================================================================================
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)
J. Kevin Gao, 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, 2010
================================================================================
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY BALANCED FUND
MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT
October 31, 2010
This page intentionally left blank
MESSAGE FROM THE PRESIDENT
AN ADVANCING STOCK MARKET
Several leading indexes of stock market performance in the United States and
around the globe provided double-digit returns for the 12 months ended October
31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap
stocks generally outperformed large-cap stocks, and growth stocks outperformed
value stocks at all capitalization levels.
Although the U.S. economy continued to advance, the level of growth varied from
quarter to quarter, and the stock market's progress was far from uniform over
the 12-month reporting period. From November 2009 through March 2010, many
stocks with low or negative earnings were particularly strong, as investors
looked for stocks likely to benefit from an eco-nomic recovery. From April
through September, however, concerns about the quality of sovereign debt in
Greece and other European nations drove stock prices lower. Fortunately, central
banks and policymakers joined forces to help restore market confidence, and in
September and October 2010, major stock indexes recouped much of the ground they
had previously lost.
A SHIFTING APPETITE FOR YIELD
Throughout the reporting period, the Federal Open Market Committee maintained
the targeted federal funds rate in a range from 0% to 0.25%, which kept short-
term yields low. Investors seeking higher yields increased their appetite for
risk, extending maturities and investing in corporate bonds and commercial
mortgage-backed securities. The high-yield bond market saw significant inflows
from individual and institutional investors. The leveraged loan market as a
whole provided double-digit returns for the reporting period, and municipal debt
overall provided strong single-digit returns.
As every investor knows, past performance is no guarantee of future results.
Economic conditions next year may be very different from those today. Individual
companies may exper-ience gains or setbacks related to their products, their
comp-etition or other industry, economic or market forces. In such an
environment, how can investors know what to expect?
HELPING INVESTORS REMAIN CONFIDENT
At MainStay, we believe that mutual fund investing can help investors remain
confident as they cope with changing markets. Each of our Funds pursues a
specific investment objective using established investment strategies. Our
portfolio managers bring a professional perspective to daily market events,
seeking to balance what's happening now with what their investments seek to
achieve over full market cycles. They aim to manage the risks of individual
securities and the market as a whole within the guidelines outlined in the
Prospectus. In doing so, they look to bring consistency of purpose and a sense
of direction to investment markets that themselves may be erratic or
unpredictable.
We hope that you will carefully review the accompanying annual report. It
provides greater insight into the market events, secur-ities and investment
decisions that affected your MainStay Fund(s) during the 12 months ended October
31, 2010.
The information in the annual report is an important part of your overall
financial plan. We hope that you will use it wisely, as you maintain or
gradually adjust your investments in line with your long-range investment goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
TABLE OF CONTENTS
<Table>
Annual Report
- ---------------------------------------------
Investment and Performance Comparison 5
- ---------------------------------------------
Portfolio Management Discussion and
Analysis 9
- ---------------------------------------------
Portfolio of Investments 11
- ---------------------------------------------
Financial Statements 20
- ---------------------------------------------
Notes to Financial Statements 28
- ---------------------------------------------
Report of Independent Registered Public
Accounting Firm 36
- ---------------------------------------------
Board Consideration and Approval of
Management Agreement and Subadvisory
Agreement 37
- ---------------------------------------------
Federal Income Tax Information 40
- ---------------------------------------------
Proxy Voting Policies and Procedures and
Proxy Voting Record 40
- ---------------------------------------------
Shareholder Reports and Quarterly
Portfolio Disclosure 40
- ---------------------------------------------
Board Members and Officers 41
- ---------------------------------------------
</Table>
- --------------------------------------------------------------------------------
INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND
CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND
EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS
CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE
FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY
WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169
LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO
MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA
THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ
THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING.
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. THE GRAPH BELOW DEPICTS THE
HISTORICAL PERFORMANCE OF CLASS I SHARES OF THE FUND. PERFORMANCE WILL VARY FROM
CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES
CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END,
PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM.
(LINE GRAPH)
<Table>
<Caption>
BANK OF
AMERICA MERRILL
LYNCH 1-10
MAINSTAY BALANCED YEAR U.S.
FUND CLASS RUSSELL MIDCAP(R) BALANCED COMPOSITE CORPORATE & RUSSELL MIDCAP(R)
I SHARES INDEX INDEX GOVERNMENT INDEX VALUE INDEX
----------------- ----------------- ------------------ ---------------- -----------------
10/31/00 10000 10000 10000 10000 10000
10552 9862 10493 11424 9862
10782 9569 10604 12103 9569
12952 12773 12910 12730 12773
14047 15294 14636 13267 15294
15376 18276 16343 13315 18276
17044 22026 18628 13936 22026
18197 24168 20154 14718 24168
13536 14784 15196 14774 14784
15686 16931 17451 16585 16931
10/31/10 18023 16951 20920 17887 21586
</Table>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010
- --------------------------------------------------------------------------------
<Table>
<Caption>
CLASS SALES CHARGE ONE YEAR
- ---------------------------------------------------------------------------------------------------------------------
Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 8.08%
Excluding sales charges 14.37
- ---------------------------------------------------------------------------------------------------------------------
Class A Shares(4) Maximum 5.5% Initial Sales Charge With sales charges 8.24
Excluding sales charges 14.54
- ---------------------------------------------------------------------------------------------------------------------
Class B Shares(4) Maximum 5% CDSC With sales charges 8.50
if Redeemed Within the First Six Years of Purchase Excluding sales charges 13.50
- ---------------------------------------------------------------------------------------------------------------------
Class C Shares(5) Maximum 1% CDSC With sales charges 12.51
if Redeemed Within One Year of Purchase Excluding sales charges 13.51
- ---------------------------------------------------------------------------------------------------------------------
Class I Shares No Sales Charge 14.90
- ---------------------------------------------------------------------------------------------------------------------
Class R1 Shares(4) No Sales Charge 14.75
- ---------------------------------------------------------------------------------------------------------------------
Class R2 Shares(4) No Sales Charge 14.47
- ---------------------------------------------------------------------------------------------------------------------
Class R3 Shares(6) No Sales Charge 14.16
- ---------------------------------------------------------------------------------------------------------------------
<Caption>
GROSS
EXPENSE
CLASS FIVE YEARS TEN YEARS RATIO(2)
- ---------------------------------------------------------------
Investor Class Shares(3) 1.62% 5.07% 1.53%
2.78 5.67 1.53
- ---------------------------------------------------------------
Class A Shares(4) 1.70 5.11 1.31
2.86 5.71 1.31
- ---------------------------------------------------------------
Class B Shares(4) 1.65 4.88 2.28
1.99 4.88 2.28
- ---------------------------------------------------------------
Class C Shares(5) 1.99 4.88 2.28
1.99 4.88 2.28
- ---------------------------------------------------------------
Class I Shares 3.23 6.07 1.06
- ---------------------------------------------------------------
Class R1 Shares(4) 3.11 5.95 1.16
- ---------------------------------------------------------------
Class R2 Shares(4) 2.86 5.69 1.41
- ---------------------------------------------------------------
Class R3 Shares(6) 2.60 5.43 1.65
- ---------------------------------------------------------------
</Table>
1. The performance table and graph 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 as indicated in the table
above, change in share price, and reinvestment of dividend and capital gain
distributions. The graph assumes the initial investment amount shown above
and reflects the deduction of all sales charges that would have applied for
the period of investment. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
For more information on share classes and current fee waivers and/or expense
limitations, please refer to the notes to the financial statements.
2. The gross expense ratios presented reflect the Fund's "Total Annual Fund
Operating Expenses" from the most recent Prospectus and may differ from
other expense ratios disclosed in this report.
3. Performance figures for Investor Class shares, first offered on February 28,
2008, includes the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain fees and expenses. Unadjusted,
the performance shown for Investor Class shares might have been lower.
4. Performance figures for Class A, B, R1 and R2 shares, first offered on
January 2, 2004, includes the historical performance of Class I shares
through January 1, 2004, adjusted for differences in certain expenses and
fees. Unadjusted, the performance shown for Class A, B, R1 and R2 shares
might have been lower.
5. 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 expenses and fees. Unadjusted, the
performance shown for Class C shares might have been lower.
6. Performance figures for Class R3 shares, first offered on April 28, 2006,
include the historical performance of Class I shares through April 27,
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell Midcap(R) Value Index(7) 27.49% 3.38% 8.00%
- --------------------------------------------------------------------------------------------------------
Balanced Composite Index(8) 19.88 5.06 7.66
- --------------------------------------------------------------------------------------------------------
Bank of America Merrill Lynch 1-10 Year U.S. Corporate & Government Index(9) 7.85 6.08 5.99
- --------------------------------------------------------------------------------------------------------
Russell Midcap(R) Index(10) 27.71 4.01 5.42
- --------------------------------------------------------------------------------------------------------
Average Lipper Mixed-Asset Target Allocation Growth Fund(11) 14.38 3.21 2.54
- --------------------------------------------------------------------------------------------------------
</Table>
2006, adjusted for differences in certain expenses and fees. Unadjusted, the
performance shown for Class R3 shares might have been lower.
7. 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.
8. The Balanced Composite Index is comprised of the Russell Midcap(R) Value
Index and the Bank of America Merrill Lynch 1-10 Year U.S. Corporate and
Government 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 Bank of America Merrill
Lynch 1-10 Year U.S. Corporate and Government 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 Bank of America Merrill Lynch 1-10 Year U.S. Corporate and Government
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.
10. 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.
11. 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 PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Balanced Fund
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, 2010, to October 31, 2010,
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 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, 2010, to October 31, 2010.
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, 2010. 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 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 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,016.20 $ 7.22 $1,018.00 $ 7.22
- -------------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,017.20 $ 6.25 $1,019.00 $ 6.26
- -------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,012.30 $11.01 $1,014.30 $11.02
- -------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,012.30 $11.01 $1,014.30 $11.02
- -------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,018.40 $ 4.99 $1,020.30 $ 4.99
- -------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,017.90 $ 5.49 $1,019.80 $ 5.50
- -------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,016.60 $ 6.76 $1,018.50 $ 6.77
- -------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,015.00 $ 8.02 $1,017.20 $ 8.03
- -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.42% for Investor Class, 1.23% for Class A, 2.17% for Class B and Class C,
0.98% for Class I, 1.08% for Class R1, 1.33% for Class R2 and 1.58% for Class
R3) multiplied by the average account value over the period, divided by 365
and multiplied by 184 (to reflect the one-half year period). The table above
represents the actual expenses incurred during the one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited)
(PIE CHART)
<Table>
Common Stocks 60.3
U.S. Government & Federal Agencies 18.2
Corporate Bonds 14.8
Yankee Bonds 3.4
Mortgage-Backed Securities 1.5
Short-Term Investments 1.0
Exchange Traded Fund 0.8
Asset-Backed Security 0.2
Convertible Bond 0.0
Other Assets, Less Liabilities (0.2)
</Table>
See Portfolio of Investments beginning on page 11 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2010 (excluding short-term
investments)
<Table>
1. United States Treasury Notes, 0.375%-3.625%, due
5/15/12-8/15/20
2. Federal Home Loan Mortgage Corporation, 3.25%-5.125%, due
2/25/11-5/29/13
3. Verizon Communications, Inc.
4. Anadarko Petroleum Corp.
5. Humana, Inc.
6. Annaly Capital Management, Inc.
7. Comcast Corp. Class A
8. Progress Energy, Inc.
9. Estee Lauder Cos., Inc. (The) Class A
10. Federal National Mortgage Association, 3.625%-5.50%, due
3/15/11-5/18/12
</Table>
8 MainStay Balanced Fund
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, 2010?
Excluding all sales charges, MainStay Balanced Fund returned 14.37% for Investor
Class shares, 14.54% for Class A shares, 13.50% for Class B shares and 13.51%
for Class C shares for the 12 months ended October 31, 2010. Over the same
period, Class I shares returned 14.90%, Class R1 shares returned 14.75%, Class
R2 shares returned 14.47% and Class R3 shares returned 14.16%. Class A, Class I,
Class R1 and Class R2 shares outperformed--and Investor Class, Class B, Class C
and Class R3 shares underperformed--the 14.38% return of the average Lipper(2)
mixed-asset target allocation growth fund. All share classes underperformed the
27.49% return of the Russell Midcap(R) Value Index(3) for the 12 months ended
October 31, 2010. The Russell Midcap(R) Value Index is the Fund's broad-based
securities-market index. The Bank of America Merrill Lynch 1-10 Year U.S.
Corporate & Government Index(4) is a secondary benchmark for the Fund. See page
5 for Fund returns with sales charges.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund invests in a mix of stocks and bonds, while the Russell Midcap(R) Value
Index consists entirely of mid-cap value stocks. Since the Fund has a
substantial allocation to bonds, which underperformed the Russell Midcap(R)
Value Index, the Fund by its very composition trailed the benchmark index by a
substantial margin.
The equity portion of the Fund underperformed the Russell Midcap(R) Value Index
primarily because of its comparatively greater position in larger-
capitalization, less value-oriented stocks. This positioning detracted from
relative performance, as mid-cap value stocks outperformed larger-cap core
stocks by a sizable margin during the reporting period. Outside of size and
style, system-wide influences on stock prices that are typically relied upon to
generate added value (such as valuation and technical factors), had an unusually
limited effect on the Fund's performance during the reporting period. Instead,
factors unique to each individual security were of atypical significance. These
security-specific effects--some positive and some negative--normally have a
relatively neutral impact across the Fund's diversified equity holdings.
However, during the reporting period, these effects were a material drag on the
relative performance of the equity portion of the Fund.
The fixed-income portion of the Fund outperformed the 7.85% return of the Bank
of America Merrill Lynch 1-10 Year U.S. Corporate & Government Index for the 12
months ended October 31, 2010. An underweight position in Treasury securities
and overweight positions in investment-grade corporate bonds and commercial
mortgage-backed securities were the strongest contributors to outperformance in
this portion of the Fund, as prices of riskier assets rallied during the
reporting period.
The Fund benefited from a relatively higher exposure to smaller-capitalization
stocks with a greater value orientation than many of its peers. As mentioned
above, mid-cap and smaller-cap value stocks substantially outperformed their
larger-cap and less value-oriented counterparts during the reporting period.
DURING THE REPORTING PERIOD, HOW WAS THE FUND'S PERFORMANCE MATERIALLY AFFECTED
BY INVESTMENTS IN DERIVATIVES?
The equity portion of the Fund did not utilize derivative investments during the
reporting period. In the fixed-income portion of the Fund, derivatives were used
to manage duration.(5) Specifically, Treasury futures contracts were bought and
sold to manage duration risk. The use of futures instead of cash Treasurys
benefited performance by helping reduce transaction costs in the fixed-income
portion of the Fund.
DURING THE REPORTING PERIOD, WHICH EQUITY SECTORS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S RELATIVE PER-FORMANCE AND WHICH EQUITY SECTORS WERE
PARTICULARLY WEAK?
The equity portion of the Fund utilizes a proprietary quantitative investment
process that focuses on a combination of valuation, growth and momentum factors.
Sector holdings are a residual of the Fund's investment process and are not a
product of top-down, macroeconomic analysis.
After accounting for capitalization and style effects, the contribution to Fund
performance attributable to sector and industry exposures was actually very
small during the reporting period. Maintaining an underweight position in
financials had a slightly positive effect, since financials underperformed the
Russell Midcap(R) Value Index. Controlling exposure to materials and consumer
staples--being underweight in both sectors early in the reporting period and
overweight in the later months of the reporting period--also added to the Fund's
returns.
These small gains were partially offset by overweight positions in energy and
health care throughout the reporting period and an underweight position in
consumer discretionary in the latter months of the reporting period.
1. "New York Life Investments" is a service mark used by New York Life
Investment Management LLC.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Russell Midcap(R) Value
Index.
4. See footnote on page 6 for more information on the Bank of America Merrill
Lynch 1-10 Year U.S. Corporate & Government Index.
5. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
mainstayinvestments.com 9
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS MADE THE STRONGEST
CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCKS DETRACTED THE
MOST?
In the equity portion of the Fund, the strongest individual contributors to
absolute performance were engine manufacturer Cummins, specialty chemical
company Ashland and bank holding company Regions Financial. The steady rise in
Cummins' share price may be attributable to strong overseas operations and
growing demand for natural gas-powered engines. (The price of natural gas
declined considerably relative to oil during the reporting period.) Ashland
benefited from increased consumption of its products outside the United States
and particularly within developing nations. Shares of Regions Financial rose on
improvements in the quality of the company's loan portfolio.
The stocks that detracted the most from the Fund's absolute performance during
the reporting period included specialty truck manufacturer Oshkosh, investment
manager BlackRock and for-profit school operator Apollo Group. Oshkosh's share
price may have been constrained by concerns that pressure on public budgets
might lead to reduced demand for its products. BlackRock saw its shares weighed
down by the company's acquisition of Barclays Global Investors in late 2009.
Apollo Group suffered from discussions about curbing federal aid to students
attending for-profit colleges.
DID THE EQUITY PORTION OF THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES
DURING THE REPORTING PERIOD?
The equity portion of the Fund remains 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.
One stock that fit the Fund's purchase criteria during the reporting period was
banking giant JPMorgan Chase, which we felt was poised to benefit from reduced
loan loss provisioning. HMO operator Humana was another significant purchase
during the reporting period. We felt that Humana's shares were priced
attractively relative to the company's operating and projected earnings. We also
established a position in automobile manufacturer Ford Motor during the
reporting period. In our view, Ford Motor was an attractively priced but
volatile name poised to do well should risk capital flow back into the equity
markets.
Among the Fund's largest sales during the reporting period were iron ore and
coal mining company Cliffs Natural Resources, high-end retailer Coach and
offshore driller Ensco.
HOW DID THE FUND'S EQUITY SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
Weighting changes in the equity portion of the Fund resulted from a combination
of stock performance and the Fund's proprietary quantitative security-selection
process. During the reporting period, the Fund's most significant increases in
equity-sector weightings were in consumer staples, health care and materials.
The Fund's most significant decreases in equity-sector weightings were in
consumer discretionary, information technology and financials.
HOW WAS THE EQUITY PORTION OF THE FUND POSITIONED AT THE END OF THE REPORTING
PERIOD?
As of October 31, 2010, the equity portion of the Fund was overweight relative
to the Russell Midcap(R) Value Index in con-sumer staples, health care and
energy. As of the same date, the equity portion of the Fund was underweight
relative to the benchmark in financials, utilities and consumer discretionary.
This positioning was a by-product of the Fund's bottom-up, stock-by-stock
investment process and does not necessarily reflect our outlook for the
performance of the sectors themselves.
WHAT FACTORS AFFECTED THE RELATIVE PERFORMANCE OF THE FIXED-INCOME PORTION OF
THE FUND DURING THE REPORTING PERIOD?
As previously noted, an underweight position in Treasury securities and
overweight positions in investment-grade corporate bonds and commercial
mortgage-backed securities were the strongest contributors to relative
performance in the fixed-income portion of the Fund, as prices of riskier assets
rallied during the reporting period.
HOW DID SECTOR WEIGHTINGS CHANGE IN THE FIXED-INCOME PORTION OF THE FUND DURING
THE REPORTING PERIOD?
The fixed-income portion of the Fund remained underweight in Treasury securities
and overweight in investment-grade corporate bonds and commercial mortgage-
backed securities throughout the reporting period.
HOW WAS THE FIXED-INCOME PORTION OF THE FUND POSITIONED AT THE END OF THE
REPORTING PERIOD?
As of October 31, 2010, the fixed-income portion of the Fund was underweight in
Treasury securities and overweight in investment-grade corporate bonds and
commercial mortgage-backed securities relative to the Bank of America Merrill
Lynch 1-10 Year U.S. Corporate & Government Index. Relative to this Index,
investment-grade corporate bonds were the most significantly overweight position
in the fixed-income portion of the Fund as of October 31, 2010.
Effective January 1, 2011, Tony Elavia will no longer serve as a portfolio
manager for the Fund. Madison Square Investors will continue to manage the
equity portion of the Fund and effective January 1, 2011, Harvey Fram will
replace Tony Elavia as a portfolio manager for the equity portion of the Fund.
