As filed with the Securities and Exchange Commission on May 30, 1997
Securities Act Registration No. 33-53368
Investment Company Registration No. 811-07290
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Post-Effective Amendment No. 8 [x] |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 10 |X|
(Check appropriate box or boxes) [x]
BEAR STEARNS INVESTMENT TRUST
(a Massachusetts Business Trust)
(Exact Name of Registrant as Specified in Charter)
245 Park Avenue
New York, New York 10167
(Address of principal executive offices)
(212) 272-2000
Registrant's telephone number, including area code
------------------------
Ellen T. Arthur, Esq.
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
(Name and Address of Agent for service)
Copy to:
Beth R. Kramer, Esq.
Mayer, Brown & Platt
1675 Broadway
New York, N.Y. 10019-5820
It is proposed that this filing will become effective: (check appropriate box).
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b) 60
[ ] days after filing pursuant to paragraph
[ ] (a) (i) on (date) pursuant to paragraph
[ ] (a)(i) 75 days after filing pursuant to
[ ] paragraph (a)(ii) on (date) pursuant to
[ ] paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended, the
Registrant has registered an indefinite number or amount of securities under the
Securities Act of 1933, as amended. Registrant has filed the Rule 24f- 2 Notice
for its fiscal year ended March 31, 1997 on May 27, 1997.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Amount Proposed Maxi- Proposed Maxi- Amount of
Title of Securities of Shares mum Per Share mum Aggregate Registration
Registered Registered Offering Price Offering Price Fees
- ------------------- ---------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Shares of
beneficial interest,
par value $0.001 Indefinite* N/A N/A N/A
Shares of 556,546** $12.18 $6,778,730 N/A
beneficial interest,
par value $0.001
</TABLE>
* Registrant continues its election to register an indefinite number of
shares of beneficial interest pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended (the "Investment Company
Act"). The Registrant's Rule 24f-2 Notice for the fiscal year ended
March 31, 1997 was filed on May 27, 1997.
** This calculation has been made pursuant to Rule 24e-2 under the
Investment Company Act. The Registrant, during its fiscal year ended
March 31, 1997, redeemed $8,155,231 worth of shares and used $1,376,501
worth of shares for reductions pursuant to paragraph (c) of Rule 24f-2
(as filed on May 27, 1997); $6,778,730 worth of shares are being
utilized for the purpose of the reduction pursuant to Paragraph (a) of
Rule 24e-2 and this Post-Effective Amendment.
Pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
the offering price as calculated on May 19, 1997 for the shares of
beneficial interest of the Registrant's Emerging Markets Debt Portfolio
was $12.18.
<PAGE>
BEAR STEARNS INVESTMENT TRUST
Cross Reference Sheet
Pursuant to Rule 495(a)
Part A
Location in Prospectus
Item 1. Cover Page.................................. Cover Page
Item 2. Synopsis.................................... Summary; Fee Table
Item 3. Condensed Financial Information............. Not Applicable
Item 4. General Description of Registrant........... Cover Page; General;
Investment Objective;
Investment Policies;
Risk Factors and
Special
Considerations
Item 5. Management of the Fund...................... Fee Table; Management
of the Portfolio
Item 5A. Management's Discussion of
Fund Performance............................ Not Applicable
Item 6. Capital Stock and Other Securities.......... Dividends, Distributions
and Taxes; General
Information
Item 7. Purchase of Securities Being Offered........ Cover Page; Fee Table;
Management of the
Portfolio; How to Buy
Shares
Item 8. Redemption or Repurchase.................... How to Redeem Shares
Item 9. Pending Legal Proceedings................... Not Applicable
Part B Location in Statement
of Additional
Information
Item 10. Cover Page.................................. Cover Page
Item 11. Table of Contents........................... Table of Contents
Item 12. General Information and History ............ Not Applicable
Item 13. Investment Objective and Policies........... Investment Objective
and Policies; Risk
Factors and Special
Considerations;
Investment Limitations;
Portfolio Transactions
Item 14. Management of the Fund...................... Management of the
Portfolio
-1-
<PAGE>
Part B Location in Statement of
Additional Information
Item 15. Control Persons and Principal Holders
of Securities............................... Management of the
Portfolio
Item 16. Investment Advisory and other Services...... Management of the
Portfolio; Distribution
Plan
Item 17. Brokerage Allocation and Other Practices.... Portfolio Transactions
Item 18. Capital Stock and Other Securities.......... Shares of the Portfolio
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.................... Shares of the Portfolio;
Purchase and Redemption
Information; Net Asset
Value
Item 20. Tax Status.................................. Taxation
Item 21. Underwriters................................ Distribution Plan
Item 22. Calculation of Performance Data............. Performance and Yield
Information
Item 23. Financial Statements........................ Financial Statements
Part C
Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this
Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A.
-2-
<PAGE>
PROSPECTUS
Emerging Markets Debt Portfolio
Emerging Markets Debt Portfolio (the "Portfolio") is organized as a separate,
non-diversified portfolio of Bear Stearns Investment Trust (the "Trust"), an
open-end management investment company organized under the laws of The
Commonwealth of Massachusetts. The Portfolio seeks to provide investors with
high current income by investing primarily in Debt Obligations of issuers
located in Emerging Countries. The Portfolio's secondary objective is to provide
investors with capital appreciation. See "Investment Objective and Policies."
There can be no assurance that the Portfolio will achieve its investment
objective.
Investments in securities in Emerging Countries and investments in securities
denominated in foreign currencies, as well as the active management techniques
that the Portfolio may employ, entail risks in addition to those that are
customarily associated with investing in dollar-denominated U.S. debt
securities. In addition, at any one time, substantially all of the Portfolio's
assets may be invested in Debt Obligations that are unrated or below investment
grade. Investments in below investment grade Debt Obligations, commonly known as
"JUNK BONDS," and certain unrated Debt Obligations may involve risks not
associated with investment grade securities, including among others, overall
greater risk of non-payment of principal and interest (default), sensitivity to
general economic conditions and changes in interest rates, greater market price
volatility and less liquid secondary market trading. As a result, the Portfolio
is intended for long-term investors who can accept the risks associated with its
investments and may not be suitable for all investors. Investors should
carefully consider these risks before investing. See "Description of the
Portfolio -- Investment Objective," p. 10; "Description of the Portfolio --
Investment Restrictions," p. 19; and "Risk Factors and Special Considerations,"
p. 19.
By this Prospectus, the Portfolio is offering Class A and Class C shares (each,
a "Class") of shares. Class A shares are subject to a sales charge imposed at
the time of purchase and Class C shares are subject to a 1.00% contingent
deferred sales charge imposed on redemptions made within the first year of
purchase. Other differences between the Classes include the services offered to
and the expenses borne by each Class, as described herein. These alternatives
are offered so an investor may choose the method of purchasing shares that is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. The
Portfolio issues other classes of shares which have different expenses which
would affect performance. Investors desiring to obtain information about these
other classes of shares should call 1-800-766-4111 or ask their sales
representatives or the Portfolio's distributor.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies, Inc., serves as investment manager to the Portfolio.
Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the
Portfolio's distributor.
----------------------------
This Prospectus sets forth concisely the information about the Portfolio that a
prospective investor ought to know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 30, 1997, containing further
information about the Portfolio which may be of interest to investors, has been
filed with the Securities and Exchange Commission, which information is
incorporated herein by reference in its entirety. For a free copy, write to the
address or call one of the telephone numbers listed under "General Information"
in this Prospectus.
----------------------------
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank, and are not federally insured by the Federal Insurance Corporation, the
Federal Reserve Board, or any other agency.
The net asset value of funds of this type will fluctuate.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
May 30, 1997
<PAGE>
Table of Contents
Page
Summary .................................................................. 3
Fee Table.................................................................. 6
Financial Highlights....................................................... 8
Alternative Purchase Methods............................................... 9
Description of the Portfolio............................................... 10
Risk Factors and Special Considerations.................................... 19
Management of the Portfolio................................................ 26
How to Buy Shares.......................................................... 29
Shareholder Services....................................................... 36
How to Redeem Shares....................................................... 38
Dividends, Distributions and Taxes......................................... 41
Performance Information.................................................... 43
General Information........................................................ 45
Appendix ................................................................. A-1
<PAGE>
Summary
General
The Portfolio is organized as a separate, non-diversified portfolio of Bear
Stearns Investment Trust (the "Trust"), an open-end, management investment
company organized under the laws of The Commonwealth of Massachusetts. By this
Prospectus, the Portfolio offers Class A shares and Class C shares, which are
distinguished by their fee structures and shareholder services, as described
herein. The Portfolio issues other classes of shares which have different
expenses which would affect performance.
