<PAGE>
The
Bear Stearns
Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
<TABLE>
<S> <C>
Robert S. Reitzes....................... Chairman of the Board
Peter B. Fox............................ President and Trustee
John R. McKernan, Jr. .................. Trustee
M.B. Oglesby, Jr. ...................... Trustee
Peter M. Bren........................... Trustee
Stephen A. Bornstein.................... Vice President
Frank J. Maresca........................ Vice President and Treasurer
Ellen T. Arthur......................... Secretary
Vincent L. Pereira...................... Assistant Treasurer
Eileen M. Coyle......................... Assistant Secretary
Investment Manager Distributor
Bear Stearns Funds Bear, Stearns & Co. Inc.
Management Inc. 245 Park Avenue
245 Park Avenue New York, NY 10167
New York, NY 10167
Custodian Transfer & Dividend
Brown Brothers Disbursement Agent
Harriman & Co. PFPC Inc.
40 Water Street Bellevue Corporate Center
Boston, MA 02109 400 Bellevue Parkway
Wilmington, DE 19809
Counsel Independent Auditors
Mayer, Brown & Platt Deloitte & Touche LLP
1675 Broadway Two World Financial Center
New York, NY 10019 New York, NY 10281
</TABLE>
This report is submitted for the general information of the shareholders of the
Portfolio. It is not authorized for the distribution to prospective investors in
the Portfolio unless it is preceded or accompanied by a current prospectus
which includes details regarding the Portfolio's objectives, policies, sales
commissions and other information. Total return is based on historical results
and is not intended to indicate future performance. The investment return and
principal value of an investment in the Portfolio will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than original cost.
BSF-R-002-03
<PAGE>
Emerging
Markets Debt
Portfolio
Annual Report
March 31, 1996
[LOGO]
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
LETTER TO SHAREHOLDERS
April 25, 1996
Dear Shareholders,
Bear Stearns Funds Management Inc. ("BSFM") assumed the responsibility for
managing the Emerging Markets Debt Portfolio (the "Portfolio") on May 4, 1995.
Since that time, the Portfolio has benefited from a reduction in concerns
surrounding developing countries and generally greater optimism regarding their
future prospects. While uncertainties linger, we remain cautiously optimistic on
the prospects for emerging market debt, and plan to continue emphasizing
countries and securities that have lagged the market's rise.
The Portfolio's total return for the quarter ended March 31, 1996 was 6.68% and
6.99% (without giving effect to sales charges and contingent deferred sales
charges, if any) for class A and C shares, respectively, compared to 5.39% for
the Salomon Brothers Emerging Markets Debt Mutual Fund ("EMMF") Index. From May
4, 1995 (when BSFM commenced its management of the Portfolio) to March 31, 1996,
the total return was 31.63% (without giving effect to sales charges and
contingent deferred sales charges, if any) for class A shares versus 33.15% for
the EMMF Index. For the period July 26, 1995 (commencement of the initial public
offering) through March 31, 1996, the total return was 25.45% (without giving
effect to sales charges and contingent deferred sales charges, if any) for class
C shares versus 24.16% for the EMMF Index. Further performance data for each
class of shares during the reporting period is available in the "Financial
Highlights" section of this report.
Current Structure
As of March 31, 1996, approximately 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 our holdings continue to be
denominated in U.S. dollars and represent obligations of sovereign countries and
cash.
We have recently increased the Portfolio's positions in sovereign loans, adding
to an existing holding in Russia and introducing a new one in Peru. While we are
cautiously optimistic on the market as a whole, we anticipate that these
positions may outperform the overall market's likely rise. Both Russia and Peru
have made significant progress in negotiations to restructure their outstanding
commercial bank debt. We anticipate further price increases as the likelihood of
completion of these restructurings rise.
Over the past 11 months as your manager, we have made two key changes in the
Portfolio's approach to the emerging markets. First, we have upgraded the
Portfolio's liquidity and its credit quality by eliminating the allocation to
corporate debt. Also, by exchanging corporate obligations for sovereign Brady
bonds, the most liquid part of the universe of emerging market debt securities,
we have raised the Portfolio's yield. We plan to shift assets back into the
corporate sector when relative valuations there become more 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 offer the most relative
value, regardless of their underlying interest rate structure.