New York Life Investments will continue to serve as the Fund's Manager
overseeing the investment portfolio of the Fund, and effective January 1, 2011,
Jae Yoon will become an additional portfolio manager. Thomas Girard will
continue to serve as a portfolio manager for the fixed-income portion of the
Fund. For more information regarding these portfolio management changes, please
refer to the relevant Prospectus supplement dated December 3, 2010.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Balanced Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 38.1%+
ASSET-BACKED SECURITY 0.2%
- -------------------------------------------------------
AUTOMOBILE 0.2%
Mercedes-Benz Auto
Receivables Trust Series
2009-1, Class A3
1.67%, due 1/15/14 $ 1,250,000 $ 1,265,681
------------
Total Asset-Backed Security
(Cost $1,249,976) 1,265,681
------------
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 14.8%
- -------------------------------------------------------
AEROSPACE & DEFENSE 0.9%
Boeing Co. (The)
4.875%, due 2/15/20 1,430,000 1,620,995
Goodrich Corp.
4.875%, due 3/1/20 220,000 243,702
L-3 Communications Corp.
5.20%, due 10/15/19 900,000 969,051
Lockheed Martin Corp.
4.25%, due 11/15/19 1,200,000 1,292,076
Northrop Grumman Corp.
5.05%, due 8/1/19 480,000 539,065
Raytheon Co.
3.125%, due 10/15/20 850,000 833,926
------------
5,498,815
------------
BANKS 3.2%
American Express Bank FSB
6.00%, due 9/13/17 2,000,000 2,289,428
Bank of America Corp.
5.65%, due 5/1/18 1,650,000 1,736,599
BB&T Corp.
3.375%, due 9/25/13 2,000,000 2,119,574
Citigroup, Inc.
5.85%, due 8/2/16 1,500,000 1,646,238
6.00%, due 8/15/17 1,150,000 1,267,860
Fifth Third Bancorp
4.50%, due 6/1/18 325,000 324,287
Goldman Sachs Group, Inc.
(The)
5.375%, due 3/15/20 700,000 740,652
6.00%, due 6/15/20 400,000 444,525
JPMorgan Chase & Co.
4.40%, due 7/22/20 1,000,000 1,017,585
5.25%, due 5/1/15 1,000,000 1,099,462
KeyBank N.A.
5.80%, due 7/1/14 275,000 301,379
KeyCorp
6.50%, due 5/14/13 400,000 440,152
Morgan Stanley
5.50%, due 1/26/20 850,000 884,754
5.625%, due 9/23/19 1,100,000 1,155,065
PNC Bank N.A.
6.875%, due 4/1/18 980,000 1,150,996
PNC Funding Corp.
4.375%, due 8/11/20 700,000 709,256
Wells Fargo & Co.
3.75%, due 10/1/14 2,500,000 2,674,235
------------
20,002,047
------------
BEVERAGES 0.5%
Anheuser-Busch Cos., Inc.
7.50%, due 3/15/12 1,500,000 1,621,675
Anheuser-Busch InBev
Worldwide, Inc.
3.00%, due 10/15/12 1,000,000 1,039,416
PepsiCo, Inc./NC
3.125%, due 11/1/20 700,000 689,006
------------
3,350,097
------------
BUILDING MATERIALS 0.2%
CRH America, Inc.
5.30%, due 10/15/13 203,000 218,510
Masco Corp.
4.80%, due 6/15/15 1,200,000 1,196,561
------------
1,415,071
------------
CHEMICALS 0.2%
Dow Chemical Co. (The)
5.70%, due 5/15/18 1,325,000 1,447,805
------------
DIVERSIFIED FINANCIAL SERVICES 0.4%
General Electric Capital
Corp.
6.00%, due 8/7/19 2,500,000 2,824,277
------------
ELECTRIC 1.6%
CenterPoint Energy Houston
Electric LLC
7.00%, due 3/1/14 1,250,000 1,474,464
Duke Energy Corp.
3.35%, due 4/1/15 1,400,000 1,491,486
Duke Energy Ohio, Inc.
5.45%, due 4/1/19 750,000 875,725
</Table>
+ Percentages indicated are based on Fund net assets.
X Among the Fund's 10 largest holdings or issuers held, as of October 31, 2010,
excluding short-term investments. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
ELECTRIC (CONTINUED)
Florida Power Corp.
4.55%, due 4/1/20 $ 850,000 $ 937,939
FPL Group Capital, Inc.
2.55%, due 11/15/13 900,000 927,836
Great Plains Energy, Inc.
2.75%, due 8/15/13 1,100,000 1,108,715
Kansas City Power & Light
Co.
7.15%, due 4/1/19 1,000,000 1,234,012
Peco Energy Co.
5.00%, due 10/1/14 1,225,000 1,384,666
Pepco Holdings, Inc.
2.70%, due 10/1/15 500,000 505,699
------------
9,940,542
------------
ENVIRONMENTAL CONTROLS 0.4%
Republic Services, Inc.
5.00%, due 3/1/20 1,025,000 1,115,414
5.50%, due 9/15/19 1,000,000 1,132,215
------------
2,247,629
------------
FINANCE--CONSUMER LOANS 0.2%
HSBC Finance Corp.
6.375%, due 11/27/12 1,000,000 1,092,879
------------
FINANCE--CREDIT CARD 0.2%
Capital One Bank USA N.A.
8.80%, due 7/15/19 1,000,000 1,268,407
------------
FINANCE--INVESTMENT BANKER/BROKER 0.4%
Bear Stearns Cos., Inc.
(The)
5.30%, due 10/30/15 2,000,000 2,250,190
------------
FINANCE--OTHER SERVICES 0.1%
National Rural Utilities
Cooperative Finance Corp.
1.90%, due 11/1/15 450,000 450,812
5.45%, due 4/10/17 400,000 457,869
------------
908,681
------------
FOOD 0.3%
Kraft Foods, Inc.
4.125%, due 2/9/16 1,325,000 1,442,414
Safeway, Inc.
5.00%, due 8/15/19 400,000 435,044
------------
1,877,458
------------
GAS 0.1%
Sempra Energy
6.50%, due 6/1/16 550,000 663,482
------------
HEALTH CARE--SERVICES 0.3%
Roche Holdings, Inc.
5.00%, due 3/1/14 (e) 1,500,000 1,682,346
------------
INSURANCE 0.7%
Hartford Financial Services
Group, Inc.
5.50%, due 3/30/20 450,000 460,025
Lincoln National Corp.
6.25%, due 2/15/20 1,600,000 1,783,595
MetLife Global Funding I
5.125%, due 6/10/14 (e) 1,500,000 1,672,350
Principal Financial Group,
Inc.
8.875%, due 5/15/19 450,000 587,847
Travelers Cos., Inc. (The)
3.90%, due 11/1/20 200,000 202,983
------------
4,706,800
------------
LODGING 0.5%
Marriott International, Inc.
5.625%, due 2/15/13 450,000 487,542
6.20%, due 6/15/16 900,000 1,021,674
Wyndham Worldwide Corp.
6.00%, due 12/1/16 1,400,000 1,495,032
------------
3,004,248
------------
MEDIA 0.7%
CBS Corp.
4.625%, due 5/15/18 250,000 258,772
NBC Universal, Inc.
4.375%, due 4/1/21 (e) 725,000 740,505
5.15%, due 4/30/20 (e) 725,000 786,731
TCM Sub LLC
3.55%, due 1/15/15 (e) 1,650,000 1,740,761
Time Warner Cable, Inc.
8.25%, due 4/1/19 710,000 924,042
------------
4,450,811
------------
MINING 0.4%
Alcoa, Inc.
6.15%, due 8/15/20 1,450,000 1,530,495
Rio Tinto Finance USA, Ltd.
3.50%, due 11/2/20 700,000 699,125
------------
2,229,620
------------
MISCELLANEOUS--MANUFACTURING 0.3%
ITT Corp.
4.90%, due 5/1/14 1,130,000 1,249,567
6.125%, due 5/1/19 400,000 468,244
------------
1,717,811
------------
OIL & GAS 0.2%
X Anadarko Petroleum Corp.
6.20%, due 3/15/40 700,000 672,562
</Table>
12 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
OIL & GAS (CONTINUED)
Marathon Oil Corp.
6.50%, due 2/15/14 $ 612,000 $ 704,224
------------
1,376,786
------------
PACKAGING & CONTAINERS 0.2%
Bemis Co., Inc.
5.65%, due 8/1/14 900,000 1,015,788
------------
PIPELINES 0.5%
Energy Transfer Partners,
L.P.
9.00%, due 4/15/19 650,000 829,449
Plains All American
Pipeline, L.P.
8.75%, due 5/1/19 800,000 1,021,539
Williams Partners, L.P.
3.80%, due 2/15/15 1,290,000 1,365,653
------------
3,216,641
------------
REAL ESTATE 0.1%
AMB Property, L.P.
6.625%, due 12/1/19 725,000 820,996
------------
REAL ESTATE INVESTMENT TRUSTS 0.8%
Brandywine Operating
Partnership, L.P.
5.70%, due 5/1/17 1,450,000 1,503,096
ERP Operating, L.P.
5.25%, due 9/15/14 922,000 1,029,038
Federal Realty Investment
Trust
5.90%, due 4/1/20 585,000 646,918
Hospitality Properties Trust
6.30%, due 6/15/16 600,000 648,050
Liberty Property, L.P.
5.125%, due 3/2/15 400,000 439,399
UDR, Inc.
5.25%, due 1/15/15 700,000 746,445
------------
5,012,946
------------
SOFTWARE 0.1%
Oracle Corp.
3.875%, due 7/15/20 (e) 700,000 729,607
------------
TELECOMMUNICATIONS 1.2%
Cellco Partnership/Verizon
Wireless Capital LLC
5.55%, due 2/1/14 2,000,000 2,256,064
Southwestern Bell Telephone
Corp.
7.00%, due 7/1/15 2,250,000 2,687,078
X Verizon Communications,
Inc.
6.10%, due 4/15/18 1,950,000 2,320,178
------------
7,263,320
------------
TRANSPORTATION 0.1%
Burlington Northern Santa Fe
LLC
4.70%, due 10/1/19 500,000 546,379
------------
Total Corporate Bonds
(Cost $84,498,173) 92,561,479
------------
MORTGAGE-BACKED SECURITIES 1.5%
- -------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 1.5%
Banc of America Commercial
Mortgage, Inc.
Series 2006-2, Class A4
5.74%, due 5/10/45 (f) 1,300,000 1,449,073
Bear Stearns Commercial
Mortgage Securities
Series 2007-PW16, Class A4
5.717%, due 6/11/40 (f) 900,000 974,735
Citigroup Commercial
Mortgage Trust Series
2006-C5, Class A4
5.431%, due 10/15/49 1,800,000 1,930,100
Commercial Mortgage Pass-
Through Certificates
Series 2006-C8, Class A4
5.306%, due 12/10/46 900,000 944,347
Greenwich Capital Commercial
Funding Corp.
Series 2007-GG9, Class A4
5.444%, due 3/10/39 1,000,000 1,068,966
JP Morgan Chase Commercial
Mortgage Securities Corp.
Series 2006-LDP7, Class A4
5.872%, due 4/15/45 (f) 1,000,000 1,109,509
Morgan Stanley Capital I
Series 2006-HQ8, Class A4
5.388%, due 3/12/44 (f) 1,000,000 1,098,637
Series 2007-HQ11, Class A4
5.447%, due 2/12/44 (g) 750,000 791,409
------------
Total Mortgage-Backed
Securities
(Cost $8,145,291) 9,366,776
------------
U.S. GOVERNMENT & FEDERAL AGENCIES 18.2%
- -------------------------------------------------------
FEDERAL HOME LOAN BANK 0.4%
5.50%, due 8/13/14 2,000,000 2,343,278
------------
X FEDERAL HOME LOAN MORTGAGE CORPORATION 1.7%
3.25%, due 2/25/11 2,000,000 2,019,040
3.50%, due 5/29/13 2,000,000 2,150,998
3.875%, due 6/29/11 4,500,000 4,607,379
5.125%, due 4/18/11 2,000,000 2,045,916
------------
10,823,333
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
X FEDERAL NATIONAL MORTGAGE ASSOCIATION 1.0%
3.625%, due 8/15/11 $ 2,000,000 $ 2,052,836
4.875%, due 5/18/12 2,000,000 2,139,250
5.50%, due 3/15/11 2,000,000 2,040,180
------------
6,232,266
------------
X UNITED STATES TREASURY NOTES 15.1%
0.375%, due 8/31/12 2,500,000 2,501,563
0.625%, due 6/30/12 8,900,000 8,944,144
0.75%, due 8/15/13 3,500,000 3,528,437
1.00%, due 7/15/13 13,320,000 13,517,669
1.125%, due 12/15/12 11,485,000 11,667,141
1.25%, due 8/31/15 8,085,000 8,132,370
1.375%, due 5/15/12 7,149,000 7,267,123
1.375%, due 9/15/12 5,875,000 5,988,370
1.375%, due 3/15/13 11,250,000 11,504,925
1.75%, due 4/15/13 13,450,000 13,888,201
1.75%, due 7/31/15 1,500,000 1,544,655
1.875%, due 8/31/17 2,500,000 2,503,125
2.375%, due 7/31/17 1,200,000 1,241,250
2.625%, due 8/15/20 2,090,000 2,091,960
3.625%, due 2/15/20 290,000 316,621
------------
94,637,554
------------
Total U.S. Government &
Federal Agencies
(Cost $111,911,445) 114,036,431
------------
YANKEE BONDS 3.4% (H)
- -------------------------------------------------------
BANKS 1.3%
Bank of Nova Scotia
1.65%, due 10/29/15 (e) 1,750,000 1,743,770
3.40%, due 1/22/15 1,000,000 1,073,059
Credit Suisse/New York NY
5.30%, due 8/13/19 1,000,000 1,109,813
HSBC Bank PLC
3.50%, due 6/28/15 (e) 900,000 952,992
Royal Bank of Scotland PLC
(The)
3.95%, due 9/21/15 1,500,000 1,545,513
Svenska Handelsbanken AB
4.875%, due 6/10/14 (e) 600,000 660,718
Westpac Banking Corp.
4.875%, due 11/19/19 1,000,000 1,086,880
------------
8,172,745
------------
FINANCE--INVESTMENT BANKER/BROKER 0.1%
BNP Paribas Home Loan
Covered Bonds S.A.
2.20%, due 11/2/15 (e) 1,000,000 1,005,573
------------
MINING 0.2%
Teck Resources, Ltd.
3.85%, due 8/15/17 350,000 361,816
4.50%, due 1/15/21 700,000 730,594
------------
1,092,410
------------
OIL & GAS 0.5%
BP Capital Markets PLC
4.50%, due 10/1/20 450,000 466,122
Petroleos Mexicanos
4.875%, due 3/15/15 1,000,000 1,084,600
Shell International Finance
B.V.
4.00%, due 3/21/14 1,500,000 1,634,551
------------
3,185,273
------------
PHARMACEUTICALS 0.2%
Novartis Securities
Investment, Ltd.
5.125%, due 2/10/19 900,000 1,033,135
------------
SOVEREIGN 0.2%
Svensk Exportkredit AB
3.25%, due 9/16/14 1,000,000 1,074,405
------------
TELECOMMUNICATIONS 0.9%
America Movil SAB de C.V.
5.00%, due 3/30/20 500,000 546,494
Deutsche Telekom
International Finance B.V.
6.00%, due 7/8/19 1,500,000 1,795,435
France Telecom S.A.
2.125%, due 9/16/15 400,000 405,432
Telefonica Emisiones SAU
5.134%, due 4/27/20 1,600,000 1,753,395
Vodafone Group PLC
5.625%, due 2/27/17 1,300,000 1,501,933
------------
6,002,689
------------
Total Yankee Bonds
(Cost $19,913,815) 21,566,230
------------
Total Long-Term Bonds
(Cost $225,732,025) 238,796,615
------------
<Caption>
SHARES
COMMON STOCKS 60.3%
- -------------------------------------------------------
AEROSPACE & DEFENSE 0.1%
L-3 Communications Holdings,
Inc. 7,710 556,585
------------
</Table>
14 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
AGRICULTURE 0.7%
Archer-Daniels-Midland Co. 54,335 $ 1,810,442
Philip Morris International,
Inc. 44,638 2,611,323
------------
4,421,765
------------
AUTO MANUFACTURERS 0.4%
Oshkosh Corp. (i) 84,816 2,502,920
------------
BANKS 2.5%
BancorpSouth, Inc. 47,254 623,280
Capital One Financial Corp. 78,499 2,925,658
CapitalSource, Inc. 60,600 370,266
Goldman Sachs Group, Inc.
(The) 3,188 513,109
JPMorgan Chase & Co. 146,297 5,505,156
M&T Bank Corp. 21,976 1,642,706
Marshall & Ilsley Corp. 183,227 1,082,872
PNC Financial Services
Group, Inc. 9,156 493,508
Regions Financial Corp. 364,323 2,295,235
------------
15,451,790
------------
BEVERAGES 0.1%
Molson Coors Brewing Co.
Class B 19,305 911,775
------------
BIOTECHNOLOGY 1.0%
Gilead Sciences, Inc. (i) 134,534 5,336,964
United Therapeutics Corp.
(i) 11,997 719,820
------------
6,056,784
------------
BUILDING MATERIALS 0.1%
Armstrong World Industries,
Inc. (i) 21,893 914,033
------------
CHEMICALS 1.7%
Ashland, Inc. 107,035 5,526,217
Cabot Corp. 58,963 2,005,921
Cytec Industries, Inc. 19,794 980,199
Huntsman Corp. 133,908 1,854,626
------------
10,366,963
------------
COAL 0.3%
Arch Coal, Inc. 75,915 1,866,750
------------
COMMERCIAL SERVICES 1.1%
Apollo Group, Inc. Class A
(i) 80,776 3,027,484
Monster Worldwide, Inc. (i) 87,445 1,579,257
R.R. Donnelley & Sons Co. 100,978 1,863,044
Washington Post Co. Class B 926 372,391
------------
6,842,176
------------
COMPUTERS 0.7%
Dell, Inc. (i) 99,586 1,432,047
Hewlett-Packard Co. 47,159 1,983,507
Western Digital Corp. (i) 32,506 1,040,842
------------
4,456,396
------------
COSMETICS & PERSONAL CARE 2.8%
Alberto-Culver Co. 11,460 427,343
Colgate-Palmolive Co. 64,475 4,972,312
X Estee Lauder Cos., Inc.
(The) Class A 88,771 6,317,832
Procter & Gamble Co. (The) 96,949 6,163,048
------------
17,880,535
------------
DISTRIBUTION & WHOLESALE 0.2%
Tech Data Corp. (i) 35,995 1,547,425
------------
ELECTRIC 4.3%
Ameren Corp. 97,567 2,827,492
American Electric Power Co.,
Inc. 23,601 883,621
Consolidated Edison, Inc. 24,371 1,211,726
DPL, Inc. 14,616 381,478
DTE Energy Co. 90,448 4,229,349
Great Plains Energy, Inc. 22,321 424,769
Hawaiian Electric
Industries, Inc. 21,774 490,786
Integrys Energy Group, Inc. 39,618 2,107,281
ITC Holdings Corp. 6,408 401,205
Mirant Corp. (i) 339,016 3,596,960
Pepco Holdings, Inc. 56,327 1,084,858
PG&E Corp. 22,365 1,069,494
Pinnacle West Capital Corp. 50,821 2,091,792
X Progress Energy, Inc. 140,552 6,324,840
------------
27,125,651
------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.5%
Energizer Holdings, Inc. (i) 16,763 1,253,537
General Cable Corp. (i) 17,513 489,313
Hubbel, Inc. Class B 8,370 452,147
SunPower Corp. Class A (i) 50,768 692,476
------------
2,887,473
------------
ENGINEERING & CONSTRUCTION 0.3%
Shaw Group, Inc. (The) (i) 62,724 1,916,845
------------
FINANCE--CREDIT CARD 0.6%
Discover Financial Services 203,872 3,598,341
------------
FOOD 1.9%
ConAgra Foods, Inc. 71,149 1,600,141
H.J. Heinz Co. 58,751 2,885,262
J.M. Smucker Co. (The) 10,269 660,091
Ralcorp Holdings, Inc. (i) 6,923 429,641
Safeway, Inc. 130,560 2,989,824
</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, 2010 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
FOOD (CONTINUED)
Tyson Foods, Inc. Class A 75,899 $ 1,180,230
Whole Foods Market, Inc. (i) 51,275 2,038,181
------------
11,783,370
------------
FOREST PRODUCTS & PAPER 0.6%
International Paper Co. 138,871 3,510,659
MeadWestvaco Corp. 16,572 426,397
------------
3,937,056
------------
GAS 1.1%
Energen Corp. 40,847 1,823,410
NiSource, Inc. 175,843 3,043,843
Sempra Energy 33,213 1,776,231
------------
6,643,484
------------
HEALTH CARE--PRODUCTS 0.4%
Johnson & Johnson 37,755 2,403,861
------------
HEALTH CARE--SERVICES 1.5%
X Humana, Inc. (i) 121,748 7,096,691
UnitedHealth Group, Inc. 61,516 2,217,652
------------
9,314,343
------------
HOUSEWARES 0.1%
Toro Co. (The) 7,413 420,762
------------
INSURANCE 6.6%
Allied World Assurance
Holdings, Ltd./Bermuda 54,942 3,143,232
American Financial Group,
Inc. 116,758 3,570,460
Arch Capital Group, Ltd. (i) 42,570 3,677,622
Aspen Insurance Holdings,
Ltd. 43,019 1,220,449
Assurant, Inc. 86,725 3,429,106
Axis Capital Holdings, Ltd. 112,926 3,840,613
Berkshire Hathaway, Inc.