Alternative Purchase Methods
By this Prospectus, the Portfolio offers investors two methods of purchasing its
shares; investors may choose the Class of shares that best suits their needs,
given the amount of purchase, the length of time the investor expects to hold
the shares and any other relevant circumstances. Each Portfolio share represents
an identical pro rata interest in the Portfolio's investment portfolio. Class A
shares of the Portfolio are sold at net asset value per share plus a maximum
initial sales charge of 3.75% of the public offering price imposed at the time
of purchase. The initial sales charge may be reduced or waived for certain
purchases. The Class A shares of the Portfolio are subject to an annual
distribution and shareholder servicing fee at the rate of 0.35% of the value of
the average daily net assets. Class C shares of the Portfolio are subject to a
1.00% contingent deferred sales charge (a "CDSC") which is assessed only if
Class C shares are redeemed within one year of purchase. See "How to Redeem
Shares." These shares of the Portfolio also are subject to an annual
distribution and shareholder servicing fee at the rate of 0.75% of the value of
the average daily net assets of Class C shares.
The minimum initial investment in the Portfolio is currently $1,000 ($500 for
retirement plans). The minimum subsequent investment in the Portfolio is $250
($100 for retirement plans). Shares may be purchased at the current net asset
value per share plus the applicable sales load, if any. The sales load is paid
at the time of purchase of shares of the Portfolio. The Portfolio and Bear
Stearns each reserve the right to modify the minimum investment requirement, the
subsequent investment requirement, the manner in which shares are offered and
the sales load rates applicable to future purchases of shares. See "How to Buy
Shares."
Investment Objective
The investment objective of the Portfolio is to provide investors with high
current income by investing primarily in Debt Obligations (as defined herein) of
issuers located in Emerging Countries. The Portfolio's secondary objective is to
provide investors with capital appreciation. There can be no assurance that the
Portfolio will achieve its investment objective.
The Portfolio defines "Debt Obligations" to include fixed or floating rate
bonds, notes, debentures, commercial paper, Loans (as defined herein), Brady
Bonds, convertible securities, and other debt securities issued or guaranteed by
governments, agencies or instrumentalities, central banks, commercial banks or
private issuers, including repurchase agreements with respect to obligations of
governments or central banks. See "Description of the Portfolio -- Investment
Objective and Policies." The Portfolio considers "Emerging Countries" to include
any country that is generally considered to be an emerging or developing country
by the World Bank, the International Finance Corporation or the United Nations
and its authorities. The Investment Manager may invest in Debt Obligations that
it determines to be proper investments for the Portfolio notwithstanding any
credit ratings that may be assigned to such securities. At any one time,
substantially all of the Portfolio's assets may be invested in Debt Obligations
that are unrated or below investment grade.
-1-
<PAGE>
Risk Factors
Investors should carefully consider the risks of investing in securities of
issuers in Emerging Countries and non-dollar denominated securities. Generally,
while the Portfolio offers potential returns higher than those available from
U.S. government securities, there is also a substantially greater risk of loss.
The Portfolio may not be suitable for all investors, and is intended for
long-term investors who can accept the risks associated with its investments.
Investors should carefully consider these risks before investing. See
"Description of the Portfolio -- Investment Objective" and "Risk Factors and
Special Considerations."
Low Rated and Unrated Instruments. At any one time, substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. Low rated debt instruments, commonly known as "JUNK BONDS,"
and certain unrated debt instruments generally offer a higher current yield than
that available from investment grade issues, but involve greater risk. Low rated
and certain unrated securities are especially subject to changes in the
financial condition of their issuers and to price fluctuation in response to
changes in interest rates.
Discount Obligations. As a result of the Portfolio holding securities purchased
at a discount, the Portfolio may be required to sell securities to meet required
dividend distributions to Shareholders. Under adverse market conditions, this
may result in Shareholders receiving a portion of their original purchase price
as a taxable dividend and could further negatively impact net asset value.
Political and Economic Factors. Investing in Debt Obligations of Emerging
Countries involves considerations and potential risks relating to political and
economic developments abroad. Governments of many Emerging Countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector. Accordingly, government actions in the future could have a
significant effect on economic conditions in Emerging Countries, which could
affect the value of securities in the Portfolio's portfolio.
Foreign Exchange Risk. The value of non-dollar denominated securities of issuers
in Emerging Countries is affected by changes in currency exchange rates or
exchange control regulations. Foreign currency exchange rates are determined by
forces of supply and demand on the foreign exchange markets. These forces are
affected by the international balance of payments, economic and financial
conditions, government intervention, speculation and other factors. Many of the
currencies of Emerging Countries have experienced significant devaluations
relative to the U.S. dollar and major adjustments have been made in certain of
them at times. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Portfolio's assets denominated
in that currency and thereby impact upon the Portfolio's total return on such
assets. A decline in the exchange rate would reduce the value of certain
portfolio securities. In addition, if the exchange rate for the currency in
which the Portfolio receives interest payments declines against the U.S. dollar
before such interest is paid as dividends to Shareholders, the Portfolio may
have to sell securities to obtain sufficient cash to pay such dividends.
Sovereign Debt. Investments in sovereign debt involve special risks. The issuer
of the debt or 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
recourse in the event of a default.
Investing in Securities Markets of Emerging Countries. Certain of the risks
associated with investments generally are heightened for investments in Emerging
Countries. For example, securities markets in Emerging Countries may be less
liquid, more volatile and less subject to governmental regulation than U.S.
securities markets. There may be less publicly available information about
issuers in Emerging Countries than about domestic issuers.
-2-
<PAGE>
Investment Practices. The Portfolio may employ investment techniques involving
risks different from those associated with investing solely in dollar
denominated fixed income securities of U.S. issuers. Losses resulting from the
use of such strategies would reduce the Portfolio's net asset value, and
possibly income, and the losses can be greater than if the strategies had not
been used.
Non-Diversification. Since the Portfolio is "non-diversified" under the
Investment Company Act of 1940, as amended (the "Investment Company Act") it is
subject only to certain tax diversification requirements. The Portfolio may,
with respect to 50% of its assets, invest up to 25% of its assets in the
securities of any one issuer (except that this limitation does not apply to U.S.
Government securities). With respect to the remaining 50% of its assets, the
Portfolio may not invest more than 5% of its assets in the securities of any one
issuer (except the U.S. Government). To the extent that the Portfolio is
non-diversified under the Investment Company Act, it will be more susceptible to
adverse developments affecting any single issuer of portfolio securities.
Management of the Portfolio
Bear Stearns Funds Management Inc. ("BSFM" or the "Investment Manager") serves
as the Portfolio's investment manager pursuant to an Investment Management
Agreement.
For its investment advisory and management services, the Investment Manager
receives from the Portfolio a monthly fee equal on an annual basis to a
percentage of the Portfolio's average daily net assets. The maximum fee payable
to the Investment Manager is 1.15% of the Portfolio's net assets up to $50
million, 1.0% 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. The investment management fees paid by the
Portfolio are greater than those paid by most funds, but are believed by the
Investment Manager to be appropriate for fees paid by funds with a global
investment strategy. See "Management of the Portfolio." Bear Stearns serves as
the distributor for the Portfolio in the sale of its shares. The Trust, on
behalf of the Portfolio, has adopted a Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act.
Brown Brothers Harriman & Co. (the "Custodian") acts as the custodian of the
Portfolio's assets and may employ subcustodians outside the United States
approved by the Trustees of the Portfolio in accordance with regulations of the
Securities and Exchange Commission (the "Commission"). Under the Transfer Agency
Agreement with the Portfolio, PFPC Inc. (the "Transfer Agent" or the
"Administrator") provides transfer agency services and responds to inquiries
from the Shareholders.
