,737,570
------------
Net realized and unrealized gain on
investments and futures
transactions 49,889,712
------------
Net increase in net assets
resulting from operations $ 49,938,624
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $3,488.
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
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 48,912 $ 7,310,737
Net realized loss on
investments and futures
transactions (44,847,858) (190,766,652)
Net change in unrealized
depreciation on
investments and futures
contracts 94,737,570 (55,255,316)
------------------------------
Net increase (decrease) in
net assets resulting from
operations 49,938,624 (238,711,231)
------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (250,167) --
Class A (1,268,569) (1,870,802)
Class B (177,128) --
Class C (205,306) --
Class I (3,284,545) (7,498,289)
------------------------------
(5,185,715) (9,369,091)
------------------------------
From net realized gain on investments:
Class A -- (28,928,748)
Class B -- (3,462,812)
Class C -- (5,460,212)
Class I -- (57,146,695)
------------------------------
-- (94,998,467)
------------------------------
Total dividends and
distributions to
shareholders (5,185,715) (104,367,558)
------------------------------
Capital share transactions:
Net proceeds from sale of
shares $ 105,241,136 $ 135,834,496
Net asset value of shares
issued in connection with
the acquisition of
MainStay Small Cap Value
Fund 28,616,643 --
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 4,832,572 93,050,364
Cost of shares redeemed (115,704,130) (683,885,456)
------------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 22,986,221 (455,000,596)
------------------------------
Net increase (decrease)
in net assets 67,739,130 (798,079,385)
NET ASSETS:
Beginning of year 220,824,655 1,018,904,040
------------------------------
End of year $ 288,563,785 $ 220,824,655
==============================
Accumulated undistributed
net investment income at
end of year $ -- $ 4,695,596
==============================
</Table>
16 MainStay U.S. Small Cap 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 $ 10.14 $ 13.86
------- -------
Net investment income
(loss) (a) (0.03) 0.10
Net realized and unrealized
gain (loss) on
investments 2.63 (3.82)
------- -------
Total from investment
operations 2.60 (3.72)
------- -------
Less dividends and
distributions:
From net investment
income (0.22) --
From net realized gain on
investments -- --
------- -------
Total dividends and
distributions (0.22) --
------- -------
Net asset value at end of
period $ 12.52 $ 10.14
======= =======
Total investment return (b) 26.91% (26.91%)(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) (0.28%) 1.10% ++
Net expenses 1.66% 1.80% ++
Expenses (before waiver) 2.02% 1.83% ++
Portfolio turnover rate 218% 158%
Net assets at end of period
(in 000's) $25,832 $11,480
</Table>
<Table>
<Caption>
CLASS B
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2009 2008 2007 2006 2005
Net asset value at
beginning of period $ 9.70 $ 17.94 $ 19.25 $ 19.18 $ 18.38
------- ------- ------- ------- -------
Net investment income
(loss) (a) (0.09) 0.06 (0.08) (0.21) (0.22)
Net realized and unrealized
gain (loss) on
investments 2.54 (6.29) (1.23) 2.08 3.93
------- ------- ------- ------- -------
Total from investment
operations 2.45 (6.23) (1.31) 1.87 3.71
------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income (0.13) -- -- -- --
From net realized gain on
investments -- (2.01) -- (1.80) (2.91)
------- ------- ------- ------- -------
Total dividends and
distributions (0.13) (2.01) -- (1.80) (2.91)
------- ------- ------- ------- -------
Net asset value at end of
period $ 12.02 $ 9.70 $ 17.94 $ 19.25 $ 19.18
======= ======= ======= ======= =======
Total investment return (b) 25.99% (38.56%) (6.81%) 10.32% 21.59%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) (0.95%) 0.47% (0.41%) (1.12%) (1.19%)
Net expenses 2.38% 2.44% 2.41% 2.39% 2.41%
Expenses (before waiver) 2.78% 2.66% 2.41% 2.39% 2.41%
Portfolio turnover rate 218% 158% 134% 124% 159%
Net assets at end of period
(in 000's) $23,354 $13,305 $32,502 $46,112 $48,496
</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 shares are not subject to
sales charges.
(c) Total return is not annualized.