Class B (i) 54,976 4,373,891
Calpine Corp. (i) 66,650 833,125
Endurance Specialty
Holdings, Ltd. 59,002 2,442,683
Everest Re Group, Ltd. 8,433 710,733
Genworth Financial, Inc.
Class A (i) 111,387 1,263,129
MetLife, Inc. 95,869 3,866,397
Old Republic International
Corp. 39,925 527,010
OneBeacon Insurance Group,
Ltd. Class A 16,588 233,559
PartnerRe, Ltd. 20,371 1,615,828
Prudential Financial, Inc. 17,423 916,101
Reinsurance Group of
America, Inc. 11,297 565,641
RenaissanceRe Holdings, Ltd. 9,600 578,496
Transatlantic Holdings, Inc. 16,642 875,369
Unitrin, Inc. 13,891 337,551
Unum Group 149,204 3,345,154
------------
41,366,149
------------
INTERNET 0.4%
eBay, Inc. (i) 49,875 1,486,774
IAC/InterActiveCorp (i) 45,469 1,268,585
------------
2,755,359
------------
INVESTMENT MANAGEMENT/ADVISORY SERVICES 0.8%
Ameriprise Financial, Inc. 26,547 1,372,214
BlackRock, Inc. 6,021 1,029,531
Federated Investors, Inc.
Class B 28,239 703,433
Legg Mason, Inc. 56,554 1,754,871
------------
4,860,049
------------
IRON & STEEL 0.5%
Reliance Steel & Aluminum
Co. 75,177 3,146,157
------------
MACHINERY--DIVERSIFIED 0.7%
Cummins, Inc. 51,295 4,519,089
------------
MEDIA 3.4%
X Comcast Corp. Class A 317,695 6,538,163
Liberty Global, Inc. Class A
(i) 31,719 1,198,661
Time Warner Cable, Inc. 87,948 5,089,551
Time Warner, Inc. 150,775 4,901,695
Walt Disney Co. (The) 106,999 3,863,734
------------
21,591,804
------------
METAL FABRICATE & HARDWARE 0.2%
Timken Co. (The) 26,041 1,078,618
------------
MINING 0.8%
Freeport-McMoRan Copper &
Gold, Inc. 51,402 4,866,741
------------
MISCELLANEOUS--MANUFACTURING 3.1%
Carlisle Cos., Inc. 39,503 1,385,370
Dover Corp. 15,772 837,493
General Electric Co. 288,246 4,617,701
ITT Corp. 74,811 3,530,331
Parker Hannifin Corp. 53,270 4,077,819
Textron, Inc. 124,020 2,582,096
Trinity Industries, Inc. 104,024 2,364,466
------------
19,395,276
------------
OFFICE EQUIPMENT/SUPPLIES 0.2%
Xerox Corp. 88,760 1,038,492
------------
OIL & GAS 6.1%
X Anadarko Petroleum Corp. 106,744 6,572,228
Chevron Corp. 60,681 5,012,857
Comstock Resources, Inc. (i) 24,311 543,351
ConocoPhillips 93,624 5,561,266
Marathon Oil Corp. 72,948 2,594,760
Murphy Oil Corp. 60,530 3,944,135
</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)
OIL & GAS (CONTINUED)
Occidental Petroleum Corp. 55,544 $ 4,367,425
Patterson-UTI Energy, Inc. 56,646 1,099,499
QEP Resources, Inc. 36,069 1,191,359
Questar Corp. 36,069 612,091
Unit Corp. (i) 62,897 2,467,449
Valero Energy Corp. 247,620 4,444,779
------------
38,411,199
------------
OIL & GAS SERVICES 1.1%
Schlumberger, Ltd. 87,414 6,109,365
SEACOR Holdings, Inc. (i) 7,915 749,946
------------
6,859,311
------------
PACKAGING & CONTAINERS 0.2%
Sealed Air Corp. 16,614 384,614
Sonoco Products Co. 10,229 342,671
Temple-Inland, Inc. 24,968 517,337
------------
1,244,622
------------
PHARMACEUTICALS 3.1%
Abbott Laboratories 22,068 1,132,530
AmerisourceBergen Corp. 103,691 3,403,138
Eli Lilly & Co. 161,450 5,683,040
Endo Pharmaceuticals
Holdings, Inc. (i) 18,654 685,348
Express Scripts, Inc. (i) 97,321 4,722,015
Forest Laboratories, Inc.
(i) 87,035 2,876,507
Herbalife, Ltd. 12,541 800,868
------------
19,303,446
------------
REAL ESTATE 0.2%
CB Richard Ellis Group, Inc.
Class A (i) 78,026 1,431,777
------------
REAL ESTATE INVESTMENT TRUSTS 3.2%
X Annaly Capital
Management, Inc. 369,707 6,547,511
Apartment Investment &
Management Co. Class A 37,285 869,113
Duke Realty Corp. 189,197 2,359,287
Hospitality Properties Trust 21,557 491,715
Liberty Property Trust 26,301 880,031
Macerich Co. (The) 59,742 2,665,091
ProLogis 213,840 2,918,916
Public Storage 18,805 1,865,832
Senior Housing Properties
Trust 33,286 795,203
SL Green Realty Corp. 14,861 976,665
------------
20,369,364
------------
RETAIL 2.1%
Big Lots, Inc. (i) 17,888 561,147
BJ's Wholesale Club, Inc.
(i) 35,902 1,498,190
Gap, Inc. (The) 85,350 1,622,504
Ross Stores, Inc. 60,003 3,539,577
Wal-Mart Stores, Inc. 112,220 6,078,957
------------
13,300,375
------------
SEMICONDUCTORS 0.7%
Intel Corp. 211,368 4,242,156
------------
SOFTWARE 0.6%
Adobe Systems, Inc. (i) 143,852 4,049,434
------------
TELECOMMUNICATIONS 2.7%
Amdocs, Ltd. (i) 57,565 1,766,094
AT&T, Inc. 165,769 4,724,416
EchoStar Corp. (i) 5,856 124,147
Frontier Communications
Corp. 320,570 2,814,605
Leap Wireless International,
Inc. (i) 58,648 669,174
Tellabs, Inc. 88,274 602,029
X Verizon Communications,
Inc. 183,570 5,960,518
------------
16,660,983
------------
TRANSPORTATION 0.6%
Ryder System, Inc. 40,354 1,765,488
Union Pacific Corp. 24,546 2,152,193
------------
3,917,681
------------
Total Common Stocks
(Cost $329,742,117) 378,215,165
------------
EXCHANGE TRADED FUND 0.8% (J)
- -------------------------------------------------------
S&P 500 Index-SPDR Trust
Series 1 40,175 4,761,943
------------
Total Exchange Traded Fund
(Cost $4,290,601) 4,761,943
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS 1.0%
- -------------------------------------------------------
REPURCHASE AGREEMENT 0.2%
State Street Bank and Trust
Co.
0.01%, dated 10/29/10
due 11/1/10
Proceeds at Maturity
$992,654
(Collateralized by United
States Treasury Notes with
rates between
2.125%-3.125% and maturity
dates between 5/31/15 and
4/30/17, with a Principal
Amount of $930,000 and a
Market Value of
$1,015,605) $ 992,653 992,653
------------
Total Repurchase Agreement
(Cost $992,653) 992,653
------------
</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, 2010 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FEDERAL AGENCY 0.8%
Federal Home Loan Bank
(Discount Note)
0.10%, due 11/1/10 $ 5,000,000 $ 5,000,000
------------
Total Federal Agency
(Cost $5,000,000) 5,000,000
------------
Total Short-Term Investments
(Cost $5,992,653) 5,992,653
------------
Total Investments
(Cost $565,757,396) (k) 100.2% 627,766,376
Other Assets, Less
Liabilities (0.2) (1,000,552)
----------- ------------
Net Assets 100.0% $626,765,824
=========== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Fair valued security--The total
market value of this security at
October 31, 2010 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) Illiquid security--The total market
value of this security at October 31,
2010 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) Collateral strip rate--Bond whose
interest is based on the weighted net
interest rate of the collateral.
Coupon rate adjusts periodically
based on a predetermined schedule.
Rate shown is the rate in effect at
October 31, 2010.
(g) Floating rate--Rate shown is the rate
in effect at October 31, 2010.
(h) Yankee Bond--dollar-denominated bond
issued in the United States by a
foreign bank or corporation.
(i) Non-income producing security.
(j) Exchange Traded Fund--An investment
vehicle that represents a basket of
securities that is traded on an
exchange.
(k) At October 31, 2010, cost is
$566,517,521 for federal income tax
purposes and net unrealized
appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 71,545,772
Gross unrealized depreciation (10,296,917)
------------
Net unrealized appreciation $ 61,248,855
============
</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.
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2010, 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 (a)
Long-Term Bonds
Asset-Backed Security $ -- $ 1,265,681 $ -- $ 1,265,681
Convertible Bond (b) -- -- 18 18
Corporate Bonds -- 92,561,479 -- 92,561,479
Mortgage-Backed Securities -- 9,366,776 -- 9,366,776
U.S. Government & Federal Agencies -- 114,036,431 -- 114,036,431
Yankee Bonds -- 21,566,230 -- 21,566,230
------------ ------------ ---------- ------------
Total Long-Term Bonds -- 238,796,597 18 238,796,615
------------ ------------ ---------- ------------
Common Stocks 378,215,165 -- -- 378,215,165
Exchange Traded Fund 4,761,943 -- -- 4,761,943
Short-Term Investments
Repurchase Agreement -- 992,653 -- 992,653
Federal Agency -- 5,000,000 -- 5,000,000
------------ ------------ ---------- ------------
Total Short-Term Investments -- 5,992,653 -- 5,992,653
------------ ------------ ---------- ------------
Total Investments in Securities $382,977,108 $244,789,250 $18 $627,766,376
============ ============ ========== ============
</Table>
(a) For a complete listing of investments and their industries, see the
Portfolio of Investments.
(b) The level 3 security valued at $18 is held in Internet within the
Convertible Bond section of the Portfolio of Investments.
The Fund recognizes transfers between the levels as of the beginning of the
period.
For the period ended October 31, 2010, the Fund did not have any transfers
between Level 1 and Level 2 fair value measurements. (See Note 2)
The following is a reconciliation of investments in which significant
unobservable inputs (Level 3) were used in determining value:
<Table>
<Caption>
BALANCE
AS OF ACCRUED REALIZED
OCTOBER 31, DISCOUNTS GAIN
INVESTMENTS IN SECURITIES 2009 (PREMIUMS) (LOSS)
Convertible Bond
Internet $18 $ -- $ --
--- -------- --------
Total $18 $-- $--
=== ======== ========
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
CHANGE IN BALANCE INVESTMENTS
UNREALIZED TRANSFERS TRANSFERS AS OF STILL HELD AT
APPRECIATION IN TO OUT OF OCTOBER 31, OCTOBER 31,
INVESTMENTS IN SECURITIES (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 2010 2010 (A)
Convertible Bond
Internet $ -- $ -- $ -- $ -- $ -- $18 $ --
-------- -------- -------- -------- -------- --- --------
Total $-- $-- $-- $-- $-- $18 $--
======== ======== ======== ======== ======== === ========
</Table>
(a) Included in "Net change in unrealized appreciation (depreciation) on
investments" in the Statement of Operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010
<Table>
ASSETS
- ---------------------------------------------------
Investment in securities, at value
(identified cost $565,757,396) $ 627,766,376
Cash 53,423
Receivables:
Dividends and interest 2,309,954
Investment securities sold 1,337,429
Fund shares sold 405,890
Other assets 56,860
-------------
Total assets 631,929,932
-------------
LIABILITIES
- ---------------------------------------------------
Payables:
Investment securities purchased 3,340,907
Fund shares redeemed 864,587
Manager (See Note 3) 393,359
Transfer agent (See Note 3) 272,339
NYLIFE Distributors (See Note 3) 167,519
Shareholder communication 59,279
Professional fees 49,506
Variation margin on futures
contracts 8,321
Custodian 2,920
Trustees 1,666
Accrued expenses 3,705
-------------
Total liabilities 5,164,108
-------------
Net assets $ 626,765,824
=============
COMPOSITION OF NET ASSETS
- ---------------------------------------------------
Share of beneficial interest
outstanding (par value of $.01 per
share) unlimited number of shares
authorized $ 251,294
Additional paid-in capital 685,963,958
-------------
686,215,252
Undistributed net investment income 414,167
Accumulated net realized loss on
investments and futures
transactions (121,872,575)
Net unrealized appreciation on
investments 62,008,980
-------------
Net assets $ 626,765,824
=============
INVESTOR CLASS
Net assets applicable to outstanding
shares $ 59,469,144
=============
Shares of beneficial interest
outstanding 2,383,688
=============
Net asset value per share
outstanding $ 24.95
Maximum sales charge (5.50% of
offering price) 1.45
-------------
Maximum offering price per share
outstanding $ 26.40
=============
CLASS A
Net assets applicable to outstanding
shares $ 152,963,330
=============
Shares of beneficial interest
outstanding 6,132,953
=============
Net asset value per share
outstanding $ 24.94
Maximum sales charge (5.50% of
offering price) 1.45
-------------
Maximum offering price per share
outstanding $ 26.39
=============
CLASS B
Net assets applicable to outstanding
shares $ 70,777,964
=============
Shares of beneficial interest
outstanding 2,845,910
=============
Net asset value and offering price
per share outstanding $ 24.87
=============
CLASS C
Net assets applicable to outstanding
shares $ 62,891,863
=============
Shares of beneficial interest
outstanding 2,529,747
=============
Net asset value and offering price
per share outstanding $ 24.86
=============
CLASS I
Net assets applicable to outstanding
shares $ 219,406,001
=============
Shares of beneficial interest
outstanding 8,781,227
=============
Net asset value and offering price
per share outstanding $ 24.99
=============
CLASS R1
Net assets applicable to outstanding
shares $ 19,660,220
=============
Shares of beneficial interest
outstanding 787,764
=============
Net asset value and offering price
per share outstanding $ 24.96
=============
CLASS R2
Net assets applicable to outstanding
shares $ 41,429,059
=============
Shares of beneficial interest
outstanding 1,661,361
=============
Net asset value and offering price
per share outstanding $ 24.94
=============
CLASS R3
Net assets applicable to outstanding
shares $ 168,243
=============
Shares of beneficial interest
outstanding 6,748
=============
Net asset value and offering price
per share outstanding $ 24.93
=============
</Table>
20 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010
<Table>
INVESTMENT INCOME
- -------------------------------------------------
INCOME
Dividends $ 9,145,971
Interest 8,398,537
-----------
Total income 17,544,508
-----------
EXPENSES
Manager (See Note 3) 4,520,653
Distribution/Service--Investor
Class (See Note 3) 144,510
Distribution/Service--Class A (See
Note 3) 388,957
Distribution/Service--Class B (See
Note 3) 739,728
Distribution/Service--Class C (See
Note 3) 652,154
Distribution/Service--Class R2
(See Note 3) 136,736
Distribution/Service--Class R3
(See Note 3) 660
Transfer agent (See Note 3) 1,714,653
Professional fees 178,194
Registration 136,628
Shareholder communication 97,367
Shareholder service (See Note 3) 77,807
Custodian 38,144
Trustees 22,087
Miscellaneous 82,946
-----------
Total expenses 8,931,224
-----------
Net investment income 8,613,284
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------
Net realized gain on:
Security transactions 40,823,624
Futures transactions 83,323
-----------
Net realized gain on investments and
futures transactions 40,906,947
-----------
Net change in unrealized
appreciation (depreciation) on
investments 36,658,585
-----------
Net realized and unrealized gain on
investments and futures
transactions 77,565,532
-----------
Net increase in net assets resulting
from operations $86,178,816
===========
</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
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
<Table>
<Caption>
2010 2009
DECREASE IN NET ASSETS
- ----------------------------------------------------------
Operations:
Net investment income $ 8,613,284 $ 7,391,572
Net realized gain (loss)
on investments and
futures transactions 40,906,947 (92,912,672)
Net change in unrealized
appreciation
(depreciation) on
investments 36,658,585 169,984,928
----------------------------
Net increase in net assets
resulting from operations 86,178,816 84,463,828
----------------------------
Dividends to shareholders:
From net investment
income:
Investor Class (723,530) (650,339)
Class A (2,224,284) (2,199,504)
Class B (359,769) (386,496)
Class C (319,986) (353,938)
Class I (3,626,888) (3,424,277)
Class R1 (350,029) (444,011)
Class R2 (738,497) (791,195)
Class R3 (1,480) (709)
----------------------------
Total dividends to
shareholders (8,344,463) (8,250,469)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 89,582,782 85,747,780
Net asset value of shares
issued to shareholders in
reinvestment of dividends 7,945,264 7,853,390
Cost of shares redeemed (199,563,577) (182,278,015)
----------------------------
Decrease in net assets
derived from capital
share transactions (102,035,531) (88,676,845)
----------------------------
Net decrease in net
assets (24,201,178) (12,463,486)
NET ASSETS
- ----------------------------------------------------------
Beginning of year 650,967,002 663,430,488
----------------------------
End of year $ 626,765,824 $ 650,967,002
============================
Undistributed net investment
income at
end of year $ 414,167 $ 295,420
============================
</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.
This page intentionally left blank
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
23
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
------------------------------------------
FEBRUARY 28,
2008**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2010 2009 2008
Net asset value at beginning of
period $ 22.09 $ 19.41 $ 25.29
------- ------- -------
Net investment income 0.30 (a) 0.22 (a) 0.29 (a)
Net realized and unrealized gain
(loss) on investments 2.86 2.71 (5.82)
------- ------- -------
Total from investment operations 3.16 2.93 (5.53)
------- ------- -------
Less dividends and distributions:
From net investment income (0.30) (0.25) (0.35)
From net realized gain on
investments -- -- --
------- ------- -------
Total dividends and distributions (0.30) (0.25) (0.35)
------- ------- -------
Net asset value at end of period $ 24.95 $ 22.09 $ 19.41
======= ======= =======
Total investment return (b) 14.37% 15.30% (22.12%)(c)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.28% 1.11% 1.81% ++
Net expenses 1.44% 1.48% 1.38% ++
Expenses (before
waiver/reimbursement) 1.44% 1.53% 1.38% ++
Portfolio turnover rate 123% 162% 69%
Net assets at end of period (in
000's) $59,469 $54,956 $49,971
</Table>
<Table>
<Caption>
CLASS B
---------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
Net asset value at beginning of
period $ 22.02 $ 19.35 $ 28.34 $ 27.84 $ 26.84
------- ------- ------- -------- --------
Net investment income 0.13 (a) 0.08 (a) 0.26 (a) 0.28 (a) 0.23
Net realized and unrealized gain
(loss) on investments 2.84 2.69 (7.25) 1.24 2.22
------- ------- ------- -------- --------
Total from investment operations 2.97 2.77 (6.99) 1.52 2.45
------- ------- ------- -------- --------
Less dividends and distributions:
From net investment income (0.12) (0.10) (0.25) (0.29) (0.20)
From net realized gain on
investments -- -- (1.75) (0.73) (1.25)
------- ------- ------- -------- --------
Total dividends and distributions (0.12) (0.10) (2.00) (1.02) (1.45)
------- ------- ------- -------- --------
Net asset value at end of period $ 24.87 $ 22.02 $ 19.35 $ 28.34 $ 27.84
======= ======= ======= ======== ========
Total investment return (b) 13.50% 14.42% (26.47%) 5.56% 9.49%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.53% 0.39% 1.06% 0.99% 0.94%
Net expenses 2.19% 2.23% 2.10% 2.03% 2.07%
Expenses (before
waiver/reimbursement) 2.19% 2.28% 2.10% 2.03% 2.07%
Portfolio turnover rate 123% 162% 69% 68% 55%
Net assets at end of period (in
000's) $70,778 $74,932 $81,144 $145,919 $156,284
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total investment 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 investment return is not annualized.