The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
-3-
<PAGE>
Fee Table
Shareholder Transaction Expenses Class A Class C
- -------------------------------- ------- -------
Maximum Sales Load Imposed on Purchases
(as a % of offering price)................................. 3.75%* None
Maximum Sales Load Imposed on Reinvested Dividends ........ None None
Maximum Deferred Sales Charge Imposed on Redemptions
(as a % of the amount subject to charge)**................. None(a) 1.00%
Exchange Fees ............................................. None None
Annual Portfolio Operating Expenses Class A Class C
(as a percentage of average net assets) ------- -------
Management Fees (after waiver)............................... 0.11% 0.11%
Distribution (Rule 12b-1) Fees (b)........................... 0.35% 0.75%
Other Expenses (after expense reimbursements)................ 1.54% 1.54%
----- -----
Total Portfolio Operating Expenses.......................... 2.00%*** 2.40%***
===== =====
(a) In certain situations where no sales charge is assessed at the time of
purchase, a contingent deferred sales charge of up to 1.00% may be imposed
on redemptions within the first year after purchase. See "How to Buy
Shares--Class A Shares."
(b) See "Distribution Plan." Long-term shareholders of the Portfolio may
indirectly pay more than the economic equivalent of the maximum front-end
sales charges permitted by the rules of the NASD. A service fee is
reallocated to NASD member firms for continuous personal service by such
members to investors in the Portfolio, such as responding to shareholder
inquiries, quoting net asset values, providing current marketing material
and attending to other shareholder matters. Pursuant to the rules of the
NASD, the aggregate initial sales charges, any deferred sales charges and
asset based sales charges on shares of the Portfolio may not exceed 6.25%
of total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Portfolio rather than on a per shareholder basis.
* The sales load may also be reduced or eliminated under certain
circumstances. See "How to Buy Shares."
** A transaction fee of $7.50 may be charged for payments of redemption
proceeds by wire. See "How to Redeem Shares".
*** The expense figures have been restated from actual expenses paid during the
fiscal year ended March 31, 1997 to reflect current expense levels. The
Investment Manager has undertaken to waive its compensation and assume its
expenses (except the brokerage fees, extraordinary items and taxes)
provided in the Investment Management Agreement to maintain total operating
expenses at 2.00% and 2.40% per annum of the average daily net assets of
the Class A shares and Class C shares, respectively. The waiver of
compensation will automatically expire at such time as the Portfolio has
average net assets of $50 million or total operating expenses of the
Portfolio are less than 2.00% per annum of the average daily net assets,
unless the Investment Manager in its sole discretion determines to continue
the waiver of compensation. Without such waiver, the investment management
fees would be equal on an annual basis to 1.15% and 1.15% of average net
assets for Class A shares and Class C shares, respectively. Without such
waiver by the Investment Manager, total operating expenses would be equal
on an annual basis to 2.80% and 3.04% of average net assets for Class A
shares and Class C shares, respectively.
-4-
<PAGE>
Example:
You would pay the following expenses on a hypothetical $1,000 investment
(including the sales load), assuming (1) a 5% annual return and the reinvestment
of dividends and (2) redemption of all shares at the end of each time period:
Class A Shares Class C Shares
- ------------------------------------- --------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- ------ ------- ------- -------- ------ ------- ------- --------
$57 $98 $141 $261 $34 $75 $128 $274
You would pay the following expenses on the same investment, assuming no
redemption:
Class A Shares Class C Shares
- ------------------------------------ ---------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- ------ ------- ------- -------- ------ ------- ------- --------
$57 $98 $141 $261 $24 $75 $128 $274
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses of the Portfolio that an investor in the Portfolio
will bear directly or indirectly, the payment of which will reduce investors'
annual return. The example assumes fees are paid at the rates provided in the
table. In addition to the expenses noted above, a transaction fee of $7.50 may
be charged for payments of redemption proceeds by wire. See "How to Redeem
Shares." For a description of the expense reimbursement or waiver arrangements
in effect, see "Management of the Portfolio."
Actual fees and expenses may be greater or less than those indicated. Moreover,
while the example assumes a 5% annual return, the Portfolio's actual performance
will vary and may result in an actual return greater or less than 5%.
-5-
<PAGE>
Financial Highlights
The following information on financial highlights for (i) the fiscal year ended
March 31, 1997, March 31, 1996, March 31, 1995 and the period commencing May 3,
1993 (commencement of investment operations) through March 31, 1994 for the
Class A Shares and (ii) for the fiscal year ended March 31, 1997 and for the
period commencing July 26, 1995 (commencement of initial public offering)
through March 31, 1996 for the Class C Shares has been audited by Deloitte &
Touche LLP, independent auditors, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto and auditor's report which appear in the Portfolio's Annual
Reports to Shareholders for those periods. The Annual Report to Shareholders for
the year ended March 31, 1997, is incorporated by reference into, and unless
previously provided, is delivered together with the Statement of Additional
Information dated May 30, 1997.
<TABLE>
<CAPTION>
For the
Period
For the For the Period For the May 3,
Fiscal Year July 26,1995* Year 1993**
For the Fiscal Year Ended Through Ended Through
Ended March 31, March 31, March 31, March 31,
March 31, 1997 1996 1996 1995 1994
-------------- ------ ------ ------ -----
Class A Class C Class A Class C Class A Class A
------- ------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance**
Net asset value, beginning of period......... $9.02 $9.04 $ 6.90 $ 7.81 $ 8.98 $ 9.55
---- ---- ------- ------- ------- -------
Net investment income (1).................... 0.85 0.84 0.91 0.59 0.79 0.66
Net realized and unrealized gain/(loss) on
investments, foreign currency contracts and
translation of foreign currency related
transactions(2)............................ 2.10 2.07 2.13 1.32 (1.85) (0.55)
---- ---- ------- ------- ------- -------
Net increase/(decrease) in net assets
from operations............................ 2.95 2.91 3.04 1.91 (1.06) 0.11
---- ---- ------ ------- ------- ------
Dividends and distributions to shareholders
from Net investment income................... (0.83) (0.81) (0.92) (0.68) (0.77) (0.65)
Net realized capital gains................... -- -- -- -- (0.25) (0.03)
------ ------ ------- ------ ------ -----
(0.83) (0.81) (0.92) (0.68 ) (1.02) (0.68)
------ ------ ------ ------ ------ -------
Net asset value, end of period............... $11.14 $11.14 $ 9.02 $ 9.04 $ 6.90 $ 8.98
====== ====== ====== ====== ====== ======
Total investment return (3)(5)............... 33.48% 32.97% 46.13% 25.45% (13.07)% 0.36%
====== ====== ====== ===== ====== ======
Ratios/Supplemental Data
Net assets, end of period (000's omitted).... $33,185 $ 2,583 $28,860 $ 202 28,049 45,691
Ratio of expenses to average net assets(1)... 2.00% 2.40% 2.00% 2.40%(4)(5) 2.00% 2.00%(4)
Ratio of net investment income to average
net assets(1).............................. 7.95% 7.59% 10.64% 8.72%(4)(5) 8.86% 7.24%(4)
Decrease reflected in above expense ratios
and net investment income due to waivers
and reimbursements......................... 0.80% 0.64% 1.18% 3.42%(4)(5) 0.53% 0.33%(4)
Portfolio turnover rate...................... 223.41% 223.41% 266.46% 266.46%(6) 35.01% 100.85%(6)
</TABLE>
* Commenced investment operations on May 3, 1993. Class C shares commenced
its initial public offering on July 26, 1995.
** Calculated based on the shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses in
investments during the respective periods because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
values during the respective periods.
(3) Total investment return does not consider the effects of sales loads or
contingent deferred sales charges. Total investment 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 investment return is not annualized.
(4) Annualized.
(5) The total investment return and ratios for Class C shares are not
necessarily comparable to those of Class A shares, due to timing
differences in the commencement of the initial public offering of Class C
shares.
(6) Not annualized.
-6-
<PAGE>
Alternative Purchase Methods
[By this Prospectus, the Portfolio offers you two methods of purchasing its
shares.]
By this Prospectus, the Portfolio offers investors two methods of purchasing its
shares; investors may choose the Class of shares that best suits their needs,
given the amount of purchase, the length of time the investor expects to hold
the shares and any other relevant circumstances. Each Portfolio share represents
an identical pro rata interest in the Portfolio's investment portfolio.