</Table>
18 MainStay U.S. Small Cap 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
$ 10.14 $ 18.65 $ 19.87 $ 19.60 $ 18.58
------- ------- -------- -------- --------
0.00 ++ 0.17 0.07 (0.07) (0.08)
2.61 (6.55) (1.29) 2.14 4.01
------- ------- -------- -------- --------
2.61 (6.38) (1.22) 2.07 3.93
------- ------- -------- -------- --------
(0.24) (0.12) -- -- --
-- (2.01) -- (1.80) (2.91)
------- ------- -------- -------- --------
(0.24) (2.13) -- (1.80) (2.91)
------- ------- -------- -------- --------
$ 12.51 $ 10.14 $ 18.65 $ 19.87 $ 19.60
======= ======= ======== ======== ========
27.05% (38.10%) (6.09%) 11.20% 22.66%
0.01% 1.24% 0.33% (0.39%) (0.44%)
1.54% 1.65% 1.66% 1.64% 1.66%
1.92% 1.84% 1.66% 1.64% 1.66%
218% 158% 134% 124% 159%
$66,905 $64,527 $301,031 $502,182 $194,615
</Table>
<Table>
<Caption>
CLASS C
----------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
$ 9.70 $ 17.94 $ 19.26 $ 19.19 $ 18.37
------- ------- ------- -------- -------
(0.08) 0.06 (0.09) (0.21) (0.22)
2.53 (6.29) (1.23) 2.08 3.95
------- ------- ------- -------- -------
2.45 (6.23) (1.32) 1.87 3.73
------- ------- ------- -------- -------
(0.14) -- -- -- --
-- (2.01) -- (1.80) (2.91)
------- ------- ------- -------- -------
(0.14) (2.01) -- (1.80) (2.91)
------- ------- ------- -------- -------
$ 12.01 $ 9.70 $ 17.94 $ 19.26 $ 19.19
======= ======= ======= ======== =======
26.00% (38.60%) (6.80%) 10.32% 21.72%
(0.83%) 0.45% (0.44%) (1.14%) (1.19%)
2.39% 2.45% 2.41% 2.39% 2.41%
2.81% 2.67% 2.41% 2.39% 2.41%
218% 158% 134% 124% 159%
$17,048 $15,123 $54,264 $120,414 $48,316
</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 $ 10.34 $ 19.03 $ 20.18 $ 19.79 $ 18.67
-------- -------- -------- -------- --------
Net investment income (a) 0.04 0.24 0.17 0.02 0.01
Net realized and unrealized gain
(loss) on investments 2.65 (6.69) (1.32) 2.17 4.02
-------- -------- -------- -------- --------
Total from investment operations 2.69 (6.45) (1.15) 2.19 4.03
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.31) (0.23) (0.00)++ -- --
From net realized gain on
investments -- (2.01) -- (1.80) (2.91)
-------- -------- -------- -------- --------
Total dividends and distributions (0.31) (2.24) (0.00)++ (1.80) (2.91)
-------- -------- -------- -------- --------
Net asset value at end of Period $ 12.72 $ 10.34 $ 19.03 $ 20.18 $ 19.79
======== ======== ======== ======== ========
Total investment return (b) 27.57% (37.81%) (5.69%) 11.73% 23.15%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.39% 1.69% 0.81% 0.09% 0.06%
Net expenses 1.18% 1.20% 1.19% 1.17% 1.16%
Expenses (before waiver) 1.68% 1.48% 1.35% 1.17% 1.16%
Portfolio turnover rate 218% 158% 134% 124% 159%
Net assets at end of Period (in
000's) $155,425 $116,390 $631,108 $862,439 $317,602
</Table>
<Table>
++ 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 shares are not subject to
sales charges.
</Table>
20 MainStay U.S. Small Cap 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:
Eclipse Funds (the "Trust") was organized on July 30, 1986, as a Massachusetts
business trust. The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company,
and is comprised of two funds (collectively referred to as the "Funds"). These
financial statements and notes relate only to the MainStay U.S. Small Cap Fund
(the "Fund"), a diversified fund. Effective January 30, 2009, the Fund changed
its principal investment strategy, investment process and principal risks.
Effective February 13, 2009, the Fund changed its name from MainStay Small Cap
Opportunity Fund to MainStay Small Company Value Fund. 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 interim subadvisor. Effective
September 8, 2009, the Fund changed its investment strategy and investment
process. Effective October 30, 2009, the Fund's shareholders approved the
retention of Epoch Investment Partners, Inc. as the Fund's subadvisor and the
Fund changed its name from MainStay Small Company Value Fund to its present
name.