</Table>
24 MainStay Balanced Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
$ 22.09 $ 19.41 $ 28.42 $ 27.92 $ 26.90
-------- -------- -------- -------- --------
0.35 (a) 0.27 (a) 0.46 (a) 0.49 (a) 0.44
2.84 2.70 (7.26) 1.25 2.23
-------- -------- -------- -------- --------
3.19 2.97 (6.80) 1.74 2.67
-------- -------- -------- -------- --------
(0.34) (0.29) (0.46) (0.51) (0.40)
-- -- (1.75) (0.73) (1.25)
-------- -------- -------- -------- --------
(0.34) (0.29) (2.21) (1.24) (1.65)
-------- -------- -------- -------- --------
$ 24.94 $ 22.09 $ 19.41 $ 28.42 $ 27.92
======== ======== ======== ======== ========
14.54% 15.52% (25.84%) 6.34% 10.35%
1.47% 1.36% 1.87% 1.74% 1.63%
1.25% 1.27% 1.29% 1.28% 1.32%
1.25% 1.31% 1.29% 1.28% 1.32%
123% 162% 69% 68% 55%
$152,963 $154,728 $173,834 $405,912 $420,694
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
$ 22.01 $ 19.34 $ 28.33 $ 27.83 $ 26.83
------- ------- ------- -------- --------
0.13 (a) 0.08 (a) 0.26 (a) 0.28 (a) 0.24
2.84 2.69 (7.25) 1.24 2.21
------- ------- ------- -------- --------
2.97 2.77 (6.99) 1.52 2.45
------- ------- ------- -------- --------
(0.12) (0.10) (0.25) (0.29) (0.20)
-- -- (1.75) (0.73) (1.25)
------- ------- ------- -------- --------
(0.12) (0.10) (2.00) (1.02) (1.45)
------- ------- ------- -------- --------
$ 24.86 $ 22.01 $ 19.34 $ 28.33 $ 27.83
======= ======= ======= ======== ========
13.51% 14.43% (26.48%) 5.56% 9.49%
0.53% 0.40% 1.06% 0.99% 0.89%
2.19% 2.23% 2.10% 2.03% 2.07%
2.19% 2.28% 2.10% 2.03% 2.07%
123% 162% 69% 68% 55%
$62,892 $66,407 $79,423 $161,163 $169,609
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
25
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
Net asset value at beginning of
period $ 22.12 $ 19.44 $ 28.47 $ 27.96 $ 26.94
-------- -------- -------- -------- --------
Net investment income 0.41 (a) 0.33 (a) 0.55 (a) 0.60 (a) 0.53
Net realized and unrealized gain
(loss) on investments 2.86 2.71 (7.28) 1.25 2.27
-------- -------- -------- -------- --------
Total from investment operations 3.27 3.04 (6.73) 1.85 2.80
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.40) (0.36) (0.55) (0.61) (0.53)
From net realized gain on
investments -- -- (1.75) (0.73) (1.25)
-------- -------- -------- -------- --------
Total dividends and distributions (0.40) (0.36) (2.30) (1.34) (1.78)
-------- -------- -------- -------- --------
Net asset value at end of period $ 24.99 $ 22.12 $ 19.44 $ 28.47 $ 27.96
======== ======== ======== ======== ========
Total investment return (b) 14.90% 15.89% (25.62%) 6.77% 10.84%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.73% 1.65% 2.22% 2.10% 2.11%
Net expenses 1.00% 0.96% 0.94% 0.91% 0.85%
Expenses (before
waiver/reimbursement) 1.00% 1.06% 1.01% 0.95% 0.85%
Portfolio turnover rate 123% 162% 69% 68% 55%
Net assets at end of period (in
000's) $219,406 $208,393 $199,126 $410,355 $376,763
</Table>
<Table>
<Caption>
CLASS R2
---------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
Net asset value at beginning of
period $ 22.08 $ 19.41 $ 28.42 $ 27.91 $ 26.90
------- ------- ------- -------- --------
Net investment income 0.33 (a) 0.26 (a) 0.46 (a) 0.50 (a) 0.46
Net realized and unrealized gain
(loss) on investments 2.85 2.70 (7.26) 1.25 2.23
------- ------- ------- -------- --------
Total from investment operations 3.18 2.96 (6.80) 1.75 2.69
------- ------- ------- -------- --------
Less dividends and distributions:
From net investment income (0.32) (0.29) (0.46) (0.51) (0.43)
From net realized gain on
investments -- -- (1.75) (0.73) (1.25)
------- ------- ------- -------- --------
Total dividends and distributions (0.32) (0.29) (2.21) (1.24) (1.68)
------- ------- ------- -------- --------
Net asset value at end of period $ 24.94 $ 22.08 $ 19.41 $ 28.42 $ 27.91
======= ======= ======= ======== ========
Total investment return (b) 14.47% 15.45% (25.86%) 6.40% 10.44%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.38% 1.30% 1.87% 1.76% 1.75%
Net expenses 1.35% 1.31% 1.29% 1.26% 1.20%
Expenses (before
waiver/reimbursement) 1.35% 1.41% 1.36% 1.30% 1.20%
Portfolio turnover rate 123% 162% 69% 68% 55%
Net assets at end of period (in
000's) $41,429 $60,425 $54,849 $105,100 $109,637
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total investment 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 investment 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 R1
----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
$ 22.10 $ 19.42 $ 28.44 $ 27.94 $ 26.93
------- ------- ------- ------- --------
0.39 (a) 0.30 (a) 0.53 (a) 0.57 (a) 0.53
2.85 2.72 (7.28) 1.25 2.23
------- ------- ------- ------- --------
3.24 3.02 (6.75) 1.82 2.76
------- ------- ------- ------- --------
(0.38) (0.34) (0.52) (0.59) (0.50)
-- -- (1.75) (0.73) (1.25)
------- ------- ------- ------- --------
(0.38) (0.34) (2.27) (1.32) (1.75)
------- ------- ------- ------- --------
$ 24.96 $ 22.10 $ 19.42 $ 28.44 $ 27.94
======= ======= ======= ======= ========
14.75% 15.80% (25.69%) 6.64% 10.70%
1.64% 1.53% 2.13% 2.02% 1.99%
1.10% 1.06% 1.04% 1.01% 0.95%
1.10% 1.16% 1.11% 1.05% 0.95%
123% 162% 69% 68% 55%
$19,660 $31,039 $25,038 $69,474 $108,739
</Table>
<Table>
<Caption>
CLASS R3
---------------------------------------------------------------------------------
APRIL 28, 2006**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2010 2009 2008 2007 2006
$22.08 $19.41 $ 28.41 $27.91 $27.25
------ ------ ------- ------ ------
0.27 (a) 0.20 (a) 0.40 (a) 0.41 (a) 0.20
2.84 2.71 (7.26) 1.26 0.66
------ ------ ------- ------ ------
3.11 2.91 (6.86) 1.67 0.86
------ ------ ------- ------ ------
(0.26) (0.24) (0.39) (0.44) (0.20)
-- -- (1.75) (0.73) --
------ ------ ------- ------ ------
(0.26) (0.24) (2.14) (1.17) (0.20)
------ ------ ------- ------ ------
$24.93 $22.08 $ 19.41 $28.41 $27.91
====== ====== ======= ====== ======
14.16% 15.17% (26.02%) 6.10% 3.18%(c)
1.12% 0.98% 1.62% 1.46% 1.36%++
1.59% 1.56% 1.54% 1.52% 1.48%++
1.59% 1.65% 1.61% 1.56% 1.48%++
123% 162% 69% 68% 55%
$ 168 $ 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
27
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 ("CDSC") 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 CDSC may be imposed on redemptions made within six
years of purchase of Class B shares and a 1.00% CDSC 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 at the end of the calendar quarter 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 the same terms and conditions, except that
Class B and Class C shares are subject to higher distribution and/or service fee
rates than Investor Class, Class A, Class R2 and Class R3 shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and Class
R1 shares are not subject to a distribution and/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. This is in addition to any fees paid under a
distribution plan, where applicable.
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 generally accepted
accounting principles ("GAAP") in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Investments are valued as of the close of regular
trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern
time) on each day the Fund is open for business ("valuation date").
"Fair value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs reflect the assumptions market participants would use in
pricing the asset or liability based on market data obtained from sources
independent of the reporting entity. Unobservable inputs 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 valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2010 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, 2010, there have been no
changes to the fair value methodologies.
The aggregate value by input level, as of October 31, 2010, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
Equity securities and Exchange Traded Funds are valued at the latest quoted
sales price as of the close of regular trading on the 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 Exchange on the valuation date. These securities are
generally categorized as Level 1 in the hierarchy.
28 MainStay Balanced Fund
Debt securities are valued at the evaluated bid prices supplied by a pricing
agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in
consultation with the Fund's Subadvisor (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, to be representative of market values, at the
regular close of trading of the Exchange on each valuation date. Debt
securities, including corporate bonds, U.S. government & federal agency bonds,
municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed
securities, and mortgage-backed securities, are generally categorized as Level 2
in the hierarchy.
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. These securities are all generally categorized as Level 2 in
the hierarchy.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board 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 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.
These securities are generally categorized as Level 3 in the hierarchy. At
October 31, 2010, the Fund held securities with a value of $18 that were valued
in such a manner.
The Fund adopted Financial Accounting Standards Board Accounting Standards
Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"),
effective April 30, 2010. The Update requires the Fund to make new disclosures
about the amounts of and reasons for significant transfers in and out of Level 1
and Level 2 measurements in the fair value hierarchy and input and valuation
techniques used to measure fair value for both recurring and nonrecurring fair
value measurements that fall in either Level 2 or Level 3. The Update also
requires that the Fund separately report information on purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measurements. The Fund recognizes transfers between levels as of the beginning
of the period. Disclosures about the valuation techniques and inputs used to
measure fair value for investments that fall in either Level 2 or Level 3 fair
value hierarchy are summarized under the Level 2 or Level 3 categories listed
above. The roll forward activity of Level 3 fair value measurements is included
at the end of the Fund's Portfolio of Investments.
Generally, a security is considered illiquid if it cannot be sold or disposed of
in the ordinary course of business at approximately the price at which it is
valued. Its illiquidity might prevent the sale of such security at a time when
the Manager or Subadvisor 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 the Fund to rely on judgments that may be
somewhat subjective in determining value, which could vary from the amount that
the 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, the Manager or Subadvisor determines the liquidity of
the Fund's investments; in doing so, the Manager or Subadvisor may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers, (3) 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 in good faith deems appropriate to reflect
their fair market value.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code")
applicable to regulated investment companies and to distribute all of the
taxable income to the shareholders of the Fund within the allowable time limits.
Therefore, no federal income tax provision is required.
Management evaluates its tax positions to determine if the tax positions taken
meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the
purposes of measuring and recognizing tax liabilities in the financial
statements. Recognition of tax benefits of an uncertain tax position is required
only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. Management has analyzed the Fund's tax
positions taken on federal income tax returns for all open tax years (current
and prior three tax years), and has concluded that no provision for federal
income tax is required in the Fund's financial statements. The Fund's federal
and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination
by the Internal Revenue Service and state departments of revenue.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income, if any, quarterly and distributions of net realized
capital and currency gains, if any, annually. Unless the shareholder elects
otherwise, all dividends and distributions are reinvested in the same class of
shares of the Fund, at NAV. Dividends and distributions to shareholders are
determined in accordance with federal income tax regulations and may differ from
GAAP.
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method 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 net
assets 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 GAAP,
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 (as defined in Note
3(A)) to be creditworthy, pursuant to guidelines established by the Fund's
Board. 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 (e.g., 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. As of October 31, 2010, the Fund had no open
futures contracts.
(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 a 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 (as defined in Note 3(A)) have
temporarily suspended securities lending, the Fund and New York Life Investments
reserve the right to reinstitute lending when deemed appropriate. The Fund had
no portfolio securities on loan as of October 31, 2010.
30 MainStay Balanced Fund
(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, 2010 is as follows:
REALIZED GAIN (LOSS)
<Table>
<Caption>
STATEMENT OF EQUITY
OPERATIONS CONTRACTS
LOCATION RISK TOTAL
Net realized gain
on futures
Futures Contracts transactions $83,323 $83,323
------------------
Total Realized Gain $83,323 $83,323
==================
</Table>
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
<Table>
<Caption>
EQUITY
CONTRACTS
RISK TOTAL
Futures Contracts Long (2) 36 36
Futures Contracts Short (2) (28) (28)
================
</Table>
(1) Amount disclosed represents the weighted average held during the year ended
October 31, 2010.
(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 the "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. Except
for the portion of salaries and expenses that are the responsibility of the
Fund, the Manager also pays the salaries and expenses of all personnel
affiliated with the Fund and the operational expenses of the Fund. The fixed-
income portion of the Fund is advised by New York Life Investments directly,
without a subadvisor. 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 a Subadvisory Agreement, as
amended ("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% up to $1 billion, 0.65% from $1 billion to $2 billion and 0.60% in excess
of $2 billion. The effective management fee rate (exclusive of any applicable
waivers/reimbursements) was 0.70% for the year ended October 31, 2010.
For the period August 1, 2009 to July 31, 2010, New York Life Investments
entered into a written expense limitation agreement under which it agreed to
waive a portion of the management fee or reimburse expenses to the extent
necessary to ensure that the total ordinary operating expenses for the Fund's
Class A shares did not exceed 1.28% of its average daily net assets. New York
Life Investments agreed to apply an equivalent waiver or reimbursement, in an
equal number of basis points, to the other share classes of the Fund.
Effective August 1, 2010, New York Life Investments entered into a written
expense limitation agreement under which it agreed to waive a portion of the
management fee or reimburse expenses to the extent necessary to ensure that the
total ordinary operating expenses for the Fund's Class A shares do not exceed
1.24% of its average net assets. New York Life Investments will apply an
equivalent waiver or reimbursement, in an equal number of basis points, to the
other share classes of the Fund. This expense limitation agreement expires on
February 28, 2011 and is reviewed annually by the Board in connection with its
review of the Fund's investment advisory agreements. Based on its review, the
Board may agree to maintain, modify or terminate the agreement. 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.
At the December 15, 2010, Board of Trustees meeting, the Board approved an
extension of the current written expense limitation agreement through February
28, 2012.
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended October 31, 2010, New York Life Investments earned fees from
the Fund in the amount of $4,520,653.
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, along with a service fee at an annual
rate of 0.25% of the average daily net assets of the Class B and Class C shares
of the Fund for a total 12b-1 fee of 1.00%. Pursuant to the Class R3 Plan, the
Distributor receives a monthly distribution and 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. Class I and Class R1 shares are not subject to a distribution or
service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the Class R1, Class R2 and Class R3 shares. This is in addition
to any fees paid under a distribution plan, where applicable.
Shareholder Service Fees incurred by the Fund for the year ended October 31,
2010, were as follows:
<Table>
Class R1 $23,029
- ----------------------------------------------
Class R2 54,646
- ----------------------------------------------
Class R3 132
- ----------------------------------------------
</Table>
(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
$24,106 and $13,199, respectively, for the year ended October 31, 2010. The Fund
was also advised that the Distributor retained CDSCs on redemptions of Class A,
Class B and Class C shares of $1,920, $117,039 and $3,366, respectively, for the
year ended October 31, 2010.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service
Company LLC, an affiliate of New York Life Investments, is the Fund's transfer,
dividend disbursing and shareholder servicing agent pursuant to an agreement
between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has
entered into an agreement with Boston Financial Data Services, Inc. ("BFDS")
pursuant to which BFDS performs certain transfer agent services on behalf of
NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the
year ended October 31, 2010, were as follows:
<Table>
Investor Class $229,334
- -----------------------------------------------
Class A 321,901
- -----------------------------------------------
Class B 294,292
- -----------------------------------------------
Class C 259,286
- -----------------------------------------------
Class I 446,691
- -----------------------------------------------
Class R1 48,143
- -----------------------------------------------
Class R2 114,737
- -----------------------------------------------
Class R3 269
- -----------------------------------------------
</Table>
(E) SMALL ACCOUNT 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 small account fee on
certain types of accounts. Certain shareholders with an account balance of less
than $1,000 are charged an annual per account fee of $20 (assessed semi-
annually). These fees are included in transfer agent fees shown on the Statement
of Operations.
(F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially
held shares of the Fund with the following values and percentages of net assets
as follows:
<Table>
Class A $ 1,575 0.0%++
- ------------------------------------------------
Class B 1,241 0.0++
- ------------------------------------------------
Class C 1,668 0.0++
- ------------------------------------------------
Class R1 1,329 0.0++
- ------------------------------------------------
Class R2 1,308 0.0++
- ------------------------------------------------
Class R3 10,647 6.3
- ------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2010, these fees, which are included in professional fees shown on the Statement
of Operations, were $68,747.
32 MainStay Balanced Fund
NOTE 4-FEDERAL INCOME TAX
As of October 31, 2010, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$414,167 $(121,112,450) $-- $61,248,855 $(59,449,428)
- --------------------------------------------------------- -----------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferral, real estate investment trusts ("REITs")
basis adjustments and class action payments basis adjustments.
The following table discloses the current year reclassifications between
undistributed net investment income and accumulated net realized loss on
investments arising from permanent differences; net assets at October 31, 2010
were not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ADDITIONAL
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
$(150,074) $150,074 $ --
- ---------------------------------------- -----------
</Table>
The reclassifications for the Fund are primarily due to return of capital and
capital gain distributions from REITs.
At October 31, 2010, for federal income tax purposes, capital loss carryforwards
of $121,112,450 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders. No capital gain distributions shall be
made until any capital loss carryforwards have been fully utilized or expired.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $ 25,929
2017 95,183
- ---------------------------------- -----
Total $121,112
- ---------------------------------- -----
</Table>
The Fund utilized $41,425,100 of capital loss carryforwards during the year
ended October 31, 2010.
The tax character of distributions paid during the years ended October 31, 2010
and October 31, 2009 shown in the Statements of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2010 2009
Distributions paid from:
Ordinary Income $8,344,463 $8,250,469
- -----------------------------------------------------
</Table>
NOTE 5-RESTRICTED SECURITY
As of October 31, 2010, the Fund held the following restricted security:
<Table>
<Caption>
DATE OF PRINCIPAL 10/31/10 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 redemption requests.
Effective September 1, 2010, under an amended credit agreement, the aggregate
commitment amount is $125,000,000 with an optional maximum amount of
$175,000,000. The commitment rate is an annual rate of 0.10% of the average
commitment amount, plus an annual 0.02% up-front payment payable, regardless of
usage, to The Bank of New York Mellon, which serves as the agent to the
syndicate. The commitment fee and up-front payment are allocated among certain
MainStay 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. Prior to September 1, 2010, the
aggregate commitment amount was $125,000,000 with an annualized commitment fee
rate of 0.10% of the average commitment amount, plus an up-front payment of
0.04% paid to The Bank of New York Mellon. The line of credit expires on August
31, 2011. There were no borrowings made or outstanding with respect to the Fund
on the Credit Agreement during the year ended October 31, 2010.
NOTE 8-PURCHASES AND SALES OF SECURITIES (IN 000'S)
During the year ended October 31, 2010, purchases and sales of U.S. Government
securities were $255,458 and $287,134, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $522,366 and $585,695, respectively.