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 3.75% of the public offering price imposed at
the time of purchase. The initial sales charge may be reduced or waived for
certain purchases. See "How to Buy Shares -- Class A Shares." The Class A shares
of the Portfolio are subject to an annual distribution and a shareholder
servicing fee at the rate of 0.35% of the value of the average daily net assets.
Class C shares of the Portfolio are subject to a 1.00% contingent deferred sales
charge (a "CDSC") which is assessed only if Class C shares are redeemed within
one year of purchase. See "How to Redeem Shares -- Contingent Deferred Sales
Charge -- Class C Shares." These shares of the Portfolio also are subject to an
annual distribution and shareholder servicing fee at the rate of 0.75% of the
value of the average daily net assets of Class C shares.
The decision as to which Class of shares is more beneficial to each investor
depends on the amount and the intended length of the investor's investment. Each
investor should consider whether, during the anticipated life of the investor's
investment in the Portfolio, the accumulated distribution and shareholder
servicing fee and CDSC, if any, on Class C shares would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent,
if any, such differential would be offset by the return of Class A shares.
Additionally, investors qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time might consider
purchasing Class A shares because the accumulated continuing distribution and
shareholder servicing fees on Class C shares may exceed the initial sales charge
on Class A shares during the life of the investment. Finally, each investor
should consider the effect of the CDSC period in the context of the investor's
own investment time frame. Generally, Class A shares may be more appropriate for
investors who invest $500,000 or more in the Portfolio's shares, but will not be
appropriate for investors who invest less than $50,000 in the Portfolio's
shares, unless they intend to hold those shares for a period exceeding six
years.
The minimum initial investment in the Portfolio is currently $1,000 ($500 for
retirement plans). The minimum subsequent investment in the Portfolio is $250
($100 for retirement plans). Shares may be purchased at the current net asset
value per share plus the applicable sales load, if any. The sales load is paid
at the time of purchase of shares of the Portfolio. The Portfolio and Bear,
Stearns & Co. Inc. ("Bear Stearns" or the "Distributor") each reserve the right
to modify the minimum investment requirement, the subsequent investment
requirement, the manner in which shares are offered and the sales load rates
applicable to future purchases of shares. See "How to Buy Shares."
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Description of the Portfolio
General
[The Portfolio is a series of Bear Stearns Investment Trust.]
Emerging Markets Debt Portfolio (the "Portfolio") is organized as a separate,
non-diversified portfolio of Bear Stearns Investment Trust (the "Trust"), an
open-end management investment company organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992. The Portfolio commenced
investment operations on May 3, 1993. By this Prospectus, the Portfolio offers
two distinct classes (each, a "Class") of shares: Class A shares and Class C
shares. The Classes are distinguished by their fee structures, as well as the
services offered to and the expenses borne by each Class, as described herein.
From time to time, other portfolios may be established and sold pursuant to
other offering documents.
Investment Objective
[The Portfolio seeks to provide investors with high current income by investing
primarily in Debt Obligations of issuers in Emerging Countries.]
The Portfolio seeks to provide investors with high current income by investing
primarily in Debt Obligations of issuers in Emerging Countries. The Portfolio's
secondary objective is to provide investors with capital appreciation. The
Portfolio considers "Emerging Countries" to include any country that is
generally considered to be an emerging or developing country by the World Bank,
the International Finance Corporation or the United Nations and its authorities.
The countries that will not be considered Emerging Countries include Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy,
Japan, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, United
Kingdom, and United States. The Portfolio primarily invests in a combination of
(a) high-yield dollar-denominated instruments and (b) local currency instruments
in Emerging Countries where the relationship between interest rates and
anticipated foreign exchange movements relative to the U.S. dollar is expected
to result in a high dollar rate of return. Although the Portfolio's primary
investment objective is current income, the Portfolio also intends to take
advantage of opportunities to realize capital appreciation from its investments
when such opportunities arise. Investing in local currency and
dollar-denominated medium and long term debt in Emerging Countries offers the
potential for capital appreciation due to interest rate and currency exchange
fluctuations and improving credit quality. No assurance can be given that the
Portfolio's investment objective will be achieved.
The Portfolio's investment objective may not be changed without the approval of
a majority (as defined in the Investment Company Act) of the outstanding voting
securities of the Portfolio.
Investment Policies
The investment policies of the Portfolio are non-fundamental and may be changed
without a vote of the shareholders of the Portfolio. The Portfolio's investment
policies are designed to enable it to capitalize on attractive investment
opportunities which exist in Emerging Countries as a result of worldwide
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economic integration and the rapidly changing political and economic environment
affecting the debt of Emerging Countries.
The Portfolio may invest at least 80% of its total assets in Debt Obligations
(defined below) of issuers in Emerging Countries. The Portfolio intends to focus
its investments in countries in Asia, Eastern Europe, Latin America and Africa.
The Portfolio may invest up to 20% of its total assets in Debt Obligations of
issuers that are not considered to be issuers in Emerging Countries.
The Portfolio may invest at least 30% of its total assets in Debt Obligations of
issuers in Latin America. The Portfolio considers "Latin America" to include the
following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama,
Paraguay, Peru, Uruguay and Venezuela.
At least 70% of the Portfolio's total assets is invested in U.S. dollar
denominated instruments. Up to 30% of the Portfolio's assets may be invested in
Debt Obligations denominated in local currencies provided that no more than 20%
of the Portfolio's assets are expected to be invested in Debt Obligations
denominated in the currency of any one country. To the extent the Portfolio
invests in non-dollar denominated securities, the Portfolio will be subject to
risks relating to fluctuations in currency exchange rates and the possible
imposition of exchange control regulations (e.g., currency blockage) or other
foreign or U.S. laws or restrictions applicable to such investments. See "Risk
Factors and Special Considerations."
Under normal circumstances, the Portfolio invests at least 70% of its total
assets in Debt Obligations of issuers in at least three Emerging Countries. The
Portfolio may not invest more than 40% of its assets in Debt Obligations of
issuers located in any one country. Investing the Portfolio's assets in
securities of issuers located in Emerging Countries will subject the Portfolio
to the risks of adverse social, political or economic events which may occur in
such foreign countries. See "Risk Factors and Special Considerations." When the
Investment Manager believes unusual circumstances warrant a defensive posture,
the Portfolio temporarily may invest up to all of its assets in cash (U.S.
dollars) or U.S. government securities.
The Portfolio considers an issuer to be located in an Emerging Country if (i)
the issuer derives 50% or more of its total revenues from either goods produced,
sales made or services performed in Emerging Countries, or (ii) the issuer is
organized under the laws of, and with a principal office in, an Emerging
Country.
The Investment Manager may invest in Debt Obligations that it determines to be
suitable investments for the Portfolio notwithstanding any credit ratings that
may be assigned to such securities. At any one time substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. The Portfolio will purchase non-performing securities and some
of these securities may be comparable to securities rated as low as D by
Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies, Inc.
("S&P") or C by Moody's Investors Service, Inc. ("Moody's") (the lowest credit
ratings of such agencies). A substantial portion of the Portfolio's holdings of
Debt Obligations are expected to trade at substantial discounts from face value.
The ratings of Moody's and S&P represent their respective opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are general
and are not absolute standards of quality. The ratings do not necessarily
reflect the current or future composition of the Portfolio. A description of the
ratings of the various securities in which the Portfolio may invest appears in
Appendix A to this Prospectus.
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Debt Obligations in which the Portfolio may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed interest
rates. The average maturity of the Portfolio's investments will vary based upon
the Investment Manager's assessment of economic and market conditions. Because
the Portfolio intends to hold fixed-rate instruments, some of which may have
long maturities, the value of the securities held by the Portfolio, and thus the
net asset value of the shares of the Portfolio, generally will vary inversely to
changes in prevailing interest rates. Thus, if interest rates have increased
from the time a debt or other fixed income security was purchased, such
security, if sold, might be sold at a price less than its cost. Conversely, if
interest rates have declined from the time such a security was purchased, such
security, if sold, might be sold at a price greater than its cost.
Debt markets in Emerging Countries presently consist of a wide variety of
instruments issued by developing countries, related institutions and companies.
The Portfolio intends to invest in two broad classes of securities: dollar
denominated instruments traded in secondary markets outside of the Emerging
Countries which have issued the securities, and non-dollar denominated
securities (as defined herein) which are traded in the country of issue and/or
in secondary markets.