Market Overview
Over the last year, the Portfolio has benefited from rallies in most emerging
markets. Both Latin American and non-Latin American countries enjoyed gains,
fueled by generally favorable inflation results, further progress on reforms,
optimism regarding the outlook for growth and selected improvements in credit
ratings. We benefited from significant positions in many of the best performing
markets
1
<PAGE>
and individual securities within these markets. Our strongest performers
included debt issued by Panama and Poland; Panama benefited from the completion
of plans to restructure a significant portion of its outstanding debt into Brady
bonds, while bonds already issued by Poland rose in response to decisions by the
major rating agencies to assign the country investment-grade credit ratings.
The market's strong performance reflected the cumulative impact of a number of
other positive developments. Mexican and Argentine assets, for example, rose in
response to the creation of significant financial assistance packages in early
1995. Argentina's rise was reinforced by the re-election of President Carlos
Menem, who accelerated the introduction of free-market reforms in Argentina.
Additionally, growing signs of progress in Venezuela's negotiations with the
International Monetary Fund for financial assistance spurred demand for its
Brady bonds, and the announcement of plans to restructure Russia's commercial
bank debt supported prices for its existing publicly-traded loans. More
generally, lower-than-expected inflation in many developing countries created a
favorable environment for the emerging debt markets as a whole.
Outlook
We remain cautiously optimistic on the outlook for emerging market debt. Yields
remain high; as of the end of March 1996, Brady bonds, on average, still yielded
more than 600 basis points over U.S. Treasury bonds. In addition, the potential
for capital gains continues to be substantial. Inflation in most of the major
emerging countries generally remains within expectations, and is likely to be
significantly below them in some countries. Economic growth appears to be
returning to those countries plagued by recessions in 1995. While the pace of
political and economic reforms has been disappointing in some respects, we
remain mindful of the fact that such reforms continue to be introduced, and that
the international financial community remains supportive. The World Bank and the
International Monetary Fund continue to oversee the development and
implementation of international support packages. As in 1995, the major credit
rating agencies are likely to reward such reforms with higher credit ratings.
Finally, we expect to see the completion, before year-end, of Brady debt
restructuring programs in Panama and Russia, and significant progress in
negotiations with Peru over a similar plan.
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
Class A Shares(2) vs. Various Indices
[graphic here]
<TABLE>
<CAPTION>
Total Return
With applicable sales load and Without applicable sales load and
CDSC, if any, and including fee CDSC, if any, and including fee
waivers and expense reimbursements waivers and expense reimbursements
----------------------------------- -----------------------------------
<S> <C> <C>
Emerging Markets Debt Portfolio(1)(4)
Class A shares................................ 26.69%(5) 31.63%
Class C shares(2)............................. 24.45(6) 25.45
Salomon Brothers Brady Bond Index(3).............. 29.75 --
Salomon Brothers Brady Bond Mutual Fund
Index(3).......................................... 44.60 --
Salomon Brothers Emerging Markets Debt Mutual
Fund Index(3)................................. 33.15 --
National Consumer Price Index(3).................. 2.44 --
</TABLE>
- ----------
(1) For the period May 4, 1995 through March 31, 1996, 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 shares 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 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 or expenses and/or are not available for
investment. The Portfolio changed the comparable index from the Salomon
Brothers Brady Bond Index included in the Annual Report for the year ended
March 31, 1995 to the Salomon Brothers Emerging Markets Debt Mutual Fund
Index ("EMMF Index") because Bear Stearns Funds Management Inc. believes
that the EMMF Index provides shareholders with a more accurate comparison.
(4) Bear Stearns Funds Management Inc. waived its advisory 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 financial
statements.
(5) Reflects the initial maximum 3.75% sales load. Excluding fee waivers and
expense reimbursements, the total return would have been 25.20% with a sales
load charged and 30.08% without a sales load charged.