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9-CAPITAL SHARE TRANSACTIONS
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 204,490 $ 4,876,415
Shares issued to shareholders in
reinvestment of dividends 30,184 718,203
Shares redeemed (359,637) (8,539,807)
------------------------
Net increase (decrease) in shares
outstanding before conversion (124,963) (2,945,189)
Shares converted into Investor
Class (See Note 1) 140,203 3,343,928
Shares converted from Investor
Class (See Note 1) (119,199) (2,841,265)
------------------------
Net increase (decrease) (103,959) $ (2,442,526)
========================
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 increase (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 increase (decrease) (86,263) $ (2,247,252)
========================
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 430,521 $ 10,240,316
Shares issued to shareholders in
reinvestment of dividends 83,747 1,990,202
Shares redeemed (1,511,721) (35,837,153)
------------------------
Net increase (decrease) in shares
outstanding before conversion (997,453) (23,606,635)
Shares converted into Class A
(See Note 1) 196,436 4,680,636
Shares converted from Class A
(See Note 1) (34,747) (846,621)
Shares converted from Class A (a) (37,263) (871,593)
------------------------
Net increase (decrease) (873,027) $(20,644,213)
========================
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 increase (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 increase (decrease) (1,952,180) $(36,420,448)
========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 197,249 $ 4,675,263
Shares issued to shareholders in
reinvestment of dividends 13,588 324,735
Shares redeemed (584,228) (13,816,972)
------------------------
Net increase (decrease) in shares
outstanding before conversion (373,391) (8,816,974)
Shares converted from Class B
(See Note 1) (183,433) (4,336,678)
------------------------
Net increase (decrease) (556,824) $(13,153,652)
========================
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 increase (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 increase (decrease) (790,669) $(15,069,264)
========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 165,215 $ 3,918,928
Shares issued to shareholders in
reinvestment of dividends 9,802 234,159
Shares redeemed (661,972) (15,608,746)
------------------------
Net increase (decrease) (486,955) $(11,455,659)
========================
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 increase (decrease) (1,089,293) $(20,503,917)
========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 1,887,081 $ 44,810,235
Shares issued to shareholders in
reinvestment of dividends 150,853 3,588,206
Shares redeemed (2,713,200) (64,655,595)
------------------------
Net increase (decrease) in shares
outstanding before conversion (675,266) (16,257,154)
Shares converted into Class I (a) 37,184 871,593
------------------------
Net increase (decrease) (638,082) $(15,385,561)
========================
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 increase (decrease) (822,941) $(15,064,274)
========================
</Table>
34 MainStay Balanced Fund
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 124,464 $ 2,958,628
Shares issued to shareholders in
reinvestment of dividends 14,742 350,029
Shares redeemed (755,942) (17,615,068)
------------------------
Net increase (decrease) (616,736) $(14,306,411)
========================
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 (decrease) 115,339 $ 2,386,772
========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 762,834 $ 18,013,377
Shares issued to shareholders in
reinvestment of dividends 31,146 738,250
Shares redeemed (1,869,166) (43,465,598)
------------------------
Net increase (decrease) (1,075,186) $(24,713,971)
========================
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 increase (decrease) (89,427) $ (1,791,020)
========================
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 3,750 $ 89,620
Shares issued to shareholders in
reinvestment of dividends 62 1,480
Shares redeemed (1,046) (24,638)
------------------------
Net increase (decrease) 2,766 $ 66,462
========================
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 (decrease) 1,644 $ 32,558
========================
</Table>
(a) In addition to any automatic conversion features described above in Note 1
with respect to Investor Class, Class A and B shares, an investor generally
may also elect to convert their shares on a voluntary basis into another
share class of the same fund for which an investor is eligible. However, the
following limitations apply:
- Investor Class and Class A shares that remain subject to a CDSC are
ineligible for a voluntary conversion; and
- All Class B and C shares are ineligible for a voluntary conversion.
These limitations do not impact any automatic conversion features described in
Note 1 with respect to Investor Class, Class A and B shares.
An investor or an investor's financial intermediary may contact the Fund to
request a voluntary conversion between shares classes of the same Fund. An
investor may be required to provide sufficient information to establish
eligibility to convert to the new share class. All permissible conversions
will be made on the basis of the relevant NAVs of the two classes without the
imposition of any sales load, fee or other charge. If an investor fails to
remain eligible for the new share class, an investor may automatically be
converted back to their original share class, or into another share class, if
appropriate.
NOTE 10-SUBSEQUENT EVENTS
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2010, events and transactions
subsequent to October 31, 2010 through 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
adjustments or disclosure have been identified other than the extension of the
written expense limitation agreement, as disclosed in Note 3(A) to these
financial statements.
mainstayinvestments.com 35
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, 2010, 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, 2010, 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, 2010, 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, 2010
36 MainStay Balanced Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED)
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of directors/trustees, including a
majority of the independent directors/trustees, annually review and approve the
fund's investment advisory agreements. At its June 29-30, 2010 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 these agreements (the "Agreements"), the
Board considered information prepared specifically in connection with the
contract review process that took place at various meetings between December
2009 and June 2010, 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 from New York Life
Investments and MSI on the fees charged to other investment advisory clients
(including institutional separate accounts) that follow investment strategies
similar to the Fund, and the rationale for any differences in the Fund's
management and/or subadvisory fee and the fees charged to such institutional
products. In addition, the Board 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 and
its independent directors/trustees (the "Independent Trustees"). Information
provided to the Board at its meetings throughout the year included, among other
things, detailed investment performance 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 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 provided, and profits 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 accounts managed by New York Life
Investments and third-party "peer funds" identified by Strategic Insight.
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 process. 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 provides 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. The Board considered New York Life Investments' willingness to invest
in personnel that benefit the Fund, and 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.
The Board also examined the nature, extent and quality of the services that MSI
provides to the equity component of the Fund. The Board evaluated MSI's
experience in serving as subadviser to the Fund and managing other portfolios.
It examined MSI's track record and experience in providing investment advisory
services, the experience of investment
mainstayinvestments.com 37
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED) (CONTINUED)
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 performance reports provided by New York Life
Investments' Investment Consulting Group on the Fund throughout the year. These
reports 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 peer
funds.
In considering the Fund's investment performance, the Board focused principally
on the Fund's long-term performance track record. The Board also 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.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the long-term investment
performance of the Fund, along with ongoing efforts by New York Life Investments
and MSI to enhance investment returns, supported a determination to approve the
Agreements. 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 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 any 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 services to the Fund. The Board noted, for
example, 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.
In addition, 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, which was developed by New York Life Investments in
consultation with an independent consultant, 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 significant. 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
any profits realized by New York Life Investments and its affiliates (including
MSI) due to their relationships with the Fund supported the Board's
determination to approve the Agreements.
38 MainStay Balanced 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 showing how the Fund's management fee
schedule compared to fee schedules of other funds and accounts managed by New
York Life Investments. The Board also reviewed information from Strategic
Insight showing how the Fund's management fee schedule 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 any
breakpoints or expense limitations. While recognizing the difficulty of
determining economies of scale with precision, the Board acknowledged that
economies of scale may be shared with the Fund in a number of ways, including,
for example, through the imposition of management fee breakpoints and by
initially setting relatively lower management fees.
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
addition, the Board noted that while the Fund had relatively high fees as
compared to the "peer fund" group identified by Strategic Insight. However, the
Board recognized certain limitations in the Strategic Insight peer group for the
Fund. The Board also noted that it would continue to monitor the fees, expenses
and investment performance of the Fund closely going forward.
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. In addition, the Board considered information provided by New York
Life Investments and MSI on fees charged to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
explanations from New York Life Investments and MSI about the different scope of
services provided to retail mutual funds as compared with other investment
advisory clients.
The Board noted that, outside of the Fund's management fee and the fees charged
under a share class's Rule 12b-1 and/or shareholder services plans, a share
class's most significant "other expenses" are transfer agent fees. Transfer
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 LLC, 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 considered representations
from New York Life Investments that NYLIM Service Company LLC historically has
realized only 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 certain 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, and following negotiations
with the Board, the Board accepted New York Life Investments' proposal, at the
request of the Board, to modify the expense limitations on the Fund's share
classes in order to increase the amount of class expenses subsidized by New York
Life Investments.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, support a conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, including the Independent Trustees, unanimously voted to approve the
Agreements.
mainstayinvestments.com 39
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2010, the Fund designated approximately
$7,021,529 under 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, 2010,
should be multiplied by 82.4% to arrive at for the corporate dividends received
deduction.
In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 which will show the federal tax status of the distributions received
by shareholders in calendar year 2009. The amounts that will be reported on such
1099-DIV or substitute Form 1099 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, 2010.
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).
40 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.,
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) or by going online to
mainstayinvestments.com.
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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 66 None
9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (1 fund); Management LLC and New York
THE MAINSTAY FUNDS: Trustee Life Investment Management
since 2008 (14 funds); Holdings LLC; Executive Vice
MAINSTAY FUNDS TRUST: Trustee President, New York Life
since 2009 (29 funds); and Insurance Company (since
MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board,
Director since 2008 (20 MacKay Shields LLC (since
portfolios). 2008); Chairman of the Board,
Institutional Capital LLC,
Madison Capital Funding LLC,
Madison Square Investors LLC
and McMorgan & Company LLC,
Chairman of the Board and
Chief Executive Officer,
NYLIFE Distributors LLC (since
2008); Chairman of the Board,
NYLCAP Manager, LLC (since
2008); Executive Vice
President, NYLIFE Insurance
Company of Arizona and
New York Life Insurance and
Annuity Corporation (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 41
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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 66 Trustee, Legg Mason
8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since
2005, and Trustee since 2000 1990) 1991 (60 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990
(1 fund);
THE MAINSTAY FUNDS: Chairman
and Board Member since 2007
(14 funds);
MAINSTAY FUNDS TRUST: Chairman
and Trustee since 2009 (29
funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm
3/27/51 ECLIPSE FUNDS: 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, State
Expert since 2007 (1 fund); 2006) Farm Variable Product Trust
THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios)
and Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since 2009 (29 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 66 None
12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (1 fund); (2000 to 2004); Independent
THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000);
since 2007 (14 funds); Head of Global Funds, Citicorp
MAINSTAY FUNDS TRUST: Trustee (1995 to 1999)
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
42 MainStay Balanced Fund
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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
RICHARD H. Indefinite; Managing Director, ICC Capital 66 None
NOLAN, JR. ECLIPSE FUNDS: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (1 fund); (1994 to 2004)
THE MAINSTAY FUNDS: Trustee
since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 66 None
TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (1 fund); Director The Carlyle Group
THE MAINSTAY FUNDS: Trustee (private investment firm)
since 1994 (14 funds); (2002 to 2004); Senior
MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and
since 2009 (29 funds); and Board Member, Groupe Arnault
MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm)
Director since 2007 (20 (1999 to 2002)
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None
5/22/40 ECLIPSE FUNDS: 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 (1 fund);
THE MAINSTAY FUNDS: Trustee
and Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 43
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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
JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32
10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion
Trustee since 2007 (2 funds); to 1995) Insurance Trust (1
ECLIPSE FUNDS INC.: Director portfolio) since 2007;
since 2007 (1 fund); Trustee, Direxion Shares
THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36
since 2007 (14 funds); portfolios)
MAINSTAY FUNDS TRUST: Trustee
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
44 MainStay Balanced Fund
The following individuals have been appointed by the Board Members to serve
as Officers of the MainStay Group of Funds.
<Table>
<Caption>
POSITIONS(S) HELD
NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S)
DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Principal Assistant Treasurer, New York
BENINTENDE Financial and Accounting Life Investment Management
5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008);
Eclipse Funds, Inc. and The Managing Director, New York
MainStay Funds (since 2007), Life Investment Management LLC
MainStay Funds Trust (since (since 2007); Treasurer and
2009) Principal Financial and
Accounting Officer, MainStay
VP Series Fund, Inc.; 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 A. Vice President and Chief Managing Director, Compliance
ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and
9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New
The MainStay Funds and York Life Investment
MainStay Funds Trust (since Management LLC (2005 to 2008);
2009) Assistant Secretary, NYLIFE
Distributors LLC (2006 to
2008); Assistant Secretary
NYLIFE Distributors LLC (2006
to 2008); Vice President and
Chief Compliance Officer,
MainStay VP Series Fund, Inc.
(since 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 Bank Asset Management
(1999 to 2005)
- --------------------------------------------------------------------------------
STEPHEN P. President, Eclipse Funds, Manager, President and Chief
FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE
2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008);
MainStay Funds Trust (since Chairman of the Board, NYLIM
2009) Service Company LLC (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. (since 2007)
- --------------------------------------------------------------------------------
J. KEVIN GAO Secretary and Chief Legal Managing Director and
10/13/67 Officer, Eclipse Funds, Associate General Counsel, New
Eclipse Funds, Inc., The York Life Investment
MainStay Funds and MainStay Management LLC (since 2010);
Funds Trust (since 2010) Secretary and Chief Legal
Officer, MainStay VP Series
Fund, Inc. (since 2010);
Director and Counsel of Credit
Suisse, Chief Legal Officer
and Secretary of Credit Suisse
Asset Management, LLC and
Credit Suisse Funds (2003 to
2010)
- --------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life
HARRINGTON President -- Administration, Investment Management LLC
2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor
Inc. and The MainStay Funds advisory organizations) (since
(since 2005), MainStay Funds 2000); Executive Vice
Trust (since 2009) President, New York Life Trust
Company and New York Life
Trust Company, FSB (since
2006); Vice
President--Administration,
MainStay VP Series Fund, Inc.
(since 2005)
- --------------------------------------------------------------------------------
</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 Board to serve a one-year term.
mainstayinvestments.com 45
MAINSTAY FUNDS
MainStay offers a wide range of Funds for virtually any investment need. The
full array of MainStay offerings is listed here, with information about the
manager, subadvisors, legal counsel, and independent registered public
accounting firm.
EQUITY FUNDS
MainStay 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 Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay High Yield Municipal Bond Fund
MainStay High Yield Opportunities 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
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
MAINSTAYINVESTMENTS.COM
MainStay Investments, an indirect subsidiary of New York Life Insurance
Company, New York, NY 10010, provides investment
advisory products and services. Securities are distributed by 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.
(C) 2010 by NYLIFE Distributors LLC. All rights reserved.
<Table>
<Caption>
- -----------------------------------------------------------------
Not Not a May Lose No Bank Not Insured by Any
FDIC/NCUA Deposit Value Guarantee Government Agency
Insured
- -----------------------------------------------------------------
</Table>
NYLIM-AO21257 MS333-10 MSBL11-12/10
B7
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY U.S. SMALL CAP FUND
MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT
October 31, 2010
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MESSAGE FROM THE PRESIDENT
AN ADVANCING STOCK MARKET
Several leading indexes of stock market performance in the United States and
around the globe provided double-digit returns for the 12 months ended October
31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap
stocks generally outperformed large-cap stocks, and growth stocks outperformed
value stocks at all capitalization levels.
Although the U.S. economy continued to advance, the level of growth varied from
quarter to quarter, and the stock market's progress was far from uniform over
the 12-month reporting period. From November 2009 through March 2010, many
stocks with low or negative earnings were particularly strong, as investors
looked for stocks likely to benefit from an eco-nomic recovery. From April
through September, however, concerns about the quality of sovereign debt in
Greece and other European nations drove stock prices lower. Fortunately, central
banks and policymakers joined forces to help restore market confidence, and in
September and October 2010, major stock indexes recouped much of the ground they
had previously lost.
A SHIFTING APPETITE FOR YIELD
Throughout the reporting period, the Federal Open Market Committee maintained
the targeted federal funds rate in a range from 0% to 0.25%, which kept short-
term yields low. Investors seeking higher yields increased their appetite for
risk, extending maturities and investing in corporate bonds and commercial
mortgage-backed securities. The high-yield bond market saw significant inflows
from individual and institutional investors. The leveraged loan market as a
whole provided double-digit returns for the reporting period, and municipal debt
overall provided strong single-digit returns.
As every investor knows, past performance is no guarantee of future results.
Economic conditions next year may be very different from those today. Individual
companies may exper-ience gains or setbacks related to their products, their
comp-etition or other industry, economic or market forces. In such an
environment, how can investors know what to expect?
HELPING INVESTORS REMAIN CONFIDENT
At MainStay, we believe that mutual fund investing can help investors remain
confident as they cope with changing markets. Each of our Funds pursues a
specific investment objective using established investment strategies. Our
portfolio managers bring a professional perspective to daily market events,
seeking to balance what's happening now with what their investments seek to
achieve over full market cycles. They aim to manage the risks of individual
securities and the market as a whole within the guidelines outlined in the
Prospectus. In doing so, they look to bring consistency of purpose and a sense
of direction to investment markets that themselves may be erratic or
unpredictable.
We hope that you will carefully review the accompanying annual report. It
provides greater insight into the market events, secur-ities and investment
decisions that affected your MainStay Fund(s) during the 12 months ended October
31, 2010.
The information in the annual report is an important part of your overall
financial plan. We hope that you will use it wisely, as you maintain or
gradually adjust your investments in line with your long-range investment goals.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
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 29
- ---------------------------------------------
Board Consideration and Approval of
Management Agreement and Subadvisory
Agreement 30
- ---------------------------------------------
Federal Income Tax Information 33
- ---------------------------------------------
Proxy Voting Policies and Procedures and
Proxy Voting Record 33
- ---------------------------------------------
Shareholder Reports and Quarterly
Portfolio Disclosure 33
- ---------------------------------------------
Board Members and Officers 34
- ---------------------------------------------
</Table>
- --------------------------------------------------------------------------------
INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND
CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND
EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS
CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE
FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY
WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169
LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO
MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA
THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ
THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING.
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. THE GRAPH BELOW DEPICTS THE
HISTORICAL PERFORMANCE OF CLASS I SHARES OF THE FUND. PERFORMANCE WILL VARY FROM
CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES
CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END,
PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM.
(LINE GRAPH)
<Table>
<Caption>
MAINSTAY U.S.
SMALL CAP
FUND CLASS RUSSELL 250TM RUSSELL 2000(R)
I SHARES INDEX VALUE INDEX
------------- ------------- ---------------
10/31/00 10000 10000 10000
10000 8784 10875
10584 7981 10600
15034 11308 14871
18150 12704 17547
22351 14597 19834
24973 17178 24376
23553 19362 24875
14648 12146 17278
18687 13757 17617
10/31/10 23021 17576 21921
</Table>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010
- --------------------------------------------------------------------------------
<Table>
<Caption>
CLASS SALES CHARGE ONE YEAR FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 15.86% -1.03%
Excluding sales charges 22.60 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Shares(4) Maximum 5.5% Initial Sales Charge With sales charges 16.03 -0.96
Excluding sales charges 22.78 0.17
- -----------------------------------------------------------------------------------------------------------------------------------
Class B Shares(4) Maximum 5% CDSC With sales charges 16.63 -0.96
if Redeemed Within the First Six Years of Purchase Excluding sales charges 21.63 -0.65
- -----------------------------------------------------------------------------------------------------------------------------------
Class C Shares(5) Maximum 1% CDSC With sales charges 20.73 -0.64
if Redeemed Within One Year of Purchase Excluding sales charges 21.73 -0.64
- -----------------------------------------------------------------------------------------------------------------------------------
Class I Shares No Sales Charges 23.19 0.59
- -----------------------------------------------------------------------------------------------------------------------------------
<Caption>
GROSS
EXPENSE
CLASS TEN YEARS RATIO(2)
- -------------------------------------------------
Investor Class Shares(3) 7.65% 1.98%
8.26 1.98
- -------------------------------------------------
Class A Shares(4) 7.69 1.88
8.30 1.88
- -------------------------------------------------
Class B Shares(4) 7.45 2.74
7.45 2.74
- -------------------------------------------------
Class C Shares(5) 7.47 2.77
7.47 2.77
- -------------------------------------------------
Class I Shares 8.70 1.64
- -------------------------------------------------
</Table>
1. The performance table and graph 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 as indicated in the table
above, change in share price, and reinvestment of dividend and capital gain
distributions. The graph assumes the initial investment amount shown above
and reflects the deduction of all sales charges that would have applied for
the period of investment. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
For more information on share classes and current fee waivers and/or expense
limitations, please refer to the notes to the financial statements.