A substantial portion of the dollar denominated Debt Obligations in which the
Portfolio intends to invest had its origin in syndicated bank loans made during
the 1970s and early 1980s. As a consequence of the substantial volatility in
commodity prices, and the dramatic increase in interest rates in the early
1980s, many emerging countries defaulted on these loans. Much of the debt owed
by governments to commercial banks was subsequently restructured, involving the
exchange of outstanding bank indebtedness for Brady Bonds (as described below).
Brady Bonds, remaining outstanding bank loans and a relatively small but growing
number of newly issued government, agency and corporate bond issues make up the
large and growing debt market in Emerging Countries. The investment vehicles
which the Investment Manager is expected to acquire or utilize on behalf of the
Portfolio are described below.
Brady Bonds. "Brady Bonds" are debt securities issued in an exchange of
outstanding commercial bank loans to public and private entities in Emerging
Countries in connection with sovereign debt restructurings, under a plan,
introduced by former U.S. Secretary of the Treasury Nicholas F. Brady, known as
the Brady Plan. Agreements implemented under the Brady Plan are designed to
reduce the debt service burden of heavily indebted nations, in exchange for
various forms of credit enhancement coupled with economic policy reforms
designed to improve the debtor country's ability to service its external
obligations. The Brady Plan only sets forth the guiding principles for debt
reduction and economic reform, emphasizing that solutions must be negotiated on
a case by case basis between debtor nations and their creditors. As a result,
the financial packages offered by each country differ.
Debt reduction is generally carried out through the exchange of outstanding
commercial bank debt for various types of bonds, which may include (i) bonds
issued at 100% of face value of such debt, (ii) bonds issued at a discount to
face value of such debt, (iii) bonds offering fixed or floating rates of
interest, (iv) bonds bearing a below market rate of interest which increases
over time, and (v) bonds issued in exchange for the advancement of new money by
existing lenders. Credit enhancement may take the form of collateralizing the
principal with U.S. Treasury zero coupon bonds with a maturity equal to the
final maturity of such bonds. Collateral purchases are financed by the
International Monetary Fund ("IMF"), the World Bank and the debtor nation's
reserves. In addition, the first two or three interest payments on certain types
of Brady Bonds may be collateralized by cash or securities agreed upon by
creditors.
As a pre-condition to issuing Brady Bonds, debtor nations are generally required
to agree to the implementation of certain domestic monetary and fiscal reform
measures with the World Bank or the
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IMF. Such measures have included the liberalization of trade and foreign
investments, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
improve the debtor's ability to service its external obligations and promote its
growth and development.
Brady Bonds have been issued by a number of Emerging Countries, primarily in
Latin America. Several other Emerging Countries are currently negotiating or
have reached agreement with their creditors in sovereign debt restructuring that
will result in the issuance of Brady Bonds. For purposes of applicable tax and
Investment Company Act rules and regulations, Brady Bonds are not considered
U.S. government securities.
The Portfolio may invest in either collateralized or uncollateralized Brady
Bonds. Brady Bonds are issued in various currencies (primarily U.S. dollars) and
are actively traded in the over-the-counter ("OTC") secondary market for debt of
Emerging Country issuers. Because of the large size of most Brady Bond issues,
Brady Bonds are generally highly liquid instruments. Brady Bonds may be
collateralized or uncollateralized, may carry floating or fixed rates of
interest, and may have maturities of up to 30 years. The most common are 30-year
collateralized fixed-rate "par bonds" and floating-rate "discount bonds," which
are collateralized as to principal by U.S. Treasury zero coupon bonds having the
same maturity as the Brady Bonds, and carry at least one year's rolling
interest-rate guarantee in the form of cash or marketable securities.
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly they do not have a long payment history. There can be no assurance
that the Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings. For
a discussion of the risks involved in investing in Brady Bonds, see "Risk
Factors and Special Considerations -- Sovereign Debt."
Loans. The Portfolio may invest up to 20% of its total assets in Loans. The
Portfolio defines "Loans" as fixed and floating rate loans arranged through
private negotiations between one or more financial institutions and an obligor
in an Emerging Country. Generally, the Loans purchased by the Portfolio will be
floating-rate debts which have been outstanding for several years, may have been
restructured and trade at a substantial discount to face value. Such Loans trade
in the international OTC secondary market.
The Portfolio may invest in Loans in the form of participations in or
assignments of Loans or portions of Loans from third parties. A loan assignment
results in the passing of title in the Loan to the Portfolio, along with all of
its rights and obligations. In a participation, a financial institution will
generally sell the Portfolio the right to receive payments of principal,
interest and any fees due under the Loan. Participations typically will result
in the Portfolio having a contractual relationship only with lenders and not
with borrowers. As a result, the Portfolio generally will have no right to
enforce compliance by the borrower with the terms of the Loan, and the Portfolio
will assume the credit risk of both the borrower and the lender that is selling
the participation. The Portfolio will acquire participations only if the seller
of the participation is determined by the Investment Manager to be creditworthy.
Although Loans are traded among certain financial institutions, some of the
Loans the Portfolio may invest in will be considered illiquid. The
characteristics of the Loans are reviewed to determine their liquidity. The
Board of Trustees reviews the characteristics of the Loans to determine their
liquidity. The Trustees have adopted guidelines and delegated to the Investment
Manager the function of monitoring
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and determining the liquidity of Loans, although the Board of Trustees retains
ultimate responsibility for any determination regarding a liquid market for the
Loans. The Portfolio will not invest in Loans determined to be illiquid by the
Board of Trustees if any such investment, together with any other illiquid
assets held by the Portfolio, amounts to more than 15% of its net assets.
Non-Dollar Denominated Securities. The Portfolio may invest up to 30% of its
total assets in non-dollar denominated securities provided that no more than 20%
of the Portfolio's assets are expected to be invested in Debt Obligations
denominated in the currency of any one country. Investments in non-dollar
denominated securities will include fixed and/or floating rate instruments,
including discount notes, commercial paper, debentures and other debt securities
issued by public or private sector entities. Such investments may also include
debt securities which are payable in local currency in amounts calculated with
reference to the U.S. dollar. The Portfolio will invest in short term or
floating rate non-dollar denominated securities when the Investment Manager
believes that the relationship between local interest rates, inflation and
currency exchange rates will result in a high dollar return.
The relative performance of various countries' fixed income markets historically
has reflected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in various markets from
time to time. In addition, the performance of non-dollar denominated securities
will depend on, among other things, the strength of the foreign currency against
the U.S. dollar. Appreciation in the value of the foreign currency generally can
be expected to increase, and declines in the value of foreign currencies
relative to the U.S. dollar will depress, the value of the Portfolio's
non-dollar denominated securities. Currently, because of high inflation and
other factors, the currencies of the countries in which the Portfolio intends to
invest are generally expected to depreciate against the U.S. dollar. However, to
the extent that local interest rates in such countries exceed the rate of
currency devaluation, the potential for attractive returns in dollars exists.
The Investment Manager evaluates currencies on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth rate forecasts,
balance of payments status and economic policies) as well as technical and
political data, but will not generally be involved in active currency
forecasting. The Portfolio may or may not hedge or cross hedge its foreign
currency exposure. See "Description of the Portfolio -- Investment Practices."
Convertible Securities. The Portfolio may invest up to 10% of its total assets
in convertible securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. Convertible debt
securities have characteristics of both fixed income and equity investments. The
value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other debt securities
of comparable maturity and quality that are not convertible) and its "conversion
value" (the value of the option to convert the security into the underlying
common stock). The Portfolio intends to invest only in convertible securities
which have a low conversion value and which, absent any potential gain from
conversion or increase in conversion value, are expected to provide the
Portfolio with returns similar to those of non-convertible debt securities of
similar maturity and quality. The Portfolio does not intend to convert any
convertible securities it may own into equity, however, it may do so for
temporary purposes. If a convertible security held by the Portfolio is called
for redemption, the Portfolio will be required to permit the issuer to redeem
the security, convert it into the underlying stock or sell it to a third party.
Any of these actions could have an adverse effect on the Portfolio's ability to
achieve its investment objective.