(6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense
reimbursements, the total return would have been 8.20% with a CDSC charged
at the end of the period and 7.20% 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
March 31, 1996
(unaudited)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
(as a percentage of total investments at market value)
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COUNTRY
<S> <C>
Argentina 20.7%
Russia 4.6%
Peru 3.9%
Venezuela 4.3%
Philippines 2.3%
Morocco 5.5%
Mexico 17.6%
Ecuador 3.5%
Costa Rica 4.3%
U.S. 7.8%
Brazil 14.5%
Poland 5.3%
Panama 5.7%
INVESTMENT
Brady Bonds 72.5%
Bank Loans 19.7%
Short-Term 7.8%
</TABLE>
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
RANK HOLDING CURRENCY SECURITY TYPE NET ASSETS
- ------------------------------------------------------ ----------- ------------- ---------------
<C> <S> <C> <C> <C>
1. Republic of Argentina, Floating Rate Bond, 6.31%,
due March 31, 2005................................ U.S. Dollar Brady Bond 19.92
2. United Mexican States, Discount Bond, Series A,
6.77%, due December 31, 2019...................... U.S. Dollar Brady Bond 13.29
3. The Republic of Panama, Bank Loan Participation... U.S. Dollar Bank Loan 5.47
4. The Kingdom of Morocco, Tranche A, Bank Loan
Participation,
6.59%, due January 1, 2009........................ U.S. Dollar Bank Loan 5.24
5. Federal Republic of Brazil, Eligible Interest
Bond, 6.81%, due April 15, 2006................... U.S. Dollar Brady Bond 5.16
6. Vneshekonombank, Bank Loan Participation.......... U.S. Dollar Bank Loan 4.41
7. Republic of Venezuela, Debt Conversion Bond,
6.56%, due December 18, 2007...................... U.S. Dollar Brady Bond 4.17
8. The Republic of Costa Rica, Principal Bond, Series
A, 6.25% due May 21, 2010......................... U.S. Dollar Brady Bond 4.12
9. The Republic of Peru, Citibank, Bank Loan
Participation..................................... U.S. Dollar Bank Loan 3.74
10. United Mexican States, Discount Bond, Series B,
6.77%, due December 31, 2019...................... U.S. Dollar Brady Bond 3.65
</TABLE>
4
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT INTEREST MATURITY MARKET
(000'S)+ RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS--88.63%
Argentina - 19.92%
SOVEREIGN
8,019 Republic of Argentina, FRB (a)(b)
(cost - $5,877,366)............................... 6.31% 03/31/05 $ 5,788,716
-----------
Brazil - 13.98%
SOVEREIGN
1,486 Federal Republic of Brazil, Capitalization Bond,
Euro (b).......................................... 8.00 04/15/14 875,631
2,050 Federal Republic of Brazil, EI Bond (a)(b)........ 6.81 04/15/06 1,499,062
1,200 Federal Republic of Brazil, FRB Discount Bond
(a)(b)............................................ 6.81 04/15/24 771,000
1,800 Federal Republic of Brazil, Par Bond, Series Z-L
(a)(b)(c)......................................... 4.25 04/15/24 915,750
-----------
Total Brazil (cost - $4,008,536).................. 4,061,443
-----------
Costa Rica - 4.12%
SOVEREIGN
1,900 The Republic of Costa Rica, Principal Bond, Series
A (b)
(cost - $1,557,079)............................... 6.25 05/21/10 1,197,000
-----------
Ecuador - 3.37%
SOVEREIGN
2,499 The Republic of Ecuador, PDI Bond (a)(b)(c)
(cost - $970,090)................................. 6.06 02/27/15 977,753
-----------
Mexico - 16.94%
SOVEREIGN
5,100 United Mexican States, Discount Bond, Series A
(a)(b)(d)......................................... 6.77 12/31/19 3,863,250
1,400 United Mexican States, Discount Bond, Series B
(b)(d)............................................ 6.77 12/31/19 1,060,500
-----------
Total Mexico (cost - $4,858,269).................. 4,923,750
-----------
Morocco - 5.24%
SOVEREIGN
2,200 The Kingdom of Morocco, Tranche A, Bank Loan
Participation (a)
(cost - $1,537,918)............................... 6.59 01/01/09 1,523,500
-----------
Panama - 5.47%
SOVEREIGN
2,000 The Republic of Panama, Bank Loan Participation
(e)(f)
(cost - $1,540,000)............................... --% -- 1,590,000
-----------
</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
MARCH 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT INTEREST MATURITY MARKET
(000'S)+ RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS (continued)
Peru - 3.74%
SOVEREIGN
1,350 The Republic of Peru, Citibank, Bank Loan
Participation (f)
(cost - $1,090,125)............................... --% -- $ 1,086,750
-----------
Philippines - 2.17%
SOVEREIGN
800 Republic of the Philippines, Par Bond (b)(c)
(cost - $608,014)................................. 6.25% 12/01/17 630,000
-----------
Poland - 5.10%
SOVEREIGN
1,800 The Polish People's Republic, Par Bond (b)(c)..... 2.75 10/27/24 879,750
800 The Polish People's Republic, PDI Bond (b)(c)..... 3.75 10/27/14 603,500
-----------
Total Poland (cost - $1,392,650).................. 1,483,250
-----------
Russia - 4.41%
SOVEREIGN
3,750 Vneshekonombank, Bank Loan Participation (f)
(cost - $1,430,625)............................... -- -- 1,282,031
-----------
Venezuela - 4.17%
SOVEREIGN
2,000 Republic of Venezuela, DCB (a)(b)
(cost - $1,104,701)............................... 6.56 12/18/07 1,212,500
-----------
