<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
LETTER TO SHAREHOLDERS
November 13, 1995
Dear Shareholders,
Bear Stearns Funds Management Inc. assumed the responsibility for managing
Emerging Markets Debt Portfolio (the "Portfolio") on May 4, 1995. Since that
time, the Portfolio has benefited from a reduction in the concerns surrounding
emerging market regions and Latin America in particular. Though questions remain
and risks linger, we remain cautiously optimistic on the prospects for emerging
market debt securities, and for Latin American securities in particular.
This letter provides us with the opportunity to outline recent developments in
the markets, and in the Portfolio's current structure. First, however, we would
like to briefly review two key changes that we have implemented in the
Portfolio's approach to the emerging markets, changes that we believe will be
beneficial to the Portfolio's future performance. One, we have upgraded the
Portfolio's liquidity, and arguably, its credit quality as well. By eliminating
the allocation to corporate debt, we have exchanged corporate obligations for
sovereign Brady bonds which, because of the nature of the Brady market, has had
the additional benefit of increasing the Portfolio's yield. We plan on shifting
some of our weightings to the corporate sector when valuations there become
compelling.
Second, we have eliminated the Portfolio's historical emphasis on floating-rate
securities. The emphasis on "floaters" limited the potential for capital gains
during periods in which the general level of interest rates was declining. We do
not have a particular bias in favor of floating or fixed rate securities.
Rather, we seek positions in those securities that have the most relative value,
regardless of their underlying interest rate structure. Because the emerging
markets are, by definition, less developed, market inefficiencies create
opportunities to profit from changes in the relative values of different
securities within each market, regardless of changes in the general level of
interest rates.
CURRENT STRUCTURE
As of September 30, 1995, two-thirds of the Portfolio's assets were invested in
various Latin American countries. The remaining one-third included positions in
Asia, Eastern Europe and Africa. All of these positions were denominated in U.S.
dollars and represented obligations of the sovereign government. Over
three-quarters were Brady bonds, with the balance represented by sovereign loan
securities and cash.
MARKET OVERVIEW
The Portfolio's calendar year-to-date (January 1, 1995 through September 30,
1995) total return was 9.8% based on class A shares. Further performance data
for each class of shares during this reporting period is available in the
Financial Highlights section of this report. This performance reflected the
cumulative impact of a number of positive developments which, for clarity, we
list below:
- - the first quarter announcement of substantial "rescue" packages for Mexico
and Argentina,
- - the re-election in Argentina of President Carlos Menem, the individual who
introduced free market reforms into the country,
- - lower-than-expected inflation in many emerging market countries,
- - the unexpected assignment of an investment grade rating to Poland,
1
<PAGE>
- - strong capital inflows into Brazil, and
- - the introduction of programs in Argentina and Brazil to begin repurchasing
outstanding Brady bond debt.
These developments contributed to a reduction in the fear and uncertainty
surrounding emerging markets. The risk premium that investors required to hold
the debt of emerging markets declined. As investors became more comfortable with
the near-term outlook for these markets, they redeployed the cash reserves that
they had raised earlier in this market.
OUTLOOK
We continue to be cautiously optimistic on the prospects for emerging market
debt. The market remains attractively valued, for reasons discussed below:
- - Emerging market debt remains attractive versus both U.S. Treasuries and the
U.S. high yield market. Due to the recent rally, year-to-date returns for
the market modestly exceed those of U.S. government securities. The field
of emerging market debt remains substantially in excess of the yields on
both U.S. governments and high yield bonds; according to Salomon Brothers,
Brady bonds yield more than 700 basis points (bps) (7.00%) over U.S.
Treasuries and more than 300 bps (3.00%) over U.S. high yield debt.
- - Inflation in many emerging market countries continues to be significantly
below earlier expectations. While some of the progress on inflation simply
reflects the effects of slower growth or recessions in several countries,
there is little evidence of any decision to combat these conditions with
excessive money creation.
- - The potential for additional reductions in U.S. short-term rates is very
supportive. Investors are likely to be more willing to purchase emerging
market country debt in search of higher yields during periods in which the
U.S. Federal Reserve is seen as supportive of the bond market.
- - The international financial community remains supportive. The World Bank
and the International Monetary Fund continue to oversee the development and
the operation of international support packages, allowing debtor nations
more time to implement reforms. While reform efforts have run into
obstacles in some countries, there is generally little evidence of a
reduced commitment to these reforms at the most senior levels of
government. In fact, in several countries, political leaders have viewed
the current environment as an opportunity to accelerate the pace of
reforms.
We are monitoring and taking into consideration a number of specific risks in
various countries which could significantly affect the performance of emerging
market country debt. Nevertheless, because emerging market country debt remains
attractive on a relative basis, our approach during our brief period as your
portfolio manager has been to remain essentially fully invested, seeking to
profit from relative value opportunities within individual countries as well as
among countries and across regions.