2. The gross expense ratios presented reflect the Fund's "Total Annual Fund
Operating Expenses" from the most recent Prospectus and may differ from
other expense ratios disclosed in this report.
3. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain expenses and fees. Unadjusted,
the performance shown for Investor Class shares might have been lower.
4. Performance figures for Class A and B shares, first offered on January 2,
2004, include the historical performance of Class I shares through January
1, 2004, adjusted for differences in certain expenses and fees. Unadjusted,
the performance shown for Class A and Class B shares might have been lower.
5. 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 January 1, 2004, and the historical performance of Class I shares
through December 29, 2002, adjusted for differences in certain expenses and
fees. Unadjusted, the performance shown for Class C shares might have been
lower.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell 2500(TM) Index(6) 27.76% 3.78% 5.80%
- -----------------------------------------------------------------
Russell 2000(R) Value Index(7) 24.43 2.02 8.16
- -----------------------------------------------------------------
Average Lipper Small-Cap Core Fund(8) 24.55 2.72 6.26
- -----------------------------------------------------------------
</Table>
6. 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. The Russell 2500(TM) Index is the Fund's broad-based securities
market index for comparison purposes. Total returns assume reinvestment of
all dividends and capital gains. An investment cannot be made directly in an
index.
7. 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.
8. 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 FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH
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, 2010, to October 31, 2010,
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 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, 2010, to October 31, 2010.
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, 2010. 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 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 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,026.80 $ 8.33 $1,017.00 $ 8.29
- -------------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,027.40 $ 7.51 $1,017.80 $ 7.48
- -------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,022.40 $12.13 $1,013.20 $12.08
- -------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,023.10 $12.14 $1,013.20 $12.08
- -------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,028.90 $ 5.98 $1,019.30 $ 5.95
- -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.63% for Investor Class, 1.47% 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, 2010 (Unaudited)
<Table>
<Caption>
Health Care Equipment & Supplies 5.6%
Machinery 4.9
Insurance 4.8
Multi-Utilities 4.6
Household Durables 4.4
Wireless Telecommunication Services 4.3
Commercial Banks 4.1
Exchange Traded Funds 4.1
Specialty Retail 3.6
Thrifts & Mortgage Finance 3.6
Aerospace & Defense 3.5
Electric Utilities 3.4
Building Products 3.3
Textiles, Apparel & Luxury Goods 3.3
Chemicals 3.0
Electronic Equipment & Instruments 3.0
Containers & Packaging 2.6
IT Services 2.6
Pharmaceuticals 2.6
Electrical Equipment 2.1
Food Products 2.0
Energy Equipment & Services 1.8
Road & Rail 1.8
Biotechnology 1.6
Hotels, Restaurants & Leisure 1.6
Metals & Mining 1.6
Professional Services 1.6
Health Care Providers & Services 1.5
Auto Components 1.4
Diversified Consumer Services 1.3
Software 1.1
Capital Markets 1.0
Communications Equipment 1.0
Internet Software & Services 1.0
Diversified Financial Services 0.9
Semiconductors & Semiconductor
Equipment 0.6
Short-Term Investment 4.8
Other Assets, Less Liabilities -0.0++
-----
100.0
=====
</Table>
See Portfolio of Investments beginning on page 11 for specific holdings within
these categories.
++ Less than one-tenth of a percent.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2010 (excluding short-term investment)
<Table>
1. iShares Russell 2000 Index Fund
2. Syniverse Holdings, Inc.
3. Endo Pharmaceuticals Holdings, Inc.
4. Silgan Holdings, Inc.
5. Woodward Governor Co.
6. Warnaco Group, Inc. (The)
7. Corn Products International, Inc.
8. Vectren Corp.
9. Platinum Underwriters Holdings, Ltd.
10. NeuStar, Inc. Class A
</Table>
8 MainStay U.S. Small Cap Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED)
Questions answered by portfolio managers David Pearl, Michael Welhoelter, CFA,
and William Priest, CFA, of Epoch Investment Partners, Inc., the Fund's
Subadvisor.
HOW DID MAINSTAY U.S. SMALL CAP FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010?
Excluding all sales charges, MainStay U.S. Small Cap Fund returned 22.60% for
Investor Class shares, 22.78% for Class A shares, 21.63% for Class B shares and
21.73% for Class C shares for the 12 months ended October 31, 2010. Over the
same period, the Fund's Class I shares returned 23.19%. All share classes
underperformed the 24.55% return of the average Lipper(1) small-cap core fund
and the 27.76% return of the Russell 2500(TM) Index(2) for the 12 months ended
October 31, 2010. The Russell 2500(TM) Index is the Fund's broad-based
securities-market index. See page 5 for Fund returns with sales charges.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund's underperformance of the Russell 2500(TM) Index was driven by a
combination of weak stock selection and sector allocation.
DURING THE REPORTING PERIOD, WHICH SECTORS WERE THE STRONGEST CONTRIBUTORS TO
THE FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS WERE PARTICULARLY WEAK?
During the reporting period, the strongest-contributing sector to the Fund's
relative performance was information technology, where strong stock selection
drove performance and the Fund's underweight position was a slight detractor.
Telecommunication services was the second-strongest contributor to the Fund's
relative performance. Strong stock selection drove performance in the sector. In
consumer staples, the Fund was helped by strong stock selection, with an
additional boost from the Fund's modestly underweight position relative to the
Russell 2500(TM) Index.
During the reporting period, the weakest-contributing sector to the Fund's
relative performance was financials, where weak stock selection hurt
performance, but the impact was slightly offset by the Fund's underweight
position in the sector. Consumer discretionary was the second-weakest
contributor to the Fund's performance relative to the benchmark. Poor stock
selection--particularly a lack of exposure to high-end retail--hurt performance
in the sector, as did the Fund's slightly overweight position relative to the
Russell 2500(TM) Index. Energy made the third-weakest sector contribution to the
Fund's relative performance. Weak stock selection resulted in negative total
return in the sector during the reporting period.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS MADE THE STRONGEST
CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE, AND WHICH STOCKS DETRACTED THE
MOST?
On an absolute basis, telecommunications firm Syniverse, specialty
pharmaceutical company Endo Pharmaceuticals and network equipment supplier ADC
Telecommunications made the strongest contributions to the Fund's results.
Syniverse Holdings announced an acquisition agreement with Carlyle Group during
the reporting period. The transaction is expected to close in early 2011.
Endo Pharmaceuticals received priority review status from the FDA for one of its
abuse-deterrent-formulated pain drugs earlier this year. In addition, the
company benefited from the third quarter 2010 acquisition of Qualitest, which
helped diversify Endo Pharmaceuticals' product line. Endo Pharmaceuticals also
benefited from increased demand for its products.
We exited the Fund's position in ADC Telecommunications after the network
equipment supplier was acquired by Tyco Electronics.
The Fund's three weakest contributors to absolute performance were marine
contractor Cal Dive International, video game retailer GameStop and homebuilder
KB Home. All three of these stocks had negative returns for the reporting
period.
Like many companies associated with oil and gas exploration in the Gulf of
Mexico, marine contractor Cal Dive International's stock price was negatively
affected by the Gulf of Mexico oil spill and the subsequent drilling moratorium
in the Gulf. Longer-term, we believe that the increased regulatory environment
should be a benefit to the company.
GameStop declined as a result of disappointing video game sales. Weakness in the
company's stock price was exacerbated when GameStop's chief financial officer
departed earlier this year. While the economic recovery has been slow, we
believe 2010 and 2011 have a much better game release schedule than 2009, which
could lead to stronger sales. GameStop has the potential to achieve a more
appropriate valuation by continuing to gain market share in new games and by
selling a higher proportion of used games, where GameStop has generated much
higher margins.
KB Home underperformed on investor concerns that the U.S. housing recovery may
be prolonged, which would hurt KB Home's ability to increase its top line and
restore profitability. Our view was that demand for new homes should recover,
and that KB Home was positioned to restore profitability more quickly than
investors expected. We believe that the company's transition from older,
costlier land, to newer, cheaper land and elimination of some one-time costs
continued to support our decision to hold the investment. As of October 31,
2010, KB Home was trading below book value despite a healthy balance
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Russell 2500(TM) Index.
mainstayinvestments.com 9
sheet, suggesting that investors overreacted to recent weaknesses in housing
macro data.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the reporting period, we added to the Fund's consumer discretionary
exposure with the purchase of a number of new companies, including Iconix Brand
Group and Jos. A. Bank Clothiers.
We consider Iconix Brand Group to be a fairly low-risk investment within the
apparel segment. The company owns a diversified portfolio of brand names,
including Candies, Danskin, Joe Boxer, Starter and many others. The company
partners with large retailers as the store's private label brand and receives a
predictable stream of guaranteed minimum royalty payments from its retail
partners.
Men's clothing retailer Jos. A. Bank has maintained sales and profitability
during the economic downturn and moved into the tuxedo rental market through a
joint venture that we believe will allow the company to benefit without
significant capital expenditure. We believe that both Iconix Brand Group and
Jos. A. Bank Clothiers are well-run companies that remained profitable during
the downturn. We believe they were well positioned for the current environment.
We also added a position in Esterline Technologies, a worldwide supplier to the
aerospace & defense industry. With the airline/aerospace cycle continuing to
ramp up, we believe that companies such as Esterline Technologies should
benefit.
Another purchase was Dril-Quip, a company that specializes in design,
manufacturing, selling and servicing offshore drilling and production equipment
that is suited for use in deepwater, harsh-environment and severe-service
applications. The company was negatively affected in the short term by the
drilling moratorium in the Gulf of Mexico. However, over the longer term, we
believe the company will benefit from increased regulatory requirements for
safety and redundancy.
During the reporting period, we chose to exit aerospace & defense supplier
Alliant Techsystems, as the current administration's spending on a number of
NASA's programs continued to be scrutinized and we felt there were better
risk/reward trade-offs elsewhere.
We also sold the Fund's position in data technology provider Sybase when the
company was acquired by SAP, a German financial technology provider. The shares
were tendered at a premium to the predeal share price.
We exited the Fund's position in network equipment supplier ADC
Telecommunications after the company was acquired by Tyco Electronics.
We also chose to exit JDA Software Group on concerns that a surprising verdict
regarding a previous acquisition the company had made might affect its cash
allocation plans. We continued to find the sector attractive and geared our
exposure toward companies that we believed would improve productivity and should
benefit from an increase in the capital-expenditure cycle.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
During the reporting period, the Fund increased its weightings in the consumer
discretionary and industrials sectors, moving from an underweight position
relative to the Russell 2500(TM) Index to an overweight position in each of
these sectors. We also increased the Fund's allocation to telecommunication
services, moving from an underweight position to a slightly overweight position
relative to the benchmark.
During the reporting period, we reduced the Fund's exposure to the financials
sector, moving from an overweight position to a significantly underweight
position relative to the Russell 2500(TM) Index. The Fund decreased its
allocation to the energy sector, which was already underweight when the
reporting period began. In information technology, the Fund moved from a market-
weight position to a significantly underweight position relative to the Russell
2500(TM) Index.
HOW WAS THE FUND POSITIONED AT THE END OF OCTOBER 2010?
As of October 31, 2010, the Fund's most substantially overweight sector
positions relative to the Russell 2500(TM) Index were in telecommunication
services, industrials and utilities. As of the same date, the Fund's most
substantially underweight sector positions relative to the Russell 2500(TM)
Index were in information technology, financials and energy.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay U.S. Small Cap Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 91.1%+
- -------------------------------------------------------
AEROSPACE & DEFENSE 3.5%
Curtiss-Wright Corp. 154,600 $ 4,774,048
Esterline Technologies Corp.
(a) 68,700 4,152,228
Hexcel Corp. (a) 247,200 4,392,744
------------
13,319,020
------------
AUTO COMPONENTS 1.4%
Tenneco, Inc. (a) 160,650 5,240,403
------------
BIOTECHNOLOGY 1.6%
Alkermes, Inc. (a) 540,535 6,253,990
------------
BUILDING PRODUCTS 3.3%
Armstrong World Industries,
Inc. (a) 125,300 5,231,275
Masco Corp. 210,150 2,240,199
Simpson Manufacturing Co.,
Inc. 193,000 5,129,940
------------
12,601,414
------------
CAPITAL MARKETS 1.0%
Waddell & Reed Financial,
Inc. Class A 129,000 3,750,030
------------
CHEMICALS 3.0%
Methanex Corp. 228,000 6,331,560
Nalco Holding Co. 178,500 5,030,130
------------
11,361,690
------------
COMMERCIAL BANKS 4.1%
Investors Bancorp, Inc. (a) 338,152 4,057,824
Simmons First National Corp.
Class A 102,355 2,783,032
Texas Capital Bancshares,
Inc. (a) 218,900 3,973,035
UMB Financial Corp. 126,300 4,680,678
------------
15,494,569
------------
COMMUNICATIONS EQUIPMENT 1.0%
Harmonic, Inc. (a) 555,000 3,873,900
------------
CONTAINERS & PACKAGING 2.6%
X Silgan Holdings, Inc. 292,350 9,866,812
------------
DIVERSIFIED CONSUMER SERVICES 1.3%
Service Corp. International 606,900 5,025,132
------------
DIVERSIFIED FINANCIAL SERVICES 0.9%
CBOE Holdings, Inc. 149,550 3,590,696
------------
ELECTRIC UTILITIES 3.4%
DPL, Inc. 215,500 5,624,550
Westar Energy, Inc. 286,600 7,250,980
------------
12,875,530
------------
ELECTRICAL EQUIPMENT 2.1%
X Woodward Governor Co. 254,600 7,979,164
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 3.0%
DTS, Inc. (a) 166,016 6,607,437
Jabil Circuit, Inc. 307,500 4,717,050
------------
11,324,487
------------
ENERGY EQUIPMENT & SERVICES 1.8%
Cal Dive International, Inc.
(a) 841,950 4,260,267
Dresser-Rand Group, Inc. (a) 70,704 2,419,491
Dril-Quip, Inc. (a) 4,717 325,945
------------
7,005,703
------------
FOOD PRODUCTS 2.0%
X Corn Products
International, Inc. 178,850 7,610,067
------------
HEALTH CARE EQUIPMENT & SUPPLIES 5.6%
Alere, Inc. (a) 143,150 4,230,083
Haemonetics Corp. (a) 92,600 5,060,590
SonoSite, Inc. (a) 196,350 6,120,229
Teleflex, Inc. 105,100 5,859,325
------------
21,270,227
------------
HEALTH CARE PROVIDERS & SERVICES 1.5%
Bio-Reference Laboratories,
Inc. (a) 263,700 5,685,372
------------
HOTELS, RESTAURANTS & LEISURE 1.6%
Multimedia Games, Inc. (a) 432,123 1,693,922
Shuffle Master, Inc. (a) 449,250 4,227,443
------------
5,921,365
------------
HOUSEHOLD DURABLES 4.4%
KB Home 355,650 3,737,881
Leggett & Platt, Inc. 166,700 3,397,346
Ryland Group, Inc. (The) 193,000 2,891,140
Tupperware Brands Corp. 154,596 6,927,447
------------
16,953,814
------------
INSURANCE 4.8%
Arthur J. Gallagher & Co. 192,650 5,425,024
X Platinum Underwriters
Holdings, Ltd. 171,098 7,365,769
Validus Holdings, Ltd. 188,930 5,358,055
------------
18,148,848
------------
</Table>
+ Percentages indicated are based on Fund net assets.
X Among the Fund's 10 largest holdings, as of October 31, 2010, 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, 2010 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
INTERNET SOFTWARE & SERVICES 1.0%
Digital River, Inc. (a) 106,752 $ 3,977,580
------------
IT SERVICES 2.6%
Forrester Research, Inc. (a) 79,162 2,617,887
X NeuStar, Inc. Class A (a) 281,100 7,255,191
------------
9,873,078
------------
MACHINERY 4.9%
Actuant Corp. Class A 38,600 867,342
Kennametal, Inc. 200,639 6,849,815
Mueller Industries, Inc. 194,124 5,707,246
Wabtec Corp. 115,181 5,395,078
------------
18,819,481
------------
METALS & MINING 1.6%
RTI International Metals,
Inc. (a) 194,350 6,044,285
------------
MULTI-UTILITIES 4.6%
CMS Energy Corp. 228,700 4,203,506
NSTAR 136,050 5,674,645
X Vectren Corp. 273,150 7,478,847
------------
17,356,998
------------
PHARMACEUTICALS 2.6%
X Endo Pharmaceuticals
Holdings, Inc. (a) 269,100 9,886,734
------------
PROFESSIONAL SERVICES 1.6%
IHS, Inc. Class A (a) 82,500 5,959,800
------------
ROAD & RAIL 1.8%
Con-Way, Inc. 153,350 5,062,084
Genesee & Wyoming, Inc.
Class A (a) 42,040 1,943,509
------------
7,005,593
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.6%
MEMC Electronic Materials,
Inc. (a) 179,150 2,296,703
------------
SOFTWARE 1.1%
Solera Holdings, Inc. 57,800 2,777,290
THQ, Inc. (a) 313,550 1,254,200
------------
4,031,490
------------
SPECIALTY RETAIL 3.6%
GameStop Corp. Class A (a) 263,700 5,184,342
JoS. A. Bank Clothiers, Inc.
(a) 108,775 4,742,590
Monro Muffler Brake, Inc. 78,130 3,729,926
------------
13,656,858
------------
TEXTILES, APPAREL & LUXURY GOODS 3.3%
Iconix Brand Group, Inc. (a) 274,050 4,795,875
X Warnaco Group, Inc. (The)
(a) 149,450 7,937,289
------------
12,733,164
------------
THRIFTS & MORTGAGE FINANCE 3.6%
Brookline Bancorp, Inc. 358,350 3,490,329
First Niagara Financial
Group, Inc. 376,850 4,465,673
Washington Federal, Inc. 380,550 5,719,666
------------
13,675,668
------------
WIRELESS TELECOMMUNICATION SERVICES 4.3%
NTELOS Holdings Corp. 281,750 5,119,398
X Syniverse Holdings, Inc.
(a) 374,198 11,409,297
------------
16,528,695
------------
Total Common Stocks
(Cost $300,133,345) 346,998,360
------------
EXCHANGE TRADED FUNDS 4.1% (B)
- -------------------------------------------------------
X iShares Russell 2000
Index Fund 168,150 11,822,627
iShares Russell 2000 Value
Index Fund 59,500 3,830,610
------------
Total Exchange Traded Funds
(Cost $15,415,165) 15,653,237
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 4.8%
- -------------------------------------------------------
REPURCHASE AGREEMENT 4.8%
State Street Bank and Trust
Co.
0.01%, dated 10/29/10
due 11/1/10
Proceeds at Maturity
$18,273,170
(Collateralized by a
United States Treasury
Note with a rate of 2.125%
and a maturity date of
5/31/15, with a Principal
Amount of $17,690,000 and
a Market Value of
$18,641,722) $18,273,155 18,273,155
------------
Total Short-Term Investment
(Cost $18,273,155) 18,273,155
------------
Total Investments
(Cost $333,821,665) (c) 100.0% 380,924,752
Other Assets, Less
Liabilities (0.0)++ (85,867)
----------- ------------
Net Assets 100.0% $380,838,885
=========== ============
</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>
++ Less than one-tenth of a percent.
(a) Non-income producing security.
(b) Exchange Traded Fund--An investment
vehicle that represents a basket of
securities that is traded on an exchange.
(c) At October 31, 2010, cost is $334,786,889
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 61,184,262
Gross unrealized depreciation (15,046,399)
------------
Net unrealized appreciation $ 46,137,863
============
</Table>
The following is a summary of the fair valuations according to the inputs used
as of October 31, 2010, 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 (a)
Common Stocks $346,998,360 $ -- $ -- $346,998,360
Exchange Traded Funds 15,653,237 -- -- 15,653,237
Short-Term Investment
Repurchase Agreement -- 18,273,155 -- 18,273,155
------------ ----------- -------- ------------
Total Investments in Securities $362,651,597 $18,273,155 $ -- $380,924,752
============ =========== ======== ============
</Table>
(a) For a complete listing of investments and their industries, see the
Portfolio of Investments.