Total Long-Term Investments (cost -
$25,975,373)...................................... 25,756,693
-----------
</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
MARCH 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT INTEREST MATURITY MARKET
(000'S)+ RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT--7.51%
Grand Cayman - 7.51%
2,183 Brown Brothers Harriman & Co.
Call Account
(cost - $2,183,000)............................... 4.875% * $ 2,183,000
-----------
Total Investments (cost - $28,158,373) - 96.14%... 27,939,693
Other assets in excess of liabilities - 3.86%..... 1,122,181
-----------
Net Assets - 100.00%.............................. $29,061,874
-----------
-----------
</TABLE>
- ---------
+ Denominated in United States dollars.
* Variable rate account. Rates reset on a 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 5,856,369 and 1,607,631 value recovery rights attached
respectively, with no market value.
(e) In the process of converting to a Brady bond issue, the conversion date
has not been finalized.
(f) Non-income producing security.
DCB Debt Conversion Bond.
EI Eligible Interest.
FRB Floating Rate Bond.
PDI Past Due Interest.
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
MARCH 31, 1996
<TABLE>
<S> <C>
Assets
Investments, at value (cost -- $28,158,373)........................................ $27,939,693
Cash............................................................................... 283
Receivable for investments sold.................................................... 3,539,874
Interest receivable................................................................ 602,532
Receivable from investment manager................................................. 53,302
Receivable for Portfolio shares sold............................................... 3,265
Deferred organization expenses and other assets.................................... 169,657
----------
Total assets................................................................. 32,308,606
----------
Liabilities
Payable for investments purchased.................................................. 3,007,368
Payable for Portfolio shares repurchased........................................... 43,862
Distribution fee payable........................................................... 26,963
Accrued expenses................................................................... 168,539
----------
Total liabilities............................................................ 3,246,732
----------
Net Assets
Capital stock, $0.001 par value (unlimited shares of beneficial interest
authorized)....................................................................... 3,222
Paid-in capital.................................................................... 35,071,752
Undistributed net investment income................................................ 8,877
Accumulated net realized loss from investments..................................... (5,803,297)
Net unrealized depreciation on investments......................................... (218,680)
----------
Net assets................................................................... $29,061,874
----------
----------
Class A
Net assets......................................................................... $28,860,313
----------
Shares of beneficial interest outstanding.......................................... 3,199,612
----------
Net asset value per share.......................................................... $9.02
Maximum offering price per share (net asset value plus sales charge of 3.75%* of
the offering price)............................................................... $9.37
Class C
Net assets......................................................................... $ 201,561
----------
Shares of beneficial interest outstanding.......................................... 22,308
----------
Net asset value and offering price per share**..................................... $9.04
</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 YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C>
Investment income
Interest........................................................................... $3,671,782
----------
Expenses
Investment management fees......................................................... 312,217
Legal and auditing fees............................................................ 187,964
Distribution fees - class A........................................................ 99,038
Distribution fees - class C........................................................ 452
Accounting fees.................................................................... 57,000
Reports and notices to shareholders................................................ 56,273
Amortization of organization expenses.............................................. 54,702
Custodian fees and expenses........................................................ 44,300
Transfer agent fees and expenses................................................... 43,810
State registration fees............................................................ 32,591
Advisory fees...................................................................... 21,087