We thank you for your continued interest in the Portfolio, and would be pleased
to respond to your questions or comments. If you have any questions concerning
the Portfolio, please call 1-800-766-4111.
Sincerely,
<TABLE>
<S> <C>
[SIG] [SIG]
Robert S. Reitzes Edward R. Vaimberg
Chairman of the Board Portfolio Manager
</TABLE>
2
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio(1)
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
EMERGING MARKETS DEBT PORTFOLIO CLASS A SHARES(2) VS. VARIOUS INDICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT PORTFOLIO CLASS A MICROPAL SALOMON BRADY BOND INDEX
<S> <C> <C> <C>
May 5,1995 9625 10000 10000
May 31,1995 10262 10467 10525
June 15,1995
June 30,1995 10352 10544 10674
July 31,1995 10300 10593 10701
August 31,1995 10562 10768 10808
September 30,1995 10963 11158 11416
<CAPTION>
MIDATLANTIC CONSUMER PRICE INDEX
<S> <C>
May 5,1995 10000
May 31,1995 10026
June 15,1995
June 30,1995 10039
July 31,1995 10059.11
August 31,1995 10072.19
September 30,1995 10085.28
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN
WITH APPLICABLE SALES WITHOUT APPLICABLE SALES
LOAD AND LOAD AND
CDSC, IF ANY, AND CDSC, IF ANY, AND INCLUDING
INCLUDING FEE FEE
WAIVERS AND EXPENSE WAIVERS AND EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
------------------------- ---------------------------
<S> <C> <C>
Emerging Markets Debt Portfolio(1)(4)
Class A shares(5)................................ 9.63% 13.94%
Class C shares(2)(6)............................. 5.80 6.85
Salomon Brothers Brady Bond Mutual Fund Index(3)..... 14.16 --
Midatlantic Consumer Price Index(3).................. 0.85 --
</TABLE>
- ----------
(1) For the period May 4, 1995 through September 30, 1995, Bear Stearns Funds
Management Inc. assumed the daily portfolio management responsibility for
the Portfolio. For the period May 3, 1993 (commencement of investment
operations) through May 3, 1995 the Portfolio's investment adviser was BEA
Associates and those results are not shown.
(2) Assuming no redemption of shares at the end of the period, the return of
class C shares (for which July 26, 1995 was the initial public offering
date) would have been higher than class A if operations were commenced on
the same day. The higher return is due to the fact that there is no
initial sales load charged to class C shares.
(3) The chart assumes a hypothetical $10,000 initial investment in the
Portfolio and reflects all Portfolio expenses. Investors should note that
the Portfolio is a professionally managed mutual fund while the indices
are either unmanaged and do not incur sales charges and/or expenses and
are not available for investment.
(4) Bear Stearns Funds Management Inc. waived its investment management fee
and agreed to voluntarily reimburse a portion of the Portfolio's operating
expenses to maintain the expense limitation, as set forth in the notes to
the financial statements.
(5) Reflects the initial maximum 3.75% sales load. Excluding fee waivers and
expense reimbursements, the total return would have been 9.09% with a
sales load charged and 13.34% without a sales load charged.
(6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense
reimbursements, the total return would have been (5.93)% with a CDSC
charged at end of the period and (5.01)% without a CDSC charged at the end
of the period.
CDSC -- Contingent Deferred Sales Charge.
3
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
SEPTEMBER 30, 1995
(UNAUDITED)
DIVERSIFICATION+
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COUNTRY
<S> <C>
Argentina 14.4%
Bulgaria 4.5%
Panama 4.3%
Poland 4.8%
Russia 4.4%
Brazil 21.0%
Costa Rica 3.8%
Ecuador 3.8%
Mexico 13.9%
Morocco 5.3%
Philippines 3.8%
Nigeria 4.0%
Venezuela 4.2%
U.S. 7.8%
100.0%
INVESTMENT
Brady Bonds 78.3%
Bank Loans 13.9%
Emerging Mkt. Short-Term 7.8%
100.0%
</TABLE>
+ Expressed as a percentage of total investments at market value.