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Repurchase Agreements. The Portfolio may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Portfolio, and which typically
involves the acquisition by the Portfolio of debt securities from a selling
financial institution, such as a bank, savings and loan association or
broker-dealer. In a repurchase agreement, the Portfolio purchases a debt
security from a seller which undertakes to repurchase the security at a
specified resale price on an agreed future date (ordinarily a week or less). The
resale price generally exceeds the purchase price by an amount which reflects an
agreed-upon market interest rate for the term of the repurchase agreement. The
principal risk is that, if the seller defaults, the Portfolio might suffer a
loss to the extent the proceeds from the sale of the underlying securities and
other collateral held by the Portfolio in connection with the related repurchase
agreement are less than the repurchase price. Repurchase agreements maturing in
more than seven days are considered by the Portfolio to be illiquid.
When-Issued Securities; When, As and If Issued Securities and Delayed Delivery
Transactions. The Portfolio may purchase securities on a when-issued basis.
When-issued transactions arise when securities are purchased by the Portfolio
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Portfolio at the time of
entering into the transaction. The Portfolio may also purchase securities on a
forward commitment basis. In a forward commitment transaction, the Portfolio
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. The Portfolio may enter into offsetting contracts for
the forward sale of other securities that it owns. Although the Portfolio would
generally purchase securities on a when-issued forward commitment basis with the
intention of actually acquiring securities for its portfolio, the Portfolio may
dispose of a when-issued security or forward commitment prior to settlement if
the Investment Manager deems it appropriate to do so.
The issuance of some of the securities in which the Portfolio may invest depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buyout or debt restructuring ("when, as and
if issued securities"). As a result, the period from the trade date to the
issuance date may be considerably longer than a typical when issued trade. Each
when issued transaction specifies a date upon which the commitment to enter into
the relevant transaction will terminate if the securities have not been issued
on or before such date. In some cases, however, the securities may be issued
prior to such termination date, but may not be deliverable until a period of
time thereafter. If the anticipated event does not occur and the securities are
not issued, the Portfolio would be entitled to receive any funds committed for
the purchase, but the Portfolio may have foregone investment opportunities
during the term of the commitment.
There is no overall limit on the percentage of the Portfolio's assets which may
be committed to the purchase of securities on a when issued basis, however, the
Portfolio may only invest a maximum of 15% of its assets in when, as and if
issued securities. An increase in the percentage of the Portfolio's assets
committed to such purchase of securities on a when-issued basis may increase the
volatility of its net asset value.
The Portfolio will hold and maintain in a segregated account until the
settlement date liquid assets in an amount sufficient to meet the purchase price
to the extent required by the Investment Company Act. The purchase of securities
on a when-issued forward commitment basis involves a risk of loss if the value
of the security to be purchased declines prior to the settlement date.
Investment in Other Funds. In accordance with the Investment Company Act, the
Portfolio may invest a maximum of up to 10% of the value of its total assets in
securities of other investment companies, and
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the Portfolio may own up to 3% of the total outstanding voting stock of any one
investment company. In addition, up to 5% of the Portfolio's total assets may be
invested in the securities of any one investment company. The Portfolio may
invest in both investment companies that are registered under the Investment
Company Act as well as those that are not required to be so registered. As
stated above, investment in other investment companies or vehicles may be the
sole or most practical means by which the Portfolio can participate in certain
securities markets. Such investment may involve the payment of substantial
premiums above the value of such issuers' portfolio securities, and is subject
to limitations under the Investment Company Act and market availability. There
can be no assurance that vehicles or funds for investing in certain Emerging
Countries will be available for investment, particularly in the early stages of
the Portfolio's operations. In addition, special tax considerations may apply.
The Portfolio does not intend to invest in such vehicles or funds unless, in the
judgment of the Investment Manager, the potential benefits of such investment
justify the payment of any applicable premium or sales charge. As an investor in
an investment company, the Portfolio would bear its ratable share of that
investment company's expenses, including its administrative and advisory fees.
At the same time, the Portfolio would continue to pay its own investment
management fees and other expenses, however, the Investment Manager has agreed
to waive its fees to the extent necessary to comply with state securities laws.
In addition, the Investment Manager has agreed to waive its fees to the extent
necessary to maintain total operating costs at its current limit of 2.00% and
2.40% per annum of the average daily net assets of the Class A shares and the
Class C shares, respectively, of the Portfolio, until such time as the net
assets of the Portfolio exceed $50 million or the total operating expenses of
the Portfolio are less than 2.00% and 2.40% per annum of the average daily net
assets of the Class A shares and the Class C shares, respectively, of the
Portfolio. See "Management of the Portfolio."
Borrowing and Leverage. The Portfolio may solely, for temporary or emergency
purposes, borrow in an amount up to 10% of the Portfolio's total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing. The Portfolio may not purchase securities when borrowings
exceed 5% of the Portfolio's total assets. If market fluctuations in the value
of the Portfolio's portfolio holdings or other factors cause the ratio of the
Portfolio's total assets to outstanding borrowings to fall below 300%, within
three days of any such event the Portfolio may be required to sell portfolio
securities to restore the 300% asset coverage, even though from an investment
standpoint such sales might be disadvantageous. Borrowings may be utilized to
meet share redemptions of the Portfolio or to pay dividends and distributions to
Shareholders of the Portfolio, in instances where the Portfolio does not desire
to liquidate its portfolio holdings. The Portfolio expects that some of its
borrowings may be made on a secured basis. In such situations, either the
custodian will segregate the pledged assets for the benefit of the lender or
arrangements will be made with a suitable subcustodian, which may include the
lender.
Borrowings create leverage, a speculative factor. To the extent the income
derived from the assets obtained with borrowed funds exceeds the interest and
other expenses that the Portfolio will have to pay, the Portfolio's net income
will be greater than if borrowing were not used. Conversely, if the income from
the assets obtained with borrowed funds is not sufficient to cover the cost of
borrowing, the net income of the Portfolio will be less than if borrowing were
not used, and therefore the amount available for distribution to Shareholders as
dividends will be reduced.
Restricted and Illiquid Securities. The Portfolio may purchase securities that
are not registered or are offered in an exempt non-public offering ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), including securities offered and sold to "qualified institutional buyers"
under Rule 144A under the Securities Act. The Portfolio will not invest more
than 15% of its net assets
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in illiquid investments, which include repurchase agreements maturing in more
than seven days, securities that are not readily marketable and restricted
securities that are not eligible for sale under Rule 144A. Restricted securities
eligible for sale under Rule 144A are also subject to this 15% limitation,
unless the Board of Trustees (or the Investment Manager pursuant to a delegated
authority) determines, based upon a continuing review of the trading markets for
the specific restricted securities sold under Rule 144A, that such restricted
securities are liquid. The Board of Trustees has adopted guidelines and
delegated to the Investment Manager the function of determining and monitoring
the liquidity of Rule 144A securities, although the Board of Trustees retains
ultimate responsibility for any determination regarding whether a liquid market
exists for Rule 144A securities. The liquidity of Rule 144A securities will be
monitored by the Investment Manager and, if as a result of changed conditions,
it is determined that a Rule 144A security is no longer liquid, the Portfolio's
holdings of illiquid securities will be reviewed to determine what, if any,
action is required to assure that the Portfolio does not exceed its applicable
percentage limitation for investments in illiquid securities. In reaching
liquidity decisions, the Investment Manager may consider, inter alia, the
following factors: (1) the unregistered nature of the security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). Investing in Rule 144A securities could have the
effect of increasing the level of portfolio illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these securities.
Lending of Portfolio Securities. The Portfolio may, in seeking to increase its
income, lend securities in its portfolio representing up to 331/3% of its total
assets, taken at market value, to securities firms and financial institutions
deemed creditworthy by the Investment Manager. Securities loans are made to
broker-dealers or institutional investors pursuant to agreements requiring that
the loans continuously be secured by collateral at least equal at all times to
the value of the securities lent plus any accrued interest, "marked to market"
on a daily basis. The collateral received will consist of cash, U.S. short term
government securities, bank letters of credit or such other collateral as may be
permitted under the Portfolio's investment program and by regulatory agencies
and approved by the Board of Trustees. While the securities loan is outstanding,
the Portfolio will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. The Portfolio has a
right to call each loan and obtain the securities on five business days' notice.
The risks in lending securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially. The creditworthiness of firms to which the Portfolio lends its
portfolio securities will be monitored on an ongoing basis by the Investment
Manager pursuant to procedures adopted and reviewed on an ongoing basis by the
Board of Trustees.