Trustees' fees and expenses........................................................ 16,287
Insurance expenses................................................................. 15,177
Other.............................................................................. 94
----------
Total expenses before waivers and reimbursements............................... 940,992
Less: waivers and reimbursements............................................... (361,596)
----------
Total expenses after waivers and reimbursements................................ 579,396
----------
Net investment income.............................................................. 3,092,386
----------
Net realized and unrealized gain/(loss) on investments
Net realized loss from investments................................................. (1,813,581)
Net change in unrealized depreciation on investments............................... 9,666,626
----------
Net realized and unrealized gain on investments.................................... 7,853,045
----------
Net increase in net assets resulting from operations................................. $10,945,431
----------
----------
</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 YEAR ENDED
MARCH 31,
---------------------------------
1996 1995
---------------- --------------
<S> <C> <C>
Increase/(decrease) in net assets from
Operations
Net investment income........................... $ 3,092,386 $ 3,470,129
Net realized loss from investments.............. (1,813,581) (4,013,591)
Net change in unrealized depreciation on
investments.................................... 9,666,626 (3,808,862)
---------------- --------------
Net increase/(decrease) in net assets resulting
from operations................................ 10,945,431 (4,352,324)
---------------- --------------
Dividends and distributions to shareholders from
Net investment income
Class A shares................................ (3,173,751) (3,383,801)
Class C shares................................ (7,284) --
---------------- --------------
(3,181,035) (3,383,801)
---------------- --------------
Net realized capital gains
Class A shares................................ -- (1,208,826)
---------------- --------------
Shares of beneficial interest
Net proceeds from the sale of shares............ 1,767,410 3,774,802
Cost of shares repurchased...................... (10,679,919) (15,340,858)
Shares issued in reinvestment of dividends...... 2,161,217 2,869,124
---------------- --------------
Net decrease in net assets derived from shares
of beneficial interest transactions............ (6,751,292) (8,696,932)
---------------- --------------
Total increase/(decrease) in net assets......... 1,013,104 (17,641,883)
---------------- --------------
Net assets
Beginning of year............................... 28,048,770 45,690,653
---------------- --------------
End of year (including undistributed net
investment income of $8,877 and $111,934,
respectively).................................. $ 29,061,874 $ 28,048,770
---------------- --------------
---------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
Contained below is per share operating performance data for each class of shares
outstanding, total investment return, ratios to average net assets and other
supplemental data for each period indicated. This information has been derived
from information provided in the financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR JULY 26, 1995* FOR THE YEAR MAY 3, 1993**
ENDED THROUGH ENDED THROUGH
MARCH 31, 1996 MARCH 31, 1996 MARCH 31, 1995 MARCH 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)........ 0.91 0.59 0.79 0.66
Net realized and unrealized
gain/(loss) on investments,
forward foreign currency
contracts and translation of
foreign currency related
transactions (2)................ 2.13 1.32 (1.85) (0.55)
------- ------- ------- -------
Net increase/(decrease) in net
assets resulting from
operations...................... 3.04 1.91 (1.06) 0.11
------- ------- ------- -------
Dividends and distributions to
shareholders from
Net investment income.......... (0.92) (0.68) (0.77) (0.65)
Net realized capital gains..... -- -- (0.25) (0.03)
------- ------- ------- -------
(0.92) (0.68) (1.02) (0.68)
------- ------- ------- -------
Net asset value, end of
period........................ $ 9.02 $ 9.04 $ 6.90 $ 8.98
------- ------- ------- -------
------- ------- ------- -------
Total investment returns
(3)(6).......................... 46.13% 25.45% (13.07)% 0.36%
------- ------- ------- -------
------- ------- ------- -------
Ratios/Supplemental Data
Net assets, end of period (000's
omitted)........................ $28,860 $ 202 $28,049 $45,691
Ratio of expenses to average net
assets (1)(6)................... 2.00% 2.40%(4) 2.00% 2.00%(4)
Ratio of net investment income to
average net assets (1)(6)....... 10.64% 8.72%(4) 8.86% 7.24%(4)
Decrease reflected in above
expense ratios and net
investment income due to waivers
and reimbursements (6).......... 1.18% 3.42%(4) 0.53% 0.33%(4)
Portfolio turnover rate.......... 266.46% 266.46% 35.01% 100.85%(5)
</TABLE>
- --------
* Commencement of initial public offering.