The Fund currently offers five classes of shares. Class I shares commenced
operations on January 12, 1987. Class A shares and Class B shares commenced
operations on January 2, 2004. Class C shares commenced operations on December
30, 2002. 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 long-term capital appreciation by
investing primarily in securities of small-cap 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. 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.
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
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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
22 MainStay U.S. Small Cap Fund
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 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.
(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
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 OTHER
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net realized gain
(loss) on futures
Futures Contracts transactions $(9,114) $(9,114)
-------------------------
Total Realized
Gain (Loss) $(9,114) $(9,114)
=========================
</Table>
CHANGE IN APPRECIATION (DEPRECIATION)
<Table>
<Caption>
STATEMENT OF OTHER
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net change in
unrealized
appreciation
(depreciation) on
Futures Contracts futures contracts $(567,308) $(567,308)
---------------------
Total Change in
Appreciation
(Depreciation) $(567,308) $(567,308)
=====================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
OTHER
CONTRACTS
RISK TOTAL
Futures Contracts (2) 88 88
-------------------------
</Table>
(1) Amount disclosed represents 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. 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 LLC, effective prior to the opening of
the U.S. financial markets on June 29, 2009. Epoch Investment Partners, Inc.
("Epoch" or "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 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. For the period from June 29, 2009, through October 16, 2009,
Epoch served as Subadvisor to the Fund pursuant to an Interim Subadvisory
Agreement that was substantially similar to the Subadvisory Agreement.
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:
0.85% on assets up to $1 billion and 0.80% on assets in excess of $1 billion.
Prior to February 13, 2009, the Fund paid the manager at an annual rate of 1.00%
of the average daily net assets.
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 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, 1.63%; Class A, 1.53%; Class B, 2.38%; Class C, 2.38%;
and Class I, 1.17%. 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
24 MainStay U.S. Small Cap Fund
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. Between February 13, 2009 and July 13, 2009,
the Fund had a similar expense limitation agreement in place. Prior to February
13, 2009, the Fund had a different expense limitation agreement in place.
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 $9,486
and $6,168, 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 $42, $20,
$30,075 and $454, 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 $1,120,862.
(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 $ 1,389 0.0%++
- ---------------------------------------------------
Class B 1,064 0.0++
- ---------------------------------------------------
Class C 1,795 0.0++
- ---------------------------------------------------
Class I 38,110,053 24.5
- ---------------------------------------------------
</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 $13,378.
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 UNREALIZED TOTAL
ORDINARY CAPITAL GAIN OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(254,741,846) $(114,710) $5,441,028 $(249,415,528)
- --------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals, and partnership basis and wash sales
adjustments from fund acquisitions.
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.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$441,207 $925,366 $(1,366,573)
- ------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to REITs, taxable over-
distributions, distribution redesignations, distributions from net operating
loss, and the capital loss carryover, wash sales deferrals and partnership basis
adjustments from fund acquisition.
At October 31, 2009, for federal income tax purposes, capital loss carryforwards
of $254,741,846 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 $22,808,254 of capital losses in its
reorganization with the MainStay Small Cap Value 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 $ 10,550
2016 196,511
2017 47,681
- ------------------------------------
Total $254,742
- ------------------------------------
</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 $5,185,715 $ 19,289,432
Long-Term Capital Gains -- 85,078,126
- -----------------------------------------------------
Total $5,185,715 $104,367,558
- -----------------------------------------------------
</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 $444,015 and $461,326, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2009:
Shares sold 248,332 $ 2,431,659
Shares issued in connection
with the acquisition of
MainStay Small Cap Value
Fund 915,198 7,435,417
Shares issued to
shareholders in
reinvestment of dividends 30,268 247,895
Shares redeemed (393,790) (3,733,172)
---------------------------
Net increase in shares
outstanding before
conversion 800,008 6,381,799
Shares converted into
Investor Class (See Note
1) 363,432 3,093,547
Shares converted from
Investor Class (See Note
1) (232,798) (2,774,761)
---------------------------
Net increase 930,642 $ 6,700,585
===========================
Period ended October 31, 2008 (a):
Shares sold 297,156 $ 4,040,651
Shares redeemed (246,008) (3,187,536)
---------------------------
Net increase in shares
outstanding before
conversion 51,148 853,115
Shares converted into
Investor Class (See Note
1) 1,181,962 15,686,288
Shares converted from
Investor Class (See Note
1) (100,494) (1,335,891)
---------------------------
Net increase 1,132,616 $ 15,203,512
===========================
(a) Investor Class shares were first offered on February
28, 2008.