Indexed Securities. The Portfolio may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically,
provide for a maturity value that depends on the price of gold, resulting in a
security whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determined by reference
to the values of one or more specified foreign currencies, and may offer higher
yields than U.S. dollar-denominated securities of equivalent issuers.
Currency-indexed securities may be positively or negatively indexed; that is,
their maturity value may increase when the specified currency
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value increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities may
also have prices that depend on the values of a number of different foreign
currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instruments to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Active Management. The Portfolio is designed to be actively managed. The
Portfolio will attempt to maximize returns by adjusting the portfolio in
response to numerous factors affecting Debt Obligations, including political and
economic developments, changing credit quality, interest rates, currency
exchange rates, and other factors. Because the Portfolio can purchase floating
rate securities and securities with short to intermediate term maturities, the
Investment Manager can adjust the Portfolio's holdings in an effort to maximize
returns in almost any interest rate environment. In addition, the Portfolio's
ability to invest in securities with any maturities of up to thirty years allows
its Investment Manager to adjust the Portfolio's investments as interest rates
change to take advantage of the most attractive segments of the yield curve.
Temporary Investments. Pending investment or for temporary defensive purposes
(such as when the Investment Manager believes instability or unfavorable
conditions exist in Emerging Countries), the Portfolio may make investments of
up to 100% of its total assets in U.S. government securities with maturities of
less than a year and certain short-term high quality debt instruments. The
short-term instruments in which the Portfolio may invest include, but are not
limited to: U.S. government securities, money market funds that invest primarily
in U.S. government securities and repurchase agreements in respect of these
securities, to the extent possible. The U.S. government securities in which the
Portfolio may invest include direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and obligations issued by U.S. government
agencies and instrumentalities, including securities that are supported by the
full faith and credit of the United States and securities that are supported
primarily or solely by the creditworthiness of the issuer (such as securities of
the Federal Home Loan Banks, the Student Loan Marketing Association and the
Tennessee Valley Authority).
Other. Certain of the securities in which the Portfolio may invest may be
considered "derivative securities." See "Description of the Portfolio -- Indexed
Securities" and "Investment Practices." New forms of securities continue to be
developed. The Portfolio may invest in such securities to the extent consistent
with its investment objectives and investment policies, subject to Federal and
state law and regulatory requirements and prior shareholder notification.
Investment Practices
[The Portfolio may engage in a variety of investment practices to enhance income
or hedge its investments.]
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The Portfolio may engage in certain forward, futures, options, forward foreign
exchange contracts, interest rate swaps and other strategies to attempt to
reduce the overall risk of its investments (hedge), adjust investment exposure,
enhance income, or to replicate a fixed income return in markets which present
an attractive interest rate environment but which restrict foreign investment in
fixed income securities; however, the instruments necessary to engage in such
investment practices may not generally be available or may not provide a perfect
hedge and also entail certain risks. See "Risk Factors."
The Portfolio may engage in currency management strategies and hedging
strategies, including among others, proxy hedging, cross hedging, settlement
hedging, transaction hedging and position hedging. A detailed discussion of
these various investment practices, the limitations on the portion of the
Portfolio's assets that may be used in connection with the investment practices
and the risks associated with such investment practices are described in
Appendix A to the Statement of Additional Information. There can be no assurance
that BSFM's use of currency management strategies will be advantageous to the
Portfolio or that it will hedge at appropriate times. See "Risk Factors."
The Portfolio intends to use such investment practices as a complement to its
fundamental investment practices based on the judgment of the Investment Manager
to the extent that they are consistent with the Portfolio's investment
objective.
Except as otherwise stated under "Investment Restrictions," the Portfolio's
investment policies and practices are not fundamental and may be changed without
a vote of the Shareholders.
Investment Restrictions
[Certain of the Portfolio's investment restrictions are fundamental and can be
changed only by shareholder vote.]
The Portfolio is subject to certain investment restrictions which, as described
in more detail in the Statement of Additional Information, have been adopted by
the Trust on behalf of the Portfolio as fundamental policies that cannot be
changed without the approval of a majority of the outstanding shares of the
Portfolio. Among other restrictions, with respect to 50% of its assets, the
Portfolio may not invest more than 25% of its total assets in the securities of
any one issuer except that this limitation will not be applicable to the
purchase of U.S. government securities. With respect to the remaining 50% of the
Portfolio's assets, no more than 5% of its assets may be invested in the
securities of any one issuer other than the U.S. government at the end of any
fiscal quarter and the Portfolio will not own more than 10% of the outstanding
voting securities of a single issuer. See "Risk Factors and Special
Considerations- Non-Diversification." In addition, the Portfolio may not invest
more than 10% of the value of its total assets in securities of issuers having a
record, together with predecessors, of less than three years of continuous
operation. This restriction does not apply to obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities. For further
discussion of investment restrictions of the Portfolio, see "Investment
Limitations" in the Statement of Additional Information.
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Risk Factors and Special Considerations
[No investment is free from risk. Investing in the Portfolio will subject
investors to certain risks which should be considered.]
Investors should carefully consider the risks of investing in securities of
issuers in Emerging Countries and non-dollar denominated securities. Generally,
while the Portfolio offers potential returns higher than those available from
U.S. government securities, there is also a substantially greater risk of loss.
The Portfolio may not be suitable for all investors, and is intended for
long-term investors who can accept the risks associated with its investments.
See "Description of the Portfolio -- Investment Practices."
Low Rated and Unrated Instruments. At any one time, substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. Investments in lower-quality and comparable unrated
obligations will be more dependent on the Investment Manager's credit analysis
than would be the case with investments in investment-grade debt obligations.
The Investment Manager considers both quantitative and qualitative factors in
evaluating the creditworthiness of individual issuers and employs its own credit
research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Investment Manager also relies, in part, on credit ratings
compiled by internationally recognized statistical rating organizations. The
Investment Manager continually monitors the Portfolio's investments and
carefully evaluates whether to dispose of or to retain lower-quality and
comparable unrated securities whose credit ratings or credit quality may have
changed.
Issuers of high-yield securities are vulnerable to real or perceived economic
changes (for instance, an economic downturn or prolonged period of rising
interest rates), political changes or adverse developments specific to the
issuer. Adverse economic, political or other developments may impair the
issuer's ability to service principal and interest obligations, to meet
projected business goals and to obtain additional financing, particularly if the
issuer is highly leveraged. In the event of a default, the Portfolio would
experience a reduction of its income and could expect a decline in the market
value of the defaulted securities.
The market prices of high-yield securities structured as zero coupon or
pay-in-kind securities are generally affected to a greater extent by interest
rate changes and tend to be more volatile than securities which pay interest
periodically.
The Portfolio may have difficulty disposing of certain high yield, high risk
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield, high risk securities is generally not
as liquid as the secondary market for higher rated securities. Reduced secondary
market liquidity may have an adverse impact on market price and the Portfolio's
ability to dispose of particular issues when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.
Debt Obligations of the type in which the Portfolio will invest substantially
all of its assets are generally considered to have a credit quality rated below
investment grade by internationally recognized credit rating organizations such
as Moody's and S&P. Securities below investment grade are the equivalent of high
yield, high risk bonds, commonly known as "JUNK BONDS." Investment grade is
generally
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considered to be debt securities rated BBB or higher by S&P or Baa or higher by
Moody's. The highest rated debt securities (securities rated Aaa by Moody's or
AAA by S&P) carry the smallest degree of investment risk and the capacity to pay
interest and repay principal is very strong. Non-investment grade debt
securities (securities rated Ba1 or lower by Moody's or BB+ or lower by S&P) are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse business, financial or economic
conditions. Some of the Debt Obligations held by the Portfolio may be comparable
to securities rated as low as C by Moody's or D by S&P, the lowest rating
assigned by these agencies. These securities are considered to have extremely
poor prospects of ever attaining any real investment grade standing, and to have
a current identifiable vulnerability to default, and the issuers and/or
guarantors of these securities are considered to be unlikely to have the
capacity to pay interest and repay principal when due in the event of adverse
business, financial or economic conditions and/or to be in default or not
current in the payment of interest or principal. The lowest ratings will be used
when payments are not made on the date due even if the applicable grace period
has not expired, unless such payments are expected to be made during such grace
period. Additionally, these ratings will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized. Debt obligations of issuers
outside the United States and its territories are rated on the same basis as
domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties that could affect the market value of a security. A
description of fixed-income securities ratings is contained in Appendix A to
this Prospectus.