For the period ended October 31, 2010, the Fund did not have any transfers
between Level 1 and Level 2 fair value measurements. (See Note 2)
At October 31, 2010, the Fund did not hold any investments with significant
unobservable inputs (Level 3). (See Note 2)
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, 2010
<Table>
ASSETS
- ---------------------------------------------------
Investment in securities, at value
(identified cost $333,821,665) $ 380,924,752
Receivables:
Investment securities sold 569,302
Dividends and interest 184,796
Fund shares sold 141,082
Other assets 37,378
-------------
Total assets 381,857,310
-------------
LIABILITIES
- ---------------------------------------------------
Payables:
Fund shares redeemed 303,870
Manager (See Note 3) 258,524
Transfer agent (See Note 3) 246,046
NYLIFE Distributors (See Note 3) 88,597
Shareholder communication 53,522
Professional fees 33,168
Investment securities purchased 28,039
Custodian 1,159
Trustees 899
Accrued expenses 4,601
-------------
Total liabilities 1,018,425
-------------
Net assets $ 380,838,885
=============
COMPOSITION OF NET ASSETS
- ---------------------------------------------------
Share of beneficial interest
outstanding (par value of $.01 per
share) unlimited number of shares
authorized $ 248,165
Additional paid-in capital 602,021,771
-------------
602,269,936
Accumulated net realized loss on
investments (268,534,138)
Net unrealized appreciation on
investments 47,103,087
-------------
Net assets $ 380,838,885
=============
INVESTOR CLASS
Net assets applicable to outstanding
shares $ 67,216,612
=============
Shares of beneficial interest
outstanding 4,379,515
=============
Net asset value per share
outstanding $ 15.35
Maximum sales charge (5.50% of
offering price) 0.89
-------------
Maximum offering price per share
outstanding $ 16.24
=============
CLASS A
Net assets applicable to outstanding
shares $ 97,707,396
=============
Shares of beneficial interest
outstanding 6,362,490
=============
Net asset value per share
outstanding $ 15.36
Maximum sales charge (5.50% of
offering price) 0.89
-------------
Maximum offering price per share
outstanding $ 16.25
=============
CLASS B
Net assets applicable to outstanding
shares $ 43,743,826
=============
Shares of beneficial interest
outstanding 2,992,439
=============
Net asset value and offering price
per share outstanding $ 14.62
=============
CLASS C
Net assets applicable to outstanding
shares $ 19,944,489
=============
Shares of beneficial interest
outstanding 1,364,641
=============
Net asset value and offering price
per share outstanding $ 14.62
=============
CLASS I
Net assets applicable to outstanding
shares $ 152,226,562
=============
Shares of beneficial interest
outstanding 9,717,413
=============
Net asset value and offering price
per share outstanding $ 15.67
=============
</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, 2010
<Table>
INVESTMENT INCOME (LOSS)
- -------------------------------------------------
INCOME
Dividends (a) $ 5,505,296
Interest 1,735
-----------
Total income 5,507,031
-----------
EXPENSES
Manager (See Note 3) 3,211,839
Transfer agent (See Note 3) 1,307,008
Distribution/Service--Investor
Class (See Note 3) 149,949
Distribution/Service--Class A (See
Note 3) 236,553
Distribution/Service--Class B (See
Note 3) 430,537
Distribution/Service--Class C (See
Note 3) 196,763
Shareholder communication 200,517
Professional fees 169,601
Registration 86,122
Custodian 20,267
Trustees 12,988
Miscellaneous 51,315
-----------
Total expenses before
waiver/reimbursement 6,073,459
Expense waiver/reimbursement from
Manager (See Note 3) (321,397)
-----------
Net expenses 5,752,062
-----------
Net investment loss (245,031)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------
Net realized gain on investments 32,704,447
Net change in unrealized
appreciation (depreciation) on
investments 39,020,459
-----------
Net realized and unrealized gain on
investments 71,724,906
-----------
Net increase in net assets resulting
from operations $71,479,875
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$24,195.
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, 2010 AND OCTOBER 31, 2009
<Table>
<Caption>
2010 2009
INCREASE IN NET ASSETS
- ----------------------------------------------------------
Operations:
Net investment income
(loss) $ (245,031) $ 48,912
Net realized gain (loss)
on investments and
futures transactions 32,704,447 (44,847,858)
Net change in unrealized
appreciation
(depreciation) on
investments and futures
contracts 39,020,459 94,737,570
----------------------------
Net increase in net assets
resulting from operations 71,479,875 49,938,624
----------------------------
Dividends to shareholders:
From net investment
income:
Investor Class -- (250,167)
Class A -- (1,268,569)
Class B -- (177,128)
Class C -- (205,306)
Class I -- (3,284,545)
----------------------------
Total dividends to
shareholders -- (5,185,715)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 86,608,870 105,241,136
Net asset value of shares
issued in connection with
the acquisition of
MainStay Small Cap Growth
Fund (See Note 9) 88,818,376 --
Net asset value of shares
issued in connection with
the acquisition of
MainStay Small Cap Value
Fund (See Note 9) -- 28,616,643
Net asset value of shares
issued to shareholders in
reinvestment of dividends -- 4,832,572
Cost of shares redeemed (154,632,021) (115,704,130)
----------------------------
Increase in net assets
derived from capital
share transactions 20,795,225 22,986,221
----------------------------
Net increase in net
assets 92,275,100 67,739,130
NET ASSETS
- ----------------------------------------------------------
Beginning of year 288,563,785 220,824,655
----------------------------
End of year $ 380,838,885 $ 288,563,785
============================
</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
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
-------------------------------------------------
FEBRUARY 28,
2008**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2010 2009 2008
Net asset value at beginning of
period $ 12.52 $ 10.14 $ 13.86
------- ------- -------
Net investment income (loss) (a) (0.03) (0.03) 0.10
Net realized and unrealized gain
(loss) on investments 2.86 2.63 (3.82)
------- ------- -------
Total from investment operations 2.83 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 $ 15.35 $ 12.52 $ 10.14
======= ======= =======
Total investment return (b) 22.60% 26.91% (26.91%)(c)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.20%) (0.28%) 1.10% ++
Net expenses 1.63% 1.66% 1.80% ++
Expenses (before
waiver/reimbursement) 1.81% 2.02% 1.83% ++
Portfolio turnover rate 49% 218% 158%
Net assets at end of period (in
000's) $67,217 $25,832 $11,480
</Table>
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
Net asset value at beginning of
period $ 12.02 $ 9.70 $ 17.94 $ 19.25 $ 19.18
------- ------- ------- ------- -------
Net investment income (loss) (a) (0.12) (0.09) 0.06 (0.08) (0.21)
Net realized and unrealized gain
(loss) on investments 2.72 2.54 (6.29) (1.23) 2.08
------- ------- ------- ------- -------
Total from investment operations 2.60 2.45 (6.23) (1.31) 1.87
------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income -- (0.13) -- -- --
From net realized gain on
investments -- -- (2.01) -- (1.80)
------- ------- ------- ------- -------
Total dividends and distributions -- (0.13) (2.01) -- (1.80)
------- ------- ------- ------- -------
Net asset value at end of period $ 14.62 $ 12.02 $ 9.70 $ 17.94 $ 19.25
======= ======= ======= ======= =======
Total investment return (b) 21.63% 25.99% (38.56%) (6.81%) 10.32%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.93%) (0.95%) 0.47% (0.41%) (1.12%)
Net expenses 2.38% 2.38% 2.44% 2.41% 2.39%
Expenses (before
waiver/reimbursement) 2.56% 2.78% 2.66% 2.41% 2.39%
Portfolio turnover rate 49% 218% 158% 134% 124%
Net assets at end of period (in
000's) $43,744 $23,354 $13,305 $32,502 $46,112
</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 investment 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 investment 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,
2010 2009 2008 2007 2006
$ 12.51 $ 10.14 $ 18.65 $ 19.87 $ 19.60
------- ------- ------- -------- --------
(0.00)++ 0.00 ++ 0.17 0.07 (0.07)
2.85 2.61 (6.55) (1.29) 2.14
------- ------- ------- -------- --------
2.85 2.61 (6.38) (1.22) 2.07
------- ------- ------- -------- --------
-- (0.24) (0.12) -- --
-- -- (2.01) -- (1.80)
------- ------- ------- -------- --------
-- (0.24) (2.13) -- (1.80)
------- ------- ------- -------- --------
$ 15.36 $ 12.51 $ 10.14 $ 18.65 $ 19.87
======= ======= ======= ======== ========
22.78% 27.05% (38.10%) (6.09%) 11.20%
(0.02%) 0.01% 1.24% 0.33% (0.39%)
1.48% 1.54% 1.65% 1.66% 1.64%
1.48% 1.92% 1.84% 1.66% 1.64%
49% 218% 158% 134% 124%
$97,707 $66,905 $64,527 $301,031 $502,182
</Table>
<Table>
<Caption>
CLASS C
- ------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
2010 2009 2008 2007 2006
$ 12.01 $ 9.70 $ 17.94 $ 19.26 $ 19.19
------- ------- ------- ------- --------
(0.12) (0.08) 0.06 (0.09) (0.21)
2.73 2.53 (6.29) (1.23) 2.08
------- ------- ------- ------- --------
2.61 2.45 (6.23) (1.32) 1.87
------- ------- ------- ------- --------
-- (0.14) -- -- --
-- -- (2.01) -- (1.80)
------- ------- ------- ------- --------
-- (0.14) (2.01) -- (1.80)
------- ------- ------- ------- --------
$ 14.62 $ 12.01 $ 9.70 $ 17.94 $ 19.26
======= ======= ======= ======= ========
21.73% 26.00% (38.60%) (6.80%) 10.32%
(0.91%) (0.83%) 0.45% (0.44%) (1.14%)
2.38% 2.39% 2.45% 2.41% 2.39%
2.56% 2.81% 2.67% 2.41% 2.39%
49% 218% 158% 134% 124%
$19,944 $17,048 $15,123 $54,264 $120,414
</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,
2010 2009 2008 2007 2006
Net asset value at beginning of
period $ 12.72 $ 10.34 $ 19.03 $ 20.18 $ 19.79
-------- -------- -------- -------- --------
Net investment income (a) 0.04 0.04 0.24 0.17 0.02
Net realized and unrealized gain
(loss) on investments 2.91 2.65 (6.69) (1.32) 2.17
-------- -------- -------- -------- --------
Total from investment operations 2.95 2.69 (6.45) (1.15) 2.19
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income -- (0.31) (0.23) (0.00)++ --
From net realized gain on
investments -- -- (2.01) -- (1.80)
-------- -------- -------- -------- --------
Total dividends and distributions -- (0.31) (2.24) (0.00)++ (1.80)
-------- -------- -------- -------- --------
Net asset value at end of period $ 15.67 $ 12.72 $ 10.34 $ 19.03 $ 20.18
======== ======== ======== ======== ========
Total investment return (b) 23.19% 27.57% (37.81%) (5.69%) 11.73%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.30% 0.39% 1.69% 0.81% 0.09%
Net expenses 1.17% 1.18% 1.20% 1.19% 1.17%
Expenses (before
waiver/reimbursement) 1.23% 1.68% 1.48% 1.35% 1.17%
Portfolio turnover rate 49% 218% 158% 134% 124%
Net assets at end of period (in
000's) $152,227 $155,425 $116,390 $631,108 $862,439
</Table>
<Table>
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total investment 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.
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 ("CDSC") 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 CDSC may be imposed on redemptions made within six
years of purchase of Class B shares and a 1.00% CDSC 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
at the end of the calendar quarter 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 the
same terms and conditions, except that Class B and Class C shares are subject to
higher distribution and/or 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 and/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 generally accepted
accounting principles ("GAAP") in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Investments are valued as of the close of regular
trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern
time) on each day the Fund is open for business ("valuation date").
"Fair value" is defined as the price that the Fund would receive upon selling an
investment in an orderly transaction to an independent buyer in the principal or
most advantageous market of the investment. Fair value measurements are
determined within a framework that has established a three-tier hierarchy which
maximizes the use of observable market data and minimizes the use of
unobservable inputs to establish classification of fair value measurements for
disclosure purposes. "Inputs" refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, such as the risk inherent in a particular valuation technique used
to measure fair value using a pricing model and/or the risk inherent in the
inputs for the valuation technique. Inputs may be observable or unobservable.
Observable inputs reflect the assumptions market participants would use in
pricing the asset or liability based on market data obtained from sources
independent of the reporting entity. Unobservable inputs 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 valuation techniques used by the Fund to measure fair value during the year
ended October 31, 2010 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, 2010, there have been no
changes to the fair value methodologies.
The aggregate value by input level, as of October 31, 2010, for the Fund's
investments is included at the end of the Fund's Portfolio of Investments.
Equity securities and Exchange Traded Funds are valued at the latest quoted
sales prices as of the close of regular trading on the 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 Exchange on the valuation date. These securities are
generally categorized as Level 1 in the hierarchy.
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
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
date of purchase and thereafter assuming a constant amortization to maturity of
the difference between the principal amount due at maturity and cost. These
securities are all generally categorized as Level 2 in the hierarchy.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board 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 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.
These securities are generally categorized as Level 3 in the hierarchy. At
October 31, 2010, the Fund did not hold securities that were valued in such a
manner.
The Fund adopted Financial Accounting Standards Board Accounting Standards
Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"),
effective April 30, 2010. The Update requires the Fund to make new disclosures
about the amounts of and reasons for significant transfers in and out of Level 1
and Level 2 measurements in the fair value hierarchy and input and valuation
techniques used to measure fair value for both recurring and nonrecurring fair
value measurements that fall in either Level 2 or Level 3. The Update also
requires that the Fund separately report information on purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measurements. The Fund recognizes transfers between levels as of the beginning
of the period. Disclosures about the valuation techniques and inputs used to
measure fair value for investments that fall in either Level 2 or Level 3 fair
value hierarchy are summarized under the Level 2 or Level 3 categories listed
above.
(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. Unless the shareholder elects otherwise, all dividends
and distributions are reinvested in the same class of shares of the Fund, at
NAV. Dividends and distributions to shareholders are determined in accordance
with federal income tax regulations and may differ from GAAP.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on Short-Term
Investments are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3(B)) are
allocated to separate classes of shares pro rata based upon their relative net
assets 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 GAAP,
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 (as defined in Note
3(A)) to be creditworthy, pursuant to guidelines established by the Fund's
Board. 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
22 MainStay U.S. Small Cap Fund
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 (e.g., 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.
As of October 31, 2010, the Fund did not hold any future contracts.
(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 a 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 (as defined in Note 3(A)) have
temporarily suspended securities lending, the Fund and New York Life Investments
reserve the right to reinstitute lending when deemed appropriate. The Fund had
no portfolio securities on loan as of October 31, 2010.
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York
Life Investments" or the "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. Except
for the portion of salaries and expenses that are the responsibility of the
Fund, the Manager also pays the salaries and expenses of all personnel
affiliated with the Fund and the operational expenses of the Fund. Epoch
Investment Partners, Inc. ("Epoch" or "Subadvisor"), a registered investment
adviser, is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of a Subadvisory Agreement ("Subadvisory Agreement")
between New York Life Investments and the Subadvisor, New York Life Investments
pays for the services of the Subadvisor.
The Fund pays the Manager a monthly fee for services performed and facilities
furnished at an annual rate of the Fund's average daily net assets as follows:
0.85% up to $1 billion and 0.80% in excess of $1 billion. The effective
management fee rate (exclusive of any applicable waivers/reimbursements) was
0.85% for the year ended October 31, 2010.
Effective August 1, 2009, New York Life Investments entered into a written
expense limitation agreement under which it agreed to waive a portion of the
Fund's management fee or reimburse the expenses of the appropriate class of the
Fund so that the total ordinary operating expenses of a class 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%. This expense
limitation expires on February 28, 2011 and is reviewed annually by the Board in
connection with its review of the Fund's investment advisory agreements. Based
on its review, the Board may agree to
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
maintain, modify or terminate the agreement. 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.
On December 15, 2010, the Board approved an extension of the current written
expense limitation agreement for the Fund's Class A shares, and the expiration
of the written expense limitation agreement on the Fund's Investor Class, Class
B, Class C, and Class I shares, effective February 28, 2011. New York Life
Investments will apply an equivalent waiver or reimbursement, in an amount equal
to the number of basis points waived for Class A shares, to the other share
classes of the Fund. This revised expense limitation agreement expires on
February 28, 2012. New York Life Investments also agreed, effective February 28,
2011, to voluntarily waive or reimburse the expenses of the appropriate class of
the Fund so that the total ordinary operating expenses of a class do not exceed
the following percentage of average daily net assets: Class B, 2.45%; Class C,
2.45%; Investor Class, 1.70%. These voluntary waivers or reimbursements may be
discontinued at any time without notice.
For the year ended October 31, 2010, New York Life Investments earned fees from
the Fund in the amount of $3,211,839 and waived/reimbursed its fees in the
amount of $321,397.
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 along
with a service fee at an annual rate of 0.25% of the average daily net assets of
the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. 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
$20,316 and $10,952, respectively for the year ended October 31, 2010. The Fund
was also advised that the Distributor retained CDSCs on redemptions of Class A,
Class B and Class C shares of $491, $62,420 and $1,332, respectively, for the
year ended October 31, 2010.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service
Company LLC, an affiliate of New York Life Investments, is the Fund's transfer,
dividend disbursing and shareholder servicing agent pursuant to an agreement
between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has
entered into an agreement with Boston Financial Data Services, Inc. ("BFDS")
pursuant to which BFDS performs certain transfer agent services on behalf of
NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the
year ended October 31, 2010, were as follows:
<Table>
Investor Class $339,992
- -----------------------------------------------
Class A 226,328
- -----------------------------------------------
Class B 245,121
- -----------------------------------------------
Class C 112,096
- -----------------------------------------------
Class I 383,471
- -----------------------------------------------
</Table>
(E) SMALL ACCOUNT 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 small account fee on
certain types of accounts. Certain shareholders with an account balance of less
than $1,000 are charged an annual per account fee of $20 (assessed semi-
annually). These fees are included in transfer agent fees shown on the Statement
of Operations.
(F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially
held shares of the Fund with the following values and percentages of net assets
as follows:
<Table>
Class A $ 1,970 0.0%++
- --------------------------------------------------
Class B 1,295 0.0++
- --------------------------------------------------
Class C 2,328 0.0++
- --------------------------------------------------
Class I 47,690,253 31.3
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal
services provided to the Fund by the Office of the General Counsel of New York
Life Investments is payable directly by the Fund. For the year ended October 31,
2010, these fees, which are included in professional fees shown on the Statement
of Operations, were $39,848.
24 MainStay U.S. Small Cap Fund
NOTE 4--FEDERAL INCOME TAX
As of October 31, 2010, the components of accumulated gain (loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$ -- $(267,568,914) $-- $46,137,863 $(221,431,051)
- ---------------------------------------------------------- -----------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals 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, 2010 were not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ON ADDITIONAL
INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL
$245,031 $40,153,692 $(40,398,723)
- ---------------------------------------- ------------
</Table>
The reclassifications for the Fund are primarily due to return of capital and
capital gain distributions from real estate investment trusts ("REITs").
At October 31, 2010, for federal income tax purposes, capital loss carryforwards
of $267,568,914 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 $85,373,247 of capital losses in its
reorganization with MainStay Small Cap Growth 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 $ 35,469
- ---------------------------------- ------
2016 184,447
- ---------------------------------- ------
2017 47,653
- ---------------------------------- ------
Total $267,569
- ---------------------------------- ------
</Table>
The Fund utilized $32,385,201 capital loss carryforwards during the year ended
October 31, 2010. The Fund had $40,132,943 of capital loss carryforward that
expired during the year ended October 31, 2010.
The tax character of distributions paid during the years ended October 31, 2010
and October 31, 2009 shown in the Statements of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2010 2009
Distributions paid from:
Ordinary Income $-- $5,185,715
- --------------------------------------------------
</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 redemption requests.
Effective September 1, 2010, under an amended credit agreement, the aggregate
commitment amount is $125,000,000 with an optional maximum amount of
$175,000,000. The commitment rate is an annual rate of 0.10% of the average
commitment amount, plus an annual 0.02% up-front payment payable, regardless of
usage, to The Bank of New York Mellon, which serves as the agent to the
syndicate. The commitment fee and up-front payment are allocated among certain
MainStay 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. Prior to September 1, 2010, the
aggregate commitment amount was $125,000,000 with an annualized commitment fee
rate of 0.10% of the average commitment amount, plus an up-front payment of
0.04% paid to The Bank of New York Mellon. The line of credit expires on August
31, 2011. There were no borrowings made or outstanding with respect to the Fund
on the Credit Agreement during the year ended October 31, 2010.