- --------------------------------------------------------------------------------
TOP TEN EMERGING MARKETS DEBT HOLDINGS
<TABLE>
<CAPTION>
% OF
RANK HOLDINGS CURRENCY SECURITY TYPE NET ASSETS
- ------------------------------------------------------ ----------- ------------- ---------------
<C> <S> <C> <C> <C>
1. Republic of Argentina, Discount Bond, 6.88%, due
March 31, 2023 U.S. Dollar Brady Bond 8.62
2. Federal Republic of Brazil, Eligible Interest,
7.25%, due April 15, 2006 U.S. Dollar Brady Bond 7.44
3. United Mexican States, Discount Bond, Series B,
7.19%, due December 31, 2019 U.S. Dollar Brady Bond 7.41
4. Federal Republic of Brazil, Note, PIK Series C,
8.00%, due April 15, 2014 U.S. Dollar Brady Bond 6.68
5. Federal Republic of Brazil, Discount Bond, 7.25%,
due April 15, 2024 U.S. Dollar Brady Bond 6.30
6. Republic of Argentina, Bond, 6.81%, due March 31,
2005 U.S. Dollar Brady Bond 5.34
7. The Kingdom of Morocco, Tranche A, Bank Loan
Participation, due January 1, 2009 U.S. Dollar Bank Loan 5.17
8. Republic of Bulgaria, FLIRB, Series A, 2.00%, due
July 28, 2012 U.S. Dollar Brady Bond 4.41
9. Vneshekonombank, Bank Loan Participation U.S. Dollar Bank Loan 4.24
10. The Republic of Panama, Bank Loan Participation U.S. Dollar Bank Loan 4.12
</TABLE>
4
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT INTEREST MATURITY MARKET
(000'S)+ RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED AND FLOATING RATE INVESTMENTS--89.56%
ARGENTINA - 13.96%
SOVEREIGN
2,500 Republic of Argentina, Bond (a)(b)................ 6.81% 03/31/05 $ 1,550,000
4,300 Republic of Argentina, Discount Bond (a)(b)....... 6.88 03/31/23 2,499,375
-----------
Total Argentina (cost - $4,958,613)............... 4,049,375
-----------
BRAZIL - 20.42%
SOVEREIGN
3,000 Federal Republic of Brazil, Discount Bond
(a)(b)............................................ 7.25 04/15/24 1,826,250
3,250 Federal Republic of Brazil, EI (a)(b)............. 7.25 04/15/06 2,157,188
3,641 Federal Republic of Brazil, PIK, Series C (b)..... 8.00 04/15/14 1,939,045
-----------
Total Brazil (cost - $5,600,029).................. 5,922,483
-----------
BULGARIA - 4.41%
SOVEREIGN
4,850 Republic of Bulgaria, FLIRB, Series A (a)(b)
(cost - $1,319,686)............................... 2.00 07/28/12 1,279,187
-----------
COSTA RICA - 3.70%
SOVEREIGN
1,900 The Republic of Costa Rica, Principal Bond, Series
A (b)
(cost - $1,544,924)............................... 6.25 05/21/10 1,073,500
-----------
ECUADOR - 3.71%
SOVEREIGN
900 The Republic of Ecuador, Discount Bond (b)(c)..... 6.81 02/28/25 443,250
1,941 The Republic of Ecuador, PDI Bond (a)(b)(c)....... 6.81 02/28/15 633,190
-----------
Total Ecuador (cost - $1,097,498)................. 1,076,440
-----------
MEXICO - 13.48%
SOVEREIGN
250 United Mexican States, Discount Bond, Series A
(a)(b)(d)......................................... 7.22 12/31/19 176,094
3,050 United Mexican States, Discount Bond, Series B
(b)(d)............................................ 7.19 12/31/19 2,148,344
750 United Mexican States, Discount Bond, Series C
(a)(b)(d)......................................... 6.97 12/31/19 528,281
1,500 United Mexican States, Discount Bond, Series D
(b)(d)............................................ 6.88 12/31/19 1,056,562
-----------
Total Mexico (cost - $3,962,766).................. 3,909,281
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT INTEREST MATURITY MARKET
(000'S)+ RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MOROCCO - 5.17%
SOVEREIGN
2,400 The Kingdom of Morocco, Tranche A, Bank Loan
Participation (a)
(cost - $1,667,807)............................... 6.69% 01/01/09 $ 1,498,500
-----------
NIGERIA - 3.88%
SOVEREIGN
2,500 Central Bank of Nigeria, Par Bond (b)(c)(e)
(cost - $1,291,635)............................... 6.25 11/15/20 1,125,000
-----------
PANAMA - 4.12%
SOVEREIGN
2,000 The Republic of Panama, Bank Loan Participation
(f)(g)
(cost - $1,540,000)............................... --% -- 1,195,000
-----------
PHILIPPINES - 3.72%
SOVEREIGN
2,000 Republic of the Philippines, FLIRB, Series B
(a)(b)
(cost - $1,083,250)............................... 5.00 06/01/08 1,078,000
-----------
POLAND - 4.68%
SOVEREIGN
1,100 The Polish People's Republic, Discount Bond
(a)(b)............................................ 7.13 10/27/24 851,125
800 The Polish People's Republic, Par Bond (b)........ 3.25 10/27/14 505,000
-----------
Total Poland (cost - $1,357,313).................. 1,356,125
-----------
RUSSIA - 4.24%
SOVEREIGN
3,750 Vneshekonombank, Bank Loan Participation (f)
(cost - $1,430,625)............................... -- -- 1,230,469
-----------
VENEZUELA - 4.07%
SOVEREIGN
2,300 Republic of Venezuela, Par Bond, Series A (b)
(cost - $1,181,625)............................... 6.75 03/31/20 1,178,750
-----------
Total Long-Term Investments (cost -
$28,035,771)...................................... 25,972,110
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT INTEREST MATURITY MARKET
(000'S)+ RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS - 7.61%
GRAND CAYMAN - 7.61%
2,206 Brown Brothers Harriman & Co.