</Table>
26 MainStay U.S. Small Cap Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 1,382,497 $ 13,228,863
Shares issued in connection
with the acquisition of
MainStay Small Cap Value
Fund 1,320,954 10,706,373
Shares issued to
shareholders in
reinvestment of dividends 128,139 1,046,901
Shares redeemed (4,019,677) (37,706,760)
---------------------------
Net decrease in shares
outstanding before
conversion (1,188,087) (12,724,623)
Shares converted into Class
A (See Note 1) 355,452 4,011,231
Shares converted from Class
A (See Note 1) (183,319) (1,382,222)
---------------------------
Net decrease (1,015,954) $ (10,095,614)
===========================
Year ended October 31,
2008:
Shares sold 3,978,284 $ 56,156,683
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,664,669 25,644,532
Shares redeemed (14,436,478) (203,503,496)
---------------------------
Net decrease in shares
outstanding before
conversion (8,793,525) (121,702,281)
Shares converted into Class
A (See Note 1) 161,393 2,200,573
Shares converted from Class
A (See Note 1) (1,142,652) (15,144,175)
---------------------------
Net decrease (9,774,784) $(134,645,883)
===========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 207,708 $ 1,957,206
Shares issued in connection
with the acquisition of
MainStay Small Cap Value
Fund 1,067,325 8,360,201
Shares issued to
shareholders in
reinvestment of dividends 20,914 165,228
Shares redeemed (409,839) (3,625,520)
---------------------------
Net increase in shares
outstanding before
conversion 886,108 6,857,115
Shares converted from Class
B (See Note 1) (314,477) (2,947,795)
---------------------------
Net increase 571,631 $ 3,909,320
===========================
Year ended October 31,
2008:
Shares sold 164,553 $ 2,135,917
Shares issued to
shareholders in
reinvestment of
distributions 217,627 3,209,993
Shares redeemed (716,632) (9,649,628)
---------------------------
Net decrease in shares
outstanding before
conversion (334,452) (4,303,718)
Shares converted from Class
B (See Note 1) (105,204) (1,406,795)
---------------------------
Net decrease (439,656) $ (5,710,513)
===========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 80,847 $ 759,856
Shares issued in connection
with the acquisition of
MainStay Small Cap Value
Fund 269,350 2,108,989
Shares issued to
shareholders in
reinvestment of dividends 18,025 142,409
Shares redeemed (507,383) (4,511,735)
---------------------------
Net decrease (139,161) $ (1,500,481)
===========================
Year ended October 31,
2008:
Shares sold 175,386 $ 2,462,014
Shares issued to
shareholders in
reinvestment of
distributions 249,183 3,677,942
Shares redeemed (1,889,664) (25,824,537)
---------------------------
Net decrease (1,465,095) $ (19,684,581)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2009:
Shares sold 7,711,474 $ 86,863,552
Shares issued in connection
with the acquisition of
MainStay Small Cap Value 689 5,663
Shares issued to
shareholders in
reinvestment of dividends 390,113 3,230,139
Shares redeemed (7,133,818) (66,126,943)
---------------------------
Net increase 968,458 $ 23,972,411
===========================
Year ended October 31,
2008:
Shares sold 4,947,957 $ 71,039,231
Shares issued to
shareholders in
reinvestment of dividends
and distributions 3,845,657 60,517,897
Shares redeemed (30,698,488) (441,720,259)
---------------------------
Net decrease (21,904,874) $(310,163,131)
===========================
</Table>
NOTE 9--FUND ACQUISITION:
At a meeting held on September 25, 2008, 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 Small Cap Value Fund, a
series of The MainStay Funds. Shareholders of the MainStay Small Cap Value Fund
approved this reorganization on January 30, 2009, which was then completed on
February 13, 2009. The aggregate net assets of the Fund immediately before the
acquisition were $140,597,322 and the combined net assets after the acquisition
were $169,213,965.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
MAINSTAY SMALL CAP VALUE FUND
- ------------------------------------------------------
Investor Class 1,496,605 $ 7,435,417
- ------------------------------------------------------
Class A 2,157,866 10,706,373
- ------------------------------------------------------
Class B 1,870,948 8,360,201
- ------------------------------------------------------
Class C 471,745 2,108,989
- ------------------------------------------------------
Class I 1,129 5,663
- ------------------------------------------------------
</Table>
In exchange for the MainStay Small Cap Value Fund shares and net assets, the
Fund issued 915,198 Investor Class Shares; 1,320,954 Class A shares; 1,067,325
Class B shares; 269,350 Class C shares and 689 Class I shares.