NOTE 7-PURCHASES AND SALES OF SECURITIES (IN 000'S)
During the year ended October 31, 2010, purchases and sales of securities, other
than short-term securities, were $175,753 and $248,550, respectively.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8-CAPITAL SHARE TRANSACTIONS
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 325,788 $ 4,592,151
Shares issued in connection
with the acquisition of
MainStay Small Cap Growth
Fund (See Note 9) 2,525,783 32,916,559
Shares redeemed (657,082) (9,210,751)
-------------------------
Net increase (decrease) in
shares outstanding before
conversion 2,194,489 28,297,959
Shares converted into
Investor Class (See Note
1) 366,776 5,085,295
Shares converted from
Investor Class (See Note
1) (245,008) (3,442,846)
-------------------------
Net increase (decrease) 2,316,257 $ 29,940,408
=========================
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 (See Note 9) 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 (decrease) 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 (decrease) 930,642 $ 6,700,585
=========================
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 989,521 $ 13,891,292
Shares issued in connection
with the acquisition of
MainStay Small Cap Growth
Fund (See Note 9) 2,011,365 26,187,437
Shares redeemed (2,212,628) (30,648,207)
-------------------------
Net increase (decrease) in
shares outstanding before
conversion 788,258 9,430,522
Shares converted into Class
A (See Note 1) 420,666 5,838,512
Shares converted from Class
A (See Note 1) (38,176) (561,498)
Shares converted from Class
A (a) (157,445) (2,153,851)
-------------------------
Net increase (decrease) 1,013,303 $ 12,553,685
=========================
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 (See Note 9) 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 increase (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 increase (decrease) (1,015,954) $ (10,095,614)
=========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 295,585 $ 3,977,211
Shares issued in connection
with the acquisition of
MainStay Small Cap Growth
Fund (See Note 9) 1,845,463 23,069,427
Shares redeemed (565,245) (7,522,226)
-------------------------
Net increase (decrease) in
shares outstanding before
conversion 1,575,803 19,524,412
Shares converted from Class
B (See Note 1) (526,988) (6,919,463)
-------------------------
Net increase (decrease) 1,048,815 $ 12,604,949
=========================
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 (See Note 9) 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 (decrease) 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 (decrease) 571,631 $ 3,909,320
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 154,519 $ 2,045,011
Shares issued in connection
with the acquisition of
MainStay Small Cap Growth
Fund (See Note 9) 181,461 2,267,000
Shares redeemed (391,014) (5,205,198)
-------------------------
Net increase (decrease) (55,034) $ (893,187)
=========================
Year ended October 31, 2009:
Shares sold 80,847 $ 759,856
Shares issued in connection
with the acquisition of
MainStay Small Cap Value
Fund (See Note 9) 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 increase (decrease) (139,161) $ (1,500,481)
=========================
</Table>
26 MainStay U.S. Small Cap Fund
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2010:
Shares sold 4,231,109 $ 62,103,205
Shares issued in connection
with the acquisition of
MainStay Small Cap Growth
Fund (See Note 9) 330,642 4,377,953
Shares redeemed (7,220,991) (102,045,639)
-------------------------
Net increase (decrease) in
shares outstanding before
conversion (2,659,240) (35,564,481)
Shares converted into Class
I (a) 154,730 2,153,851
-------------------------
Net increase (decrease) (2,504,510) $ (33,410,630)
=========================
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
Fund (See Note 9) 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 (decrease) 968,458 $ 23,972,411
=========================
</Table>
(a) In addition to any automatic conversion features described above in Note 1
with respect to Investor Class, Class A and B shares, an investor generally
may also elect to convert their shares on a voluntary basis into another
share class of the same fund for which an investor is eligible. However, the
following limitations apply:
- Investor Class and Class A shares that remain subject to a CDSC are
ineligible for a voluntary conversion; and
- All Class B and C shares are ineligible for a voluntary conversion.
These limitations do not impact any automatic conversion features described
in Note 1 with respect to Investor Class, Class A and B shares.
An investor or an investor's financial intermediary may contact the Fund to
request a voluntary conversion between shares classes of the same Fund. An
investor may be required to provide sufficient information to establish
eligibility to convert to the new share class. All permissible conversions
will be made on the basis of the relevant NAVs of the two classes without the
imposition of any sales load, fee or other charge. If an investor fails to
remain eligible for the new share class, an investor may automatically be
converted back to their original share class, or into another share class, if
appropriate.
NOTE 9-FUND ACQUISITIONS
At a meeting held on June 23, 2009, the Board 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 the 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>
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.
At a meeting held on September 25, 2008, the Board approved a plan of
reorganization where the Fund would acquire the assets, including the
investments, and assume the identified 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.
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 Growth Fund's net assets after adjustments for any permanent
book-to-tax differences at the acquisition date were as follows, which include
the following amounts of capital stock, unrealized appreciation and accumulated
net realized loss:
<Table>
<Caption>
TOTAL NET CAPITAL UNREALIZED ACCUMULATED NET UNDISTRIBUTED NET
ASSETS 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>
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
ACCUMULATED UNDISTRIBUTED
TOTAL NET UNREALIZED NET REALIZED NET INVESTMENT
ASSETS CAPITAL STOCK DEPRECIATION LOSS INCOME
MainStay Small Cap Value Fund $28,616,643 $69,577,796 ($18,029,815) ($23,059,649) $128,311
- ----------------------------------------------------------------------------------------------------------------
</Table>
Assuming the acquisition of MainStay Small Cap Growth Fund had been completed on
November 1, 2009, the beginning of the annual reporting period of the Fund, the
Fund's pro forma results of operations for the period ended October 31, 2010,
are as follows:
<Table>
Net investment income (loss) $ (96,599)
- ------------------------------------------------
Net gain on investments $75,464,772
- ------------------------------------------------
Net increase in net assets
resulting from operations $75,368,173
- ------------------------------------------------
</Table>
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 have been included in the Fund's Statement of Operations since
November 24, 2010.
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.
NOTE 10-SUBSEQUENT EVENTS
In connection with the preparation of the financial statements of the Fund as of
and for the fiscal year ended October 31, 2010, events and transactions
subsequent to October 31, 2010 through 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 other than the extension of the Class A
expense limitation agreement and the expiration of the expense limitation
agreement for Class B, Class C, Class I and Investor Class shares, as discussed
in Note 3(A) to these financial statements.
28 MainStay U.S. Small Cap 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 U.S. Small Cap Fund ("the Fund"),
one of the funds constituting Eclipse Funds as of October 31, 2010, 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, 2010, 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 of Eclipse Funds as of October 31, 2010, 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, 2010
mainstayinvestments.com 29
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 directors/trustees, including a
majority of the independent directors/trustees, annually review and approve the
fund's investment advisory agreements. At its June 29-30, 2010 meeting, the
Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously
approved the Management Agreement between 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 Epoch Investment Partners, Inc. ("Epoch") on behalf of the Fund.
In reaching its decisions to approve these agreements (the "Agreements"), the
Board considered information prepared specifically in connection with the
contract review process that took place at various meetings between December
2009 and June 2010, 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 from New York Life
Investments and Epoch on the fees charged to other investment advisory clients
(including institutional separate accounts) that follow investment strategies
similar to the Fund, and the rationale for any differences in the Fund's
management and/or subadvisory fee and the fees charged to such institutional
products. In addition, the Board requested and received information on the
profitability of the Fund to New York Life Investments and its affiliates and
Epoch 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 and its independent directors/trustees
(the "Independent Trustees"). Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment
performance 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 provided to the Fund by New York Life Investments and Epoch; (ii) the
investment performance of the Fund, New York Life Investments and Epoch; (iii)
the costs of the services provided, and profits realized, by New York Life
Investments and its affiliates and by Epoch 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 accounts managed by New York Life
Investments and third-party "peer funds" identified by Strategic Insight.
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 process. 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 EPOCH
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that New York Life Investments provides 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 Epoch's compliance with the Fund's
policies and investment objectives, and for implementing Board directives as
they relate to the Fund. The Board considered New York Life Investments'
willingness to invest in personnel that benefit the Fund, and 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.
The Board also examined the nature, extent and quality of the services that
Epoch provides to the Fund. The Board evaluated Epoch's experience in serving as
subadviser to the Fund and managing other portfolios. It examined Epoch's track
record and experience in providing investment advisory services, the experience
of investment advisory, senior management and administrative personnel at Epoch,
and Epoch's overall legal and compliance environment. The Board also reviewed
Epoch's willingness to invest in personnel designed to benefit the Fund. In this
regard, the Board considered the experience of the Fund's
30 MainStay U.S. Small Cap Fund
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 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 particularly considered
the detailed investment performance reports provided by New York Life
Investments' Investment Consulting Group on the Fund throughout the year. These
reports 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 peer
funds.
In considering the Fund's investment performance, the Board focused principally
on the Fund's long-term performance track record. The Board also 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.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the long-term investment
performance of the Fund, along with ongoing efforts by New York Life Investments
and Epoch to enhance investment returns, supported a determination to approve
the Agreements. 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 EPOCH
The Board considered the costs of the services provided by New York Life
Investments and Epoch under the Agreements, and the profits realized by New York
Life Investments, its affiliates and Epoch due to their relationships with the
Fund.
In evaluating any costs and profits of New York Life Investments and its
affiliates and Epoch 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 Epoch 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 services to the Fund. The Board noted, for
example, 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.
In addition, although the Board did not receive specific profitability
information from Epoch (due to the fact that Epoch was appointed as Subadviser
only recently), the Board considered representations from Epoch and New York
Life Investments that the subadvisory fee paid by New York Life Investments to
Epoch for services provided to the Fund was the result of arm's-length
negotiations. Because Epoch is not affiliated with New York Life Investments,
and Epoch's fees are paid directly by New York Life Investments, the Board
focused primarily on the profitability of the relationship among New York Life
Investments and 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, which was developed by New York Life Investments in
consultation with an independent consultant, 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 Epoch from legally permitted
"soft-dollar" arrangements by which brokers provide research and other services
to Epoch in exchange for commissions paid by the Fund with respect to trades on
the Fund's portfolio securities. The Board also requested and received
information from Epoch and New York Life Investments concerning other business
relationships between Epoch and its affiliates and New York Life Investments and
its affiliates.
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 significant. 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,
mainstayinvestments.com 31
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT (UNAUDITED) (CONTINUED)
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
any profits realized by New York Life Investments and its affiliates and Epoch
due to their relationships with the Fund supported the Board's determination to
approve the Agreements. 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 showing how the Fund's management fee
schedule compared to fee schedules of other funds and accounts managed by New
York Life Investments. The Board also reviewed information from Strategic
Insight showing how the Fund's management fee schedule 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 any
breakpoints or expense limitations. While recognizing the difficulty of
determining economies of scale with precision, the Board acknowledged that
economies of scale may be shared with the Fund in a number of ways, including,
for example, through the imposition of management fee breakpoints and by
initially setting relatively lower management fees.
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 Epoch 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. In addition, the Board considered information provided by New York
Life Investments and Epoch 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 Epoch 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 LLC, 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 considered representations
from New York Life Investments that NYLIM Service Company LLC historically has
realized only 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 certain 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.
32 MainStay U.S. Small Cap Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 which will show the federal tax status of the distributions received
by shareholders in calendar year 2010. The amounts that will be reported on such
1099-DIV or substitute Form 1099 will be the amounts you are to use on your
federal income tax return.
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).
mainstayinvestments.com 33
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.,
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) or by going online to
mainstayinvestments.com.
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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 66 None
9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief
2008 (2 funds); Executive Officer (since 2008)
ECLIPSE FUNDS INC.: Director of New York Life Investment
since 2008 (1 fund); Management LLC and New York
THE MAINSTAY FUNDS: Trustee Life Investment Management
since 2008 (14 funds); Holdings LLC; Executive Vice
MAINSTAY FUNDS TRUST: Trustee President, New York Life
since 2009 (29 funds); and Insurance Company (since
MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board,
Director since 2008 (20 MacKay Shields LLC (since
portfolios). 2008); Chairman of the Board,
Institutional Capital LLC,
Madison Capital Funding LLC,
Madison Square Investors LLC
and McMorgan & Company LLC,
Chairman of the Board and
Chief Executive Officer,
NYLIFE Distributors LLC (since
2008); Chairman of the Board,
NYLCAP Manager, LLC (since
2008); Executive Vice
President, NYLIFE Insurance
Company of Arizona and
New York Life Insurance and
Annuity Corporation (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."
34 MainStay U.S. Small Cap Fund
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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 66 Trustee, Legg Mason
8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since
2005, and Trustee since 2000 1990) 1991 (60 portfolios)
(2 funds);
ECLIPSE FUNDS INC.: Chairman
since 2005 and Director since
1990
(1 fund);
THE MAINSTAY FUNDS: Chairman
and Board Member since 2007
(14 funds);
MAINSTAY FUNDS TRUST: Chairman
and Trustee since 2009 (29
funds); and
MAINSTAY VP SERIES FUND, INC.:
Chairman and Director since
2007 (20 portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm
3/27/51 ECLIPSE FUNDS: 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, State
Expert since 2007 (1 fund); 2006) Farm Variable Product Trust
THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios)
and Audit Committee Financial
Expert since 2006 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
and Audit Committee Financial
Expert since 2009 (29 funds);
and
MAINSTAY VP SERIES FUND, INC.:
Director and Audit Committee
Financial Expert since 2007
(20 portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 66 None
12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive
2002 (2 funds); Officer, Babson--United, Inc.
ECLIPSE FUNDS INC.: Director (financial services firm)
since 2002 (1 fund); (2000 to 2004); Independent
THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000);
since 2007 (14 funds); Head of Global Funds, Citicorp
MAINSTAY FUNDS TRUST: Trustee (1995 to 1999)
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 2007 (20
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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
RICHARD H. Indefinite; Managing Director, ICC Capital 66 None
NOLAN, JR. ECLIPSE FUNDS: Trustee since Management;
11/16/46 2007 (2 funds); President--Shields/Alliance,
ECLIPSE FUNDS INC.: Director Alliance Capital Management
since 2007 (1 fund); (1994 to 2004)
THE MAINSTAY FUNDS: Trustee
since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 2006 (20
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman and Chief Executive 66 None
TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company
2/13/52 2007 (2 funds); (financial advisory firm)
ECLIPSE FUNDS INC.: Director (since 2004); Managing
since 2007 (1 fund); Director The Carlyle Group
THE MAINSTAY FUNDS: Trustee (private investment firm)
since 1994 (14 funds); (2002 to 2004); Senior
MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and
since 2009 (29 funds); and Board Member, Groupe Arnault
MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm)
Director since 2007 (20 (1999 to 2002)
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None
5/22/40 ECLIPSE FUNDS: 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 (1 fund);
THE MAINSTAY FUNDS: Trustee
and Audit Committee Financial
Expert since 2007 (14 funds);
MAINSTAY FUNDS TRUST: Trustee
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 1994 and Audit
Committee Financial Expert
since 2003 (20 portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
36 MainStay U.S. Small Cap Fund
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF
POSITION(S) HELD FUNDS IN FUND OTHER
WITH THE FUND COMPLEX DIRECTORSHIPS
NAME AND 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
JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32
10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion
Trustee since 2007 (2 funds); to 1995) Insurance Trust (1
ECLIPSE FUNDS INC.: Director portfolio) since 2007;
since 2007 (1 fund); Trustee, Direxion Shares
THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36
since 2007 (14 funds); portfolios)
MAINSTAY FUNDS TRUST: Trustee
since 2009 (29 funds); and
MAINSTAY VP SERIES FUND, INC.:
Director since 1997 (20
portfolios).
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
The following individuals have been appointed by the Board Members to serve
as Officers of the MainStay Group of Funds.
<Table>
<Caption>
POSITIONS(S) HELD
NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S)
DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Principal Assistant Treasurer, New York
BENINTENDE Financial and Accounting Life Investment Management
5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008);
Eclipse Funds, Inc. and The Managing Director, New York
MainStay Funds (since 2007), Life Investment Management LLC
MainStay Funds Trust (since (since 2007); Treasurer and
2009) Principal Financial and
Accounting Officer, MainStay
VP Series Fund, Inc.; 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 A. Vice President and Chief Managing Director, Compliance
ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and
9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New
The MainStay Funds and York Life Investment
MainStay Funds Trust (since Management LLC (2005 to 2008);
2009) Assistant Secretary, NYLIFE
Distributors LLC (2006 to
2008); Assistant Secretary
NYLIFE Distributors LLC (2006
to 2008); Vice President and
Chief Compliance Officer,
MainStay VP Series Fund, Inc.
(since 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 Bank Asset Management
(1999 to 2005)
- --------------------------------------------------------------------------------
STEPHEN P. President, Eclipse Funds, Manager, President and Chief
FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE
2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008);
MainStay Funds Trust (since Chairman of the Board, NYLIM
2009) Service Company LLC (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. (since 2007)
- --------------------------------------------------------------------------------
J. KEVIN GAO Secretary and Chief Legal Managing Director and
10/13/67 Officer, Eclipse Funds, Associate General Counsel, New
Eclipse Funds, Inc., The York Life Investment
MainStay Funds and MainStay Management LLC (since 2010);
Funds Trust (since 2010) Secretary and Chief Legal
Officer, MainStay VP Series
Fund, Inc. (since 2010);
Director and Counsel of Credit
Suisse, Chief Legal Officer
and Secretary of Credit Suisse
Asset Management, LLC and
Credit Suisse Funds (2003 to
2010)
- --------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life
HARRINGTON President -- Administration, Investment Management LLC
2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor
Inc. and The MainStay Funds advisory organizations) (since
(since 2005), MainStay Funds 2000); Executive Vice
Trust (since 2009) President, New York Life Trust
Company and New York Life
Trust Company, FSB (since
2006); Vice
President--Administration,
MainStay VP Series Fund, Inc.
(since 2005)
- --------------------------------------------------------------------------------
</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 Board to serve a one-year term.
38 MainStay U.S. Small Cap Fund
MAINSTAY FUNDS
MainStay offers a wide range of Funds for virtually any investment need. The
full array of MainStay offerings is listed here, with information about the
manager, subadvisors, legal counsel, and independent registered public
accounting firm.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay Common Stock Fund
MainStay Epoch U.S. All Cap Fund
MainStay Epoch U.S. Equity Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay MAP Fund
MainStay S&P 500 Index Fund
MainStay U.S. Small Cap Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay High Yield Municipal Bond Fund
MainStay High Yield Opportunities 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
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
MAINSTAYINVESTMENTS.COM
MainStay Investments, an indirect subsidiary of New York Life Insurance
Company, New York, NY 10010, provides investment
advisory products and services. Securities are distributed by 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.
2010 by NYLIFE Distributors LLC. All rights reserved.
<Table>
<Caption>
- -----------------------------------------------------------------
Not Not a May Lose No Bank Not Insured by Any
FDIC/NCUA Deposit Value Guarantee Government Agency
Insured
- -----------------------------------------------------------------
</Table>
NYLIM-AO21230 MS333-10 MSUSC11-12/10
B1
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"). 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, 2010 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 $69,580. The aggregate fees billed for the fiscal year
ended October 31, 2009 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 $65,571.
(b) Audit Related Fees
The aggregate fees billed for the fiscal year ended October 31, 2010 for
assurance and related services by KPMG that are reasonably related to the
performance of the audit of the Registrant's financial statements and are not
reported under paragraph (a) of this Item were $0. The aggregate fees billed for
the fiscal year ended October 31, 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. 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) $21,525 during the fiscal
year ended October 31, 2010, and (ii) $12,400 during the fiscal year ended
October 31, 2009. 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, 2010 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, 2009 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 no 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, 2010 and October 31, 2009 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, 2010 and (ii) $0 for
the fiscal year ended October 31, 2009.
(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 7, 2011
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 7, 2011
By: /s/ Jack R. Benintende
---------------------------------
Jack R. Benintende
Treasurer and Principal Financial
and Accounting Officer
Date: January 7, 2011
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.