Call Account
(cost - $2,206,000)............................... 4.75% * $ 2,206,000
-----------
Total Investments (cost - $30,241,771) - 97.17%... 28,178,110
Other assets in excess of liabilities - 2.83%..... 820,427
-----------
Net Assets - 100.00%.............................. $28,998,537
-----------
-----------
</TABLE>
- ---------
+ Denominated in United States dollars unless otherwise indicated.
* Variable rate account. Rates reset on daily basis; amounts available
generally on the same business day.
(a) Adjustable rate; rate reset based on London Interbank Offered Rate
("LIBOR").
(b) Brady bond.
(c) Step-up coupon; coupon increases at periodic intervals.
(d) With additional 337,793, 4,121,072, 1,013,378 and 2,026,757 value
recovery rights attached respectively, with no market value.
(e) With an additional 750 warrants attached with no market value.
(f) Non-income producing security.
(g) In the process of converting to a Brady bond issue, the conversion date
has not been finalized.
EI Eligible Interest.
FLIRB Front-Loaded Interest Reduction Bond.
PDI Past Due Interest.
PIK Payment-In-Kind.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $30,241,771)......................................... $28,178,110
Cash............................................................................... 708
Receivable for investment securities sold.......................................... 2,502,385
Interest receivable................................................................ 916,055
Receivable for Portfolio shares sold............................................... 9,683
Deferred organization expenses and other assets.................................... 239,689
----------
Total assets................................................................. 31,846,630
----------
LIABILITIES
Payable for investment securities purchased........................................ 2,366,170
Payable for Portfolio shares repurchased........................................... 346,395
Distribution fee payable........................................................... 25,799
Accrued expenses and other liabilities............................................. 109,729
----------
Total liabilities............................................................ 2,848,093
----------
NET ASSETS
Capital stock, $0.001 par value (unlimited shares of beneficial interest
authorized)....................................................................... 3,574
Paid-in capital.................................................................... 38,106,137
Undistributed net investment income................................................ 114,527
Accumulated net realized losses from investments and other assets and liabilities
denominated in foreign currencies................................................. (7,162,040)
Net unrealized depreciation of investments......................................... (2,063,661)
----------
Net assets applicable to shares outstanding.................................. $28,998,537
----------
----------
CLASS A
Net assets......................................................................... $28,969,187
----------
Shares of beneficial interest outstanding.......................................... 3,570,385
----------
Net asset value per share.......................................................... $8.11
Maximum offering price per share (net asset value plus sales charge of 3.75%* of
the offering price)............................................................... $8.43
CLASS C
Net assets......................................................................... $ 29,350
----------
Shares of beneficial interest outstanding.......................................... 3,619
----------
Net asset value per share and the offering price per share**....................... $8.11
</TABLE>
- --------
* On investments of $50,000 or more, the offering price is reduced.
**Redemption price per share is equal to the net asset value per share less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest................................................................. $1,982,584
----------
EXPENSES
Investment management fees............................................... $ 144,758
Legal and auditing fees.................................................. 66,212
Distribution fees........................................................ 48,287
Reports and notices to shareholders...................................... 36,143
Amortization of organization expenses.................................... 27,351
Accounting fees.......................................................... 25,500
Custodian fees and expenses.............................................. 23,900
Transfer agent fees and expenses......................................... 21,905
Advisory fees............................................................ 21,087
State registration fees.................................................. 9,554
Insurance expenses....................................................... 9,335
Trustees' fees and expenses.............................................. 8,143
Other.................................................................... 6,202 448,377
---------
Less: Waiver and reimbursements.......................................... (143,285)
Less: Waiver of advisory fees............................................ (13,865)
----------
Total expenses..................................................... 291,227
----------
Net investment income.................................................... 1,691,357
----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized loss on investment transactions............................. (3,157,916)
Net change in unrealized depreciation of investments..................... 7,821,645
----------