**Commencement of investment operations.
***Calculated based on the shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on the
actual
shares outstanding on the dates of distribution.
(1)Reflects waivers and reimbursements.
(2)The amount shown for a share outstanding throughout the respective period is
not in accord with the change in aggregate gains and losses in investments
during the respective 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)Not annualized.
(6) The total investment return and ratios for class C shares are not
necessarily comparable to those of class A, due to timing differences in the
commencement
of the initial public offering of class C shares.
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 initial public offering for the class C
shares commenced 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 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.
The assets of the Portfolio are not listed on security exchanges or traded on
other regulated markets, therefore, in the absence of reported sales prices on a
valuation date, assets generally will be valued at the mean of the last bid and
offer quotations. In the absence of reported bid and offer quotations on such
valuation date, such assets will be valued from the broker bids of at least one
market maker. In the absence of current broker bids or if PFPC Inc. (the
"Administrator"), in consultation with the Valuation Committee, concludes that
such broker bids are not indicative of the fair value for such assets by reason
of the illiquidity of a particular security or investment, or other factors, the
value of such assets will be recorded at their fair value determined in good
faith by the Administrator after consultation with the Valuation Committee. In
making this determination the Valuation Committee 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
60 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 management,
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 treated as adjustments to interest
income and
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<PAGE>
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 fiscal year ended March
31, 1996.
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
March 31, 1996, 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, 1996, the Portfolio had
capital loss carryforwards of $463,150 and $5,340,147 available as a reduction,
to the extent provided in regulations, of any future net capital gains realized
before the end of fiscal years 2003 and 2004, respectively. 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.
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.
Dividends and Distributions--The Portfolio declares and pays as quarterly
dividends 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
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<PAGE>
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 Investment 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 Portfolio will not pay BSFM or BEA at a later time for any amounts
they waived nor will the Portfolio reimburse BSFM or BEA for any amounts they
may assume.
The Investment Manager has voluntarily undertaken to limit the total operating
expenses (exclusive of brokerage commissions, taxes, interest, and extraordinary
items) to a 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 by the Investment Manager of its investment management
fees and reimbursements of expenses exceeding the manager's fee. Accordingly,
for the year ended March 31, 1996, BSFM waived $294,429 of its investment
management fees, and the Adviser waived $13,865 of its advisory fees. In
addition, BSFM reimbursed $53,302 in order to maintain the voluntary expense
limitation.
The fees are 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 assets 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 assets 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 assets
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 enables 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 & Co. Inc. ("Bear Stearns" or
"Distributor"). The initial public offering for the class C shares commenced on
July 26, 1995. Such fees are based on the average daily net assets in each class
of the Portfolio and are accrued daily and paid monthly or at such other
intervals as the Board of Trustees may determine. For the year ended March 31,
1996, Bear Stearns, as distributor, earned $99,490 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
charges imposed on sales of the Portfolio's class A shares, and reallows a
portion of such charges to dealers through which the sales are made. As a result
of an undertaking by the Distributor, it reallowed or will reallow all of the
sales charges to its dealers selling Portfolio shares for the period April 3,
1995 through September 26, 1995 and the period February 15, 1996 through June
30, 1996. Furthermore, the Distributor has increased the compensation paid to
its dealers selling Portfolio shares on net asset value transfers (purchases
made by investors with the proceeds
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<PAGE>
from a redemption of shares of an investment company sold with a sales charge or
commission and not distributed by Bear Stearns) from 0.50% to 1.00% for the
period April 15, 1996 through June 30, 1996. 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 year ended March 31, 1996, Bear Stearns has advised the Portfolio that
it received approximately $30,280 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.
Investments in Securities
For U.S. federal income tax purposes, the cost of securities owned at March 31,
1996, was $28,186,996. Accordingly, the net unrealized depreciation on
investments of $247,303 was composed of gross appreciation of $647,050 for those
securities having an excess of value over cost and gross depreciation of
$894,353 for those investments having an excess of cost over value.
For the year ended March 31, 1996, aggregate purchases and sales of portfolio
securities (excluding short-term securities) were $71,628,452 and $77,501,097,
respectively.