MainStay Small Cap Value Fund's net assets after adjustments for any permanent
book-to-tax differences at the acquisition date were as follows, which include
the following amounts of capital stock, unrealized depreciation and accumulated
net realized loss:
<Table>
<Caption>
TOTAL UNREALIZED ACCUMULATED NET UNDISTRIBUTED NET
NET ASSETS CAPITAL STOCK DEPRECIATION REALIZED LOSS INVESTMENT INCOME
MainStay Small Cap Value Fund $28,616,643 $69,577,796 ($18,029,815) ($23,059,649) $128,311
- ------------------------------------------------------------------------------------------------------------------
</Table>
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 MainStay Funds, a separate
registrant in the MainStay Group of Funds, 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.
The Equity Index Fund is not a portfolio of the Trust.
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 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:
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 Small Cap Growth Fund, a
series of The MainStay Funds. Shareholders of MainStay Small Cap Growth Fund
approved this reorganization on November 16, 2009, which was then completed on
November 24, 2009. The aggregate net assets of the Fund immediately before the
acquisition were $293,161,292 and the combined net assets after the acquisition
were $381,979,668.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
MAINSTAY SMALL CAP GROWTH
FUND
- ------------------------------------------------------
Investor Class 2,862,295 $32,916,559
- ------------------------------------------------------
Class A 2,275,595 26,187,437
- ------------------------------------------------------
Class B 2,190,085 23,069,427
- ------------------------------------------------------
Class C 215,221 2,267,000
- ------------------------------------------------------
Class I 374,503 4,377,953
- ------------------------------------------------------
</Table>
28 MainStay U.S. Small Cap Fund
In exchange for the MainStay Small Cap Growth Fund shares and net assets, the
Fund issued 2,525,783 Investor Class Shares; 2,011,365 Class A shares; 1,845,463
Class B shares; 181,461 Class C shares and 330,642 Class I shares.
MainStay Small 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:
<Table>
<Caption>
TOTAL UNREALIZED ACCUMULATED NET UNDISTRIBUTED NET
NET ASSETS CAPITAL STOCK APPRECIATION REALIZED LOSS INVESTMENT LOSS
MainStay Small Cap Growth Fund $88,818,376 $172,773,002 $1,479,126 $(85,422,964) $(10,788)
- -------------------------------------------------------------------------------------------------------------------
</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 Small 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 Small Cap Growth Fund that will be included
in the Fund's Statement of Operations since November 24, 2009.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
Eclipse Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay U.S. Small Cap Fund (formerly, the
MainStay Small Company Value Fund) ("the Fund"), one of the funds constituting
Eclipse 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 U.S. Small Cap Fund (formerly the MainStay Small Company Value Fund) of
Eclipse 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 U.S. Small Cap 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 Company Value Fund,
subsequently renamed the MainStay U.S. Small Cap 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"). In addition to the New Subadvisory Agreement, the Board approved an
interim subadvisory agreement which provided that Epoch 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 shareholders approved the New Subadvisory Agreement, if
earlier.(1) In addition, the Board approved New York Life Investments' proposal
to reorganize the MainStay Small Cap Growth 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 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 reaching its decisions to approve the New Subadvisory Agreements, 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,
- ----------
1. The interim subadvisory agreement and the New Subadvisory Agreement are
referred to collectively as the "New Subadvisory Agreements" and all of the
agreements described herein may be referred to as the "Agreements."
mainstayinvestments.com 31
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 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 Agreements,
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 Agreements, 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
32 MainStay U.S. Small Cap Fund
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 Agreements, 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 Agreements, 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 Agreements, 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 Agreements. 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
mainstayinvestments.com 33
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 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
34 MainStay U.S. Small Cap Fund
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.
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 Agreements.
mainstayinvestments.com 35
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of the Fund was held on
October 30, 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 Epoch to appoint Epoch as the subadvisor
to the Fund.
No other business came before the special meeting. The proposal to appoint Epoch
was approved by the shareholders of the Fund as shown below:
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTENTIONS TOTAL
10,382,319 124,392 228,627 10,735,337
</Table>
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2009, the Fund designates approximately
$4,706,527 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 87.7% 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 Securities and Exchange Commission's ("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
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 U.S. Small Cap 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 U.S. Small Cap 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 U.S. Small Cap 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 Eclipse Funds
(C) 2009 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04847
NYLIM-AO17195 (RECYCLE LOGO) MS283-09 MSUSC11-12/09
B1
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 $65,571. 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 were normally
provided by the KPMG in connection with the statutory and regulatory filings or
engagements for that fiscal year were $94,510.