Net realized and unrealized gain on investments.......................... 4,663,729
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $6,355,086
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE
SEPTEMBER 30, YEAR ENDED
1995 (UNAUDITED) MARCH 31, 1995
---------------- --------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income........................... $ 1,691,357 $ 3,470,129
Net realized loss on investments and foreign
currency related transactions.................. (3,157,916) (4,013,591)
Net change in unrealized depreciation of
investments and translation of other assets and
liabilities denominated in foreign
currencies..................................... 7,821,645 (3,808,862)
---------------- --------------
Net increase/(decrease) in net assets resulting
from operations................................ 6,355,086 (4,352,324)
---------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income........................... (1,688,766) (3,383,801)
Net realized gains.............................. -- (1,208,826)
---------------- --------------
(1,688,766) (4,592,627)
---------------- --------------
SHARES OF BENEFICIAL INTEREST
Net proceeds from the sale of shares of
beneficial interest............................ 789,534 3,774,802
Cost of shares repurchased...................... (5,653,118) (15,340,858)
Shares issued in reinvestment of dividends...... 1,147,031 2,869,124
---------------- --------------
Net decrease in net assets derived from shares
of beneficial interest transaction............. (3,716,553) (8,696,932)
---------------- --------------
Total increase/(decrease) in net assets......... 949,767 (17,641,883)
---------------- --------------
NET ASSETS
Beginning of period............................. 28,048,770 45,690,653
---------------- --------------
End of period (including undistributed net
investment income of $114,527 and $111,934,
respectively).................................. $28,998,537 $ 28,048,770
---------------- --------------
---------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE BEAR STEARNS FUNDS
The Emerging Markets Debt Portfolio
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
Contained below are per share operating performance data for each class of
shares outstanding, total investment return ratios to average net assets and
other supplemental data for the period. This information has been derived from
information provided in the financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX MONTHS JULY 26, 1995* FOR THE PERIOD
ENDED SEPTEMBER THROUGH SEPTEMBER FOR THE YEAR MAY 3, 1993**
30, 1995 30, 1995 ENDED MARCH THROUGH MARCH
(UNAUDITED) (UNAUDITED) 31, 1995 31, 1994
CLASS A CLASS C CLASS A CLASS A
------------------ ------------------ -------------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period.......................... $ 6.90 $ 7.81 $ 8.98 $ 9.55
------- ------- ------- -------
Net investment income(1)......... 0.47 0.24 0.79 0.66
Net realized and unrealized
gain/(loss) on investments,
forward foreign currency
contracts and translation of
foreign currency related
transactions(2)................. 1.21 0.30 (1.85) (0.55)
------- ------- ------- -------
Net increase/(decrease) in net
assets from operations.......... 1.68 0.54 (1.06) 0.11
------- ------- ------- -------
Dividends and distributions to
shareholders from
Net investment income............ (0.47) (0.24) (0.77) (0.65)
Net capital gains................ -- -- (0.25) (0.03)
------- ------- ------- -------
Total dividends and distributions
to shareholders................. (0.47) (0.24) (1.02) (0.68)
------- ------- ------- -------
Net asset value, end of period... $ 8.11 $ 8.11 $ 6.90 $ 8.98
------- ------- ------- -------
------- ------- ------- -------
Total investment return(3)(5).... 8.73% 6.85% (13.07)% 0.36%
------- ------- ------- -------
------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted)........................ $28,969 $ 29 $28,049 $45,691
Ratio of expenses to average net
assets(1)(5).................... 2.00%(4) 2.40%(4) 2.00% 2.00%(4)
Ratio of net investment income to
average net assets(1)(5)........ 11.63%(4) 11.19%(4) 8.86% 7.24%(4)
Decrease reflected in above
expense ratios and net
investment income due to waivers
and reimbursements(5)........... 1.06% 84.22% 0.53% 0.33%
Portfolio turnover rate(6)....... 105.92% 105.92% 35.01% 100.85%
</TABLE>
- --------
* Commencement of initial public offering.
** Commencement of investment operations.
(1)Reflects waivers and reimbursements.
(2)The amount shown for a share outstanding throughout the period is not in
accord with the change in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of Portfolio
shares in relation to fluctuating net asset value during the period.
(3)Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each period
reported and includes reinvestment of dividends and distributions, if any.
Total returns are not annualized.
(4)Annualized.
(5)The total investment return and ratios for class C shares are not necessarily
comparable to those of class A, due to the timing difference in the
commencement of the initial public offering of class C shares.
(6)Not annualized.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Bear Stearns Investment Trust (the "Trust") was organized as a Massachusetts
business trust on October 15, 1992 and is registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end management investment
company. The Trust currently has one fund in operation, the Emerging Markets
Debt Portfolio (the "Portfolio"), a non-diversified portfolio. On February 22,
1995, the Portfolio changed its name from the Emerging Markets Debt Fund. As of
the date hereof, the Portfolio offers two classes of shares, which have been
designated as class A and C shares. The class C shares commenced initial public
offering on July 26, 1995.