Shares of Beneficial Interest
The Portfolio offers class A and C shares. Class A shares are sold with a
front-end sales charge of up to 3.75%. Class C shares are sold with a contingent
deferred sales charge ("CDSC") of 1.00% during the first year.
At March 31, 1996, there was an unlimited amount of $0.001 par value shares of
beneficial interest authorized of which Bear Stearns Funds Management Inc. 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 YEAR
JULY 26, 1995* ENDED
FOR THE YEAR ENDED THROUGH MARCH 31,
MARCH 31, 1996 MARCH 31, 1996 1995
CLASS A CLASS C CLASS A
----------------------------- ---------------------- ------------
Shares Amount Shares Amount Shares
------------ --------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales........................................... 187,769 $ 1,560,594 23,786 $ 206,816 499,765
Repurchases..................................... (1,315,721) (10,659,478) (2,227) (20,441) (1,878,080)
Reinvestments................................... 265,067 2,154,823 749 6,394 350,988
------------ --------------- --------- ----------- ------------
Net increase/(decrease) in shares outstanding... (862,885) $ (6,944,061) 22,308 $ 192,769 (1,027,327)
------------ --------------- --------- ----------- ------------
------------ --------------- --------- ----------- ------------
<CAPTION>
Amount
---------------
<S> <C>
Sales........................................... $ 3,774,802
Repurchases..................................... (15,340,858)
Reinvestments................................... 2,869,124
---------------
Net increase/(decrease) in shares outstanding... $ (8,696,932)
---------------
---------------
</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, The Insiders Select Fund, and S&P STARS Portfolio, and S&P STARS Fund
are also parties to the credit agreement. The credit agreement provides that
each party to the agreement 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 is
the aggregate outstanding principal amount of all loans to any of the portfolios
to 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%.
Each loan is payable on demand or upon termination of this credit agreement or,
for money market loans, on the last day of the interest period and, in any
event, not later than 14 days from the date the loan was advanced.
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 March 31, 1996.
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<PAGE>
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.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in exchange rates.
Credit Risk
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 Portfolio 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.
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<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders,
Emerging Markets Debt Portfolio
(A Series of Bear Stearns Investment Trust):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Emerging Markets Debt Portfolio (the "Trust")
as of March 31, 1996, and the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended and the financial highlights for the years ended March 31, 1996 and 1995
and the period May 3, 1993 through March 31, 1994 for class A shares and July
26, 1995 through March 31, 1996 for class C shares. These financial statements
and financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion of these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 at March
31, 1996 by correspondence with the custodian and brokers. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Emerging Markets
Debt Portfolio at March 31, 1996, the results of its operations, the changes in
its net assets and the financial highlights for the respective stated periods
presented in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
May 9, 1996
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<PAGE>
THE BEAR STEARNS FUNDS
Emerging Markets Debt Portfolio
SHAREHOLDER TAX INFORMATION
(unaudited)
The Portfolio is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise its shareholders within 60 days of the Portfolio's fiscal
year end (March 31, 1996) as to the U.S. federal tax status of distributions
received by the Portfolio's shareholders in respect of such fiscal year.
During the year ended March 31, 1996, the following ordinary income dividends
per share were paid by the Portfolio:
<TABLE>
<CAPTION>
NET INVESTMENT
INCOME
- ------------------------
CLASS A CLASS C
- ----------- -----------
<S> <C>
$ 0.921 $ 0.683
- ----------- -----------
- ----------- -----------
</TABLE>
There were no dividends which would qualify for the dividends received deduction
available to corporate shareholders. All Portfolio dividends were derived from
income on foreign obligations.
Because the Portfolio's fiscal year is not the calendar year, another
notification will be sent with respect to calendar year 1996. The second
notification, which will reflect the amount to be used by calendar year
taxpayers on their U.S. federal income tax returns, will be made in conjunction
with Form 1099-DIV and will be mailed in January, 1997.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their dividend. They will generally not be entitled to a foreign tax
credit or deduction for the withholding taxes paid by the Portfolio.
In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs)
need not be reported as taxable income for U.S. federal income tax purposes.
However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may
need this information for their annual information reporting.
Shareholders are advised to consult their own tax advisers with respect to the
tax consequences of their investment in the Portfolio.
18