(b) Audit Related Fees
The aggregate fees billed for the fiscal year ended October 31, 2009 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 $10,000. The aggregate fees
billed for the fiscal year ended October 31, 2008 for assurance and related
services by KPMG that are reasonably related to the performance of the audit of
the Registrant's financial statements and are not reported under paragraph (a)
of this Item were $0. These audit-related services include review of financial
highlights for the Registrant's registration statements and issuance of consents
to use KPMG's reports.
(c) Tax Fees
The aggregate fees billed for professional services rendered by KPMG for
tax compliance, tax advice, and tax planning were (i) $12,400 during the fiscal
year ended October 31, 2009, and (ii) $12,400 during the fiscal year ended
October 31, 2008. These services included preparation of and advice relating to
federal, state and local income tax returns and excise tax returns, as well as
services relating to excise tax distribution requirements.
(d) All Other Fees
The aggregate fees billed for the fiscal year ended October 31, 2009 for
products and services provided by KPMG, other than the services reported in
paragraphs (a) through (c) of this Item were $0. The aggregate fees billed for
the fiscal year ended October 31, 2008 for products and services provided by
KPMG, other than the services reported in paragraphs (a) through (c) of this
Item were $0.
(e) Pre-Approval Policies and Procedures
(1) The Registrant's Audit Committee has adopted pre-approval policies and
procedures (the "Procedures") to govern the Committee's pre-approval of (i)
all audit services and permissible non-audit services to be provided to the
Registrant by its independent accountant, and (ii) all permissible
non-audit services to be provided by such independent accountant to the
Registrant's investment adviser and to any entity controlling, controlled
by or under common control with the investment adviser that provides
ongoing services to the Registrant (collectively, the "Service Affiliates")
if the services directly relate to the Registrant's operations and
financial reporting. In accordance with the Procedures, the Audit Committee
is responsible for the engagement of the independent accountant to certify
the Registrant's financial statements for each fiscal year. With respect to
the pre-approval of non-audit services provided to the Registrant and its
Service Affiliates, the Procedures provide that the Audit Committee may
annually pre-approve a list of the types of services that may be provided
to the Registrant or its Service Affiliates, or the Audit Committee may
pre-approve such services on a project-by-project basis as they arise.
Unless a type of service has received general pre-approval, it will require
specific pre-approval by the Audit Committee if it is to be provided by the
independent accountant. The Procedures also permit the Audit Committee to
delegate authority to one or more of its members to pre-approve any
proposed non-audit services that have not been previously pre-approved by
the Audit Committee, subject to the ratification by the full Audit
Committee no later than its next scheduled meeting. To date, the Audit
Committee has not delegated such authority.
(2) With respect to the services described in paragraphs (b) through (d) of
this Item 4, no amount was approved by the Audit Committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) There were zero hours expended on KPMG's engagement to audit the
Registrant's financial statements for the most recent fiscal year that were
attributed to work performed by
persons other than KPMG's full-time, permanent employees.
(g) All non-audit fees billed by KPMG for services rendered to the Registrant
for the fiscal years ended October 31, 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 Committee of the Board of Trustees has considered
whether the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining KPMG's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments is included as part of Item 1 of this report.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Since the Registrant's last response to this Item, there have been no material
changes to the procedures by which shareholders may recommend nominees to the
Registrant's Board of Trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940, the "Disclosure Controls") as of a date within 90 days prior to the filing
date (the "Filing Date") of this Form N-CSR (the "Report"), the Registrant's
principal executive officer and principal financial officer have concluded that
the Disclosure Controls are reasonably designed to ensure that information
required to be disclosed by the Registrant in the Report is recorded, processed,
summarized and reported by the Filing Date, including ensuring that information
required to be disclosed in the Report is accumulated and communicated to the
Registrant's management, including the Registrant's principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d)) under the Investment Company Act of 1940
that occurred during the second fiscal quarter of the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of 1940.
(b) Certifications of principal executive officer and principal financial
officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ECLIPSE FUNDS
By: /s/ Stephen P. Fisher
---------------------------------
Stephen P. Fisher
President and Principal Executive
Officer
Date: January 8, 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 and Principal Executive
Officer
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.