ORGANIZATIONAL MATTERS--Prior to commencing investment operations on May 3,
1993, the Portfolio did not have any transactions other than those relating to
organizational matters and the sale of 10,472 shares of beneficial interest of
the Trust to Bear Stearns Funds Management Inc. ("BSFM" or the "Investment
Manager"). Costs of $273,667 incurred by the Trust in connection with the
organization, its registration with the Commission and with various states and
the initial public offering of its shares have been deferred and are being
amortized, using the straight-line method over the period of benefit not
exceeding sixty months, beginning with the commencement of investment operations
of the Portfolio. In the event that the Investment Manager or any transferee of
the Investment Manager redeems any of its original shares prior to the end of
the sixty month period, the proceeds of the redemption payable in respect of
such shares shall be reduced by the pro rata share (based on the proportionate
share of the original shares redeemed to the total number of original shares
outstanding at the time of the redemption) of the unamortized deferred
organization expenses as of the date of such redemption. In the event that the
Portfolio is liquidated prior to the end of the sixty month period, the
Investment Manager or the transferee of the Investment Manager shall bear the
unamortized deferred organization expenses.
PORTFOLIO VALUATION--The Portfolio calculates the net asset value of and
completes orders to purchase or repurchase Portfolio shares of beneficial
interest on each business day, with the exception of those days on which the New
York Stock Exchange is closed.
Securities which are listed on stock exchanges, whether U.S. or foreign, are
valued at the last sale price on the day the securities are valued or, lacking
any sales on such day, at the mean of the bid and asked prices available prior
to the valuation. If on any business day a foreign securities exchange or
foreign market is closed, the securities traded on such exchange or in such
market will be valued at the last sale price reported on the previous business
day of such foreign exchange or market. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
designated by the Board of Trustees of the Trust (the "Board of Trustees") or
its delegates as the primary market. Securities traded in the over-the-counter
market and listed on the NASDAQ are valued at the last trade price listed on the
NASDAQ at 4:00 p.m.; securities listed on NASDAQ for which there were no sales
on that day and over-the-counter securities are valued at the mean of the bid
and asked prices available prior to valuation. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Trustees. In making this
determination the Board of Trustees will consider, among other things, publicly
available information regarding the issuer, market conditions and values
ascribed to comparable companies. In instances where the price determined above
is deemed not to represent fair market value, the price is determined in such
manner as the Board of Trustees may prescribe. The amortized cost method of
valuation may also be used with respect to debt obligations with sixty days or
less remaining to maturity, unless this method does not represent fair value.
Any assets which are denominated in a foreign currency are converted into U.S.
dollars at the prevailing market rates for purposes of calculating net asset
value. Expenses and fees, including the investment advisory,
12
<PAGE>
administration and distribution fees, are accrued daily and taken into account
for the purpose of determining the net asset value of the Portfolio's shares.
Because of the differences in operating expenses incurred by each class, the per
share net asset value of each class will differ.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized gains and losses from security and foreign currency
transactions are calculated on the identified cost basis. Interest income is
recorded on an accrual basis. Discounts are accreted as adjustments to interest
income and identified costs of investments over the lives of the respective
investments. The Portfolio's net investment income (other than distribution
fees) and unrealized and realized gains or losses are allocated daily to each
class of shares based upon the relative proportion of net assets of each class
at the beginning of the day (after adjusting for current capital share activity
of the respective classes).
FOREIGN CURRENCY TRANSLATION--The books and records of the Portfolio are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities and other assets and liabilities stated in foreign
currencies are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the rate
of exchange prevailing on the respective dates of such transactions. The
resulting exchange gains and losses are included in the Statement of Operations.
The Portfolio does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market prices of
investments. However, the Portfolio does isolate the effect of fluctuations in
foreign exchange rates when determining the gain or loss upon the sale or
maturity of foreign currency-denominated debt obligations pursuant to U.S.
federal income tax regulations; such amount is categorized as foreign exchange
gain or loss for both financial reporting and income tax reporting purposes.
There were no foreign exchange gains or losses for the period.
FORWARD FOREIGN CURRENCY CONTRACTS--The Portfolio is permitted to enter into
forward foreign currency exchange contracts solely for purposes of protecting
against adverse changes in foreign currency exchange rates. The Portfolio may
enter into contracts to purchase foreign currencies to protect against a rise in
the U.S. dollar price of securities it has purchased pending final settlement,
or it may enter into contracts to sell foreign currencies to protect against the
decline in value of its non-dollar denominated securities due to a decline in
the value of foreign currencies against the U.S. dollar. When the Portfolio
enters into a forward foreign currency exchange contract to buy a foreign
currency, it will place cash or readily marketable securities in a segregated
account of the Portfolio in an amount equal to the value of the Portfolio's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Portfolio's commitment with respect to the contract.
Investors should be aware that the forward currency market for the purchase of
U.S. dollars in many emerging countries is not highly developed and that in
certain emerging countries no forward market for foreign currencies currently
exists or that such market may be closed to investment by the Portfolio. At
September 30, 1995, the Portfolio held no such contracts.
U.S. FEDERAL TAX STATUS--The Portfolio intends to distribute substantially all
of its taxable income and to comply with the other requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies.
Accordingly, no provision for U.S. federal income taxes is required. In
addition, by distributing during each calendar year substantially all of its
ordinary income and capital gains, if any, the Portfolio intends not to be
subject to a U.S. federal excise tax. At March 31, 1995, the Portfolio had a
capital loss carryforward of $463,150 available as a reduction, to the extent
provided in regulations, of any future net capital gains realized before the end
of fiscal year 2003. To the extent that the loss is used to offset future
capital gains, it is probable that the gains so offset will not be distributed
to shareholders. In accordance with U.S. federal tax regulations, the Portfolio
has elected to defer $3,539,713 of realized losses arising after October 31,
1994. Such losses are treated for tax purposes as arising on April 1, 1995.
FOREIGN WITHHOLDING TAXES--Income received by the Portfolio from sources outside
of the United States may be subject to withholding and other taxes imposed by
countries other than the United States.
13
<PAGE>
DIVIDENDS AND DISTRIBUTION--The Portfolio declares and pays dividends quarterly
to shareholders substantially all of its net investment income. Distribution of
net realized gains, if any, will be declared and paid at least annually.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles.
INVESTMENT MANAGER
Bear Stearns Funds Management Inc., a wholly-owned subsidiary of The Bear
Stearns Companies Inc., serves as the Portfolio's investment manager pursuant to
the Investment Management Agreement adopted by the shareholders of the Portfolio
on May 4, 1995. For its investment management and administrative services, the
Investment Manager receives from the Portfolio a monthly fee at an annual rate
equal to 1.15% of the Portfolio's average daily net assets up to $50 million,
1.00% of the Portfolio's average daily net assets of more than $50 million but
not in excess of $100 million and 0.70% of the Portfolio's average daily net
assets above $100 million.
Prior to the adoption of the Investment Management Agreement with BSFM, BEA
Associates ("BEA" or the "Adviser") served as investment adviser to the
Portfolio pursuant to an Investment Advisory Agreement, and BSFM served as
manager of the Portfolio pursuant to the Management Agreement. BEA received from
the Portfolio a monthly fee equal to 0.80% of the Portfolio's average daily net
assets up to $50 million, 0.70% of the Portfolio's average daily net assets of
more than $50 million but not in excess of $100 million and 0.50% of the
Portfolio's average daily net assets above $100 million. BSFM received from the
Portfolio a monthly fee at an annual rate equal to 0.45% of the Portfolio's
average daily net assets up to $50 million, 0.40% of the Portfolio's average
daily net assets of more than $50 million but not in excess of $100 million and
0.30% of the Portfolio's average daily net assets above $100 million.
The Investment Manager has voluntarily undertaken to limit the Portfolio's
expenses (exclusive of brokerage commissions, taxes, interest, and extraordinary
items) to the maximum annual level of 2.00% of the average daily net assets of
the Portfolio's class A shares (2.40% for class C shares), as did BEA and BSFM
in their respective capacities prior to May 4, 1995. As necessary, this
limitation is effected by waivers of fees. Accordingly, for the six months ended
September 30, 1995, BSFM waived $143,285 of its investment management fees, and
the Adviser waived $13,865 of its advisory fees for the period April 1, 1995
through May 3, 1995.
Each of the foregoing fees has been computed daily and paid monthly, and are
subject to reduction in any year to the extent that the Portfolio's expenses
(exclusive of brokerage commissions, taxes, interest, distribution-related
expenses and extraordinary items) exceed the most stringent limits prescribed by
the laws or regulations of any state in which the Portfolio's shares are offered
for sale, based on the average total net asset value of the Portfolio.
DISTRIBUTION PLAN
The Trust on behalf of the Portfolio has entered into an amended and restated
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act. Upon adoption of the Plan by the shareholders of the Portfolio on
May 4, 1995, the Plan has increased the amount of 12b-1 fees on the Portfolio's
current shares, which have been designated class A shares, from an annual rate
of 0.25% of the average daily net asset value of the Portfolio to an annual rate
of 0.35% of the average daily net assets of the class A shares of the Portfolio.
The Plan provides for 12b-1 fees on the class C shares at an annual rate of
0.75% of the average daily net assets of the class C shares. Despite the
increase in fees under the amended and restated 12b-1 plan, the total operating
expenses of the Portfolio have remained constant, as BSFM agreed to waive its
fees to the extent necessary to maintain the total operating expenses at 2.00%
per annum of the daily net asset value of the class A shares of the Portfolio
(until such time as the average net assets of the Portfolio exceed $50 million
or the total operating expenses are less than 2.00% per annum of the daily net
asset value of the class A shares of the Portfolio; 2.40% per annum for class C
shares). In addition, a higher level of 12b-1 fees will enable the Portfolio to
offer improved shareholder services, such as lower investment minimums and the
ability to exchange shares of the Portfolio with shares of the same class of
certain other funds and portfolios affiliated with Bear Stearns. Class C shares
commenced its initial public offering on July 26, 1995. Such fees are based on
the average daily net assets in each class of the Portfolio and are paid
monthly. For the six months
14
<PAGE>
ended September 30, 1995, Bear, Stearns & Co. Inc. ("Bear Stearns"), as
distributor, earned $48,287 in distribution fees under the Plan and the 12b-1
plan in effect thereto. Bear Stearns uses these fees to pay dealers whose
clients hold the Portfolio's shares and other distribution-related activities.
In addition, as distributor of the Portfolio, Bear Stearns collects the sales
charge imposed on the sales of the Portfolio's class A shares and reallows a
portion of such charges to dealers through which the sales are made. For the
period April 3, 1995 through September 26, 1995, as a result of an undertaking
by the Distributor, it reallowed all of the sales charges to dealers selling the
Portfolio. In addition, Bear Stearns advanced 1.00% in sales commissions on the
sale of class C shares to dealers at the time of such sales.
For the six months ended September 30, 1995, Bear Stearns has advised the
Portfolio that it received approximately $13,000 in front-end sales charges
resulting from sales of class A shares in the Portfolio. From these fees, Bear
Stearns paid such sales charges to dealers which in turn paid commissions to
salespersons. In addition, Bear Stearns has advised the Portfolio that during
the period, it received no contingent deferred sales charges from class C
shareholders.
INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at September
30, 1995, was the same as the cost of securities for financial statement
purposes.
At September 30, 1995, the net unrealized depreciation of investments of
$2,063,661 was composed of gross appreciation of $430,100 for those securities
having an excess of value over cost and gross depreciation of $2,493,761 for
those investments having an excess of cost over value.
For the six months ended September 30, 1995, aggregate purchases and sales of
portfolio securities (excluding short term securities) were $28,978,498 and
$31,050,634, respectively.
SHARES OF BENEFICIAL INTEREST
At September 30, 1995, there was an unlimited amount of $0.001 par value shares
of beneficial interest authorized of which Bear Stearns owned 12,645 class A
shares (including 2,173 shares acquired through dividends reinvested).
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX MONTHS JULY 26, 1995*
ENDED THROUGH FOR THE
SEPTEMBER 30, 1995 SEPTEMBER 30, 1995 YEAR ENDED
CLASS A CLASS C MARCH 31, 1995
(UNAUDITED) (UNAUDITED) CLASS A
------------------ ------------------ --------------
<S> <C> <C> <C>
Shares sold........................ 99,939 3,519 499,765
Shares repurchased................. (738,605) 0 (1,878,080)
Shares reinvested.................. 146,554 100 350,988
-------- ----- --------------
Net increase/(decrease) in shares
outstanding....................... (492,112) 3,619 (1,027,327)
-------- ----- --------------
-------- ----- --------------
</TABLE>
- ---------
* Commencement of initial public offering.
CREDIT AGREEMENT
The Trust (on behalf of the Portfolio) has entered into a credit agreement with
The First National Bank of Boston. The Bear Stearns Funds, which consists of the
Total Return Bond Portfolio, Small Cap Value Portfolio, Large Cap Value
Portfolio, S&P STARS Portfolio and S&P STARS Fund are also parties to the credit
agreement. The credit agreement provides that each portfolio party thereto is
permitted to borrow an amount equal to the lesser of $5,000,000 or 5.0% of the
assets of such portfolio. However, at no time shall the aggregate outstanding
principal amount of all loans to any of the portfolios exceed $25,000,000. The
line of credit will bear interest at the greater of: (i) the annual rate of
interest announced from time to time from the bank at its head office as its
Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%.
15
<PAGE>
Each loan is payable on demand or upon termination of this credit agreement on
January 23, 1996, or such earlier date on what the bank in its discretion shall
have terminated the line of credit.
The Portfolio uses the facility to borrow money only for temporary or emergency
(not leveraging) purposes. The Portfolio did not have any borrowing outstanding
at September 30, 1995.
CONCENTRATION OF RISK
Investments in emerging markets debt involve special risks. The issuer of the
debt of the governmental authorities that control the repayment of the debt may
be unable or unwilling to repay principal or interest when due in accordance
with the terms of such debt, and the Portfolio may have limited legal recourse
in the event of a default.
Certain emerging countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging country's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Portfolio
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.
Most securities markets in emerging market countries may have substantially less
volume and are subject to less government supervision than U.S. securities
markets. Securities of many issuers in emerging market countries may be less
liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging market countries than in the
United States.
Forward contracts are subject to the risk that the counterparty to the contract
will default on its obligations. A default on the contract would deprive the
Portfolio of unrealized profits, the benefits of a currency hedge, increase
transaction costs or force the Fund to cover its purchase or sale commitments,
if any, at the current market price. The Portfolio will not enter into such
transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by BSFM.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in exchange rates.
16