Of the Portfolio's total net assets as of March 31, 1997, 91.10% consisted of
portfolio investments and 8.90% consisted of other assets in excess of
liabilities. The percentage of the Portfolio's investments invested in
securities rated by S&P and Moody's as of March 31, 1997 are as follows:
Percentage of
S&P Moody's Total Investments
Ratings Ratings Rated*
------- ------- ------
BBB Baa 4.92%
B Ba -0-%
BB B 35.98%
BB Ba 23.70%
B B 35.40%
NR NR -0-%
Based on the weighted average ratings of all investments held during the
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1997),
the percentage of the Portfolio's total investments in securities rated by S&P
or Moody's applicable rating category (AAA, A, BB, or B by S&P or Aaa, A, Ba or
B by Moody's) by monthly dollar-weighted average is set forth below. It should
be noted that this information reflects the average composition of the
Portfolio's assets during the most recent period and is not necessarily
representative of the Portfolio's assets as of the end of such period, the
current fiscal period or at any time in the future.
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<PAGE>
Percentage of
S&P Moody's Total Investments
Ratings Ratings Rated*
------- ------- ------
BBB Baa 5.08%
B Ba -0-%
BB B 39.41%
BB Ba 27.10%
B B 28.41%
NR NR -0-%
* Equivalent Unrated - This category represents the comparable quality of
unrated securities as determined by the Investment Manager. For foreign
government obligations not individually rated by an internationally
recognized statistical rating organization, the Portfolio assigns a rating
based on the rating of the sovereign credit of the issuing government.
Debt Obligations in which the Portfolio may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed rates. Changes
in interest rates generally will cause the value of debt securities held by the
Portfolio to vary inversely to changes in prevailing interest rates. The
Portfolio's investments in fixed-rate debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
short-term obligations. Brady Bonds and other Debt Obligations acquired at a
discount are subject to greater fluctuations of market value in response to
changing interest rates than Debt Obligations of comparable maturities which are
not subject to a discount.
Discount Obligations. The Portfolio expects to invest in both short-term and
long-term Debt Obligations purchased at a discount, for example, zero coupon
securities. The amount of original issue discount and/or market discount on
obligations purchased by the Portfolio may be significant, and accretion of
market discount together with original issue discount, will cause the Portfolio
to realize income prior to the receipt of cash payments with respect to these
securities. See "Taxation" in the Statement of Additional Information for a
discussion of original issue discount and market discount. In order to
distribute income realized by the Portfolio and thereby maintain its
qualification as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended (the "Code"), the Portfolio may be required to
liquidate portfolio securities that it might otherwise have continued to hold,
use its cash assets or borrow funds on a temporary basis necessary to declare
and pay a distribution to Shareholders. Under adverse market conditions, this
may result in Shareholders receiving a portion of their original purchase price
as a taxable dividend and could further negatively impact net asset value.
Political and Economic Factors. Investing in Debt Obligations of Emerging
Countries involves risks relating to political and economic developments abroad.
The value of the Portfolio's investments will be affected by commodity prices,
inflation, interest rates, taxation, social instability, and other political,
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<PAGE>
economic or diplomatic developments in or affecting the Emerging Countries in
which the Portfolio has invested. In many cases, governments of Emerging
Countries continue to exercise a significant degree of control over the economy,
and government actions concerning the economy may adversely effect issuers
within that country. Government actions relative to the economy, as well as
economic developments generally, may also effect a given country's international
foreign currency reserves. Fluctuations in the level of these reserves affect
the amount of foreign exchange readily available for external debt payments and
thus could have a bearing on the capacity of Emerging Country issuers to make
payments on their debt obligations regardless of their financial condition. In
addition, there is a possibility of expropriation or confiscatory taxation,
imposition of withholding taxes on dividend or interest payments, or other
similar developments which could affect investments in those countries. While
the Investment Manager intends to manage the Portfolio in a manner that will
minimize the exposure to such risks, there can be no assurance that adverse
political changes will not cause the Portfolio to suffer a loss of interest or
principal on any of its holdings. The Portfolio will treat investments of the
Portfolio that are subject to repatriation restrictions of more than seven (7)
days as illiquid securities.
Foreign Exchange Risk. Many of the currencies of Emerging Countries have
experienced significant devaluations relative to the dollar, and major
adjustments have been made in certain of them at times. To the extent the
Portfolio had invested in non-dollar denominated securities, a decline in the
value of such currency would reduce the value of certain portfolio securities
and the net asset value of the Portfolio. The Portfolio may invest up to 30% of
its assets in Debt Obligations denominated in local currencies. In addition, if
the exchange rate for the currency in which the Portfolio receives interest
payments declines against the U.S. dollar before such interest is paid as
dividends to Shareholders, the Portfolio may have to sell portfolio securities
to obtain sufficient cash to pay such dividends.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention or failure to intervene by U.S. or foreign governments or central
banks or by currency controls or political developments in the U.S. or abroad.
To the extent that a substantial portion of the Portfolio's total assets,
adjusted to reflect the Portfolio's net position after giving effect to currency
transactions, is denominated in currencies of foreign countries, the Portfolio
will be more susceptible to the risk of adverse economic and political
developments within those countries.
Sovereign Debt. Investing in Debt Obligations of governmental issuers in
Emerging Countries involves economic and political risks. While the Investment
Manager intends to manage the Portfolio in a manner that will minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause the Portfolio to suffer a loss of interest or principal on any of
its holdings. The governmental entity that controls the servicing of obligations
of those issuers may not be willing or able to repay the principal and/or
interest when due in accordance with the terms of the obligations. A
governmental entity's willingness or ability to repay principal and interest
when due in a timely manner may be affected by, among other factors, its cash
flow situation, the market value of the debt, the relative size of the debt
service burden to the economy as a whole, the governmental entity's dependence
on expected disbursements from third parties, the governmental entity's policy
toward the IMF and the political constraints to which the governmental entity
may be subject. As a result, governmental entities may default on their
obligations. Holders of certain Emerging Country Debt Obligations may be
requested to participate in the restructuring and rescheduling of these
obligations and
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to extend further loans to their issuers. The interests of holders of Emerging
Country Debt Obligations could be adversely affected in the course of
restructuring arrangements or by certain other factors referred to below.
Sovereign obligors in developing and Emerging Countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. The issuers of the sovereign
debt securities in which the Portfolio expects to invest have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Portfolio may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Portfolio's holdings.
Sovereign debt issued by issuers in many Emerging Countries generally is deemed
to be the equivalent in terms of quality to securities rated below investment
grade by Moody's and S&P. Such securities are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve major risk
exposure to adverse conditions. Some of such sovereign debt may be comparable to
securities rated D by S&P or C by Moody's.
Investing in Securities Markets of Emerging Countries. Most securities markets
in Emerging Countries may have substantially less volume and are subject to less
government supervision than U.S. securities markets and securities of many
issuers in Emerging Countries may be less liquid and more volatile than
securities of comparable domestic issuers. In addition, there is generally less
government regulation of securities exchanges, securities dealers, and listed
and unlisted companies in Emerging Countries than in the United States.
Markets in Emerging Countries also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Portfolio is uninvested
and no return is earned thereon. The inability of the Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of securities due to
settlement problems could result either in losses to the Portfolio due to
subsequent declines in value of the security or, if the Portfolio has entered
into a contract to sell the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign securities are
generally higher than costs associated with transactions in U.S. securities.
Such transactions also involve additional costs for the purchase or sale of
foreign currency.
Foreign investment in certain Emerging Country Debt Obligations is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain Emerging Country Debt Obligations and
increase the costs and expenses of the Portfolio. Certain Emerging Countries
require prior governmental approval of investments by foreign persons, limit the
amount of investment by foreign persons in a particular company, limit the
investment by foreign persons
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only to a specific class of securities of a company that may have less
advantageous rights than the classes available for purchase by domiciliaries of
the countries and/or impose additional taxes on foreign investors. Certain
Emerging Countries may also restrict investment opportunities in issuers in
industries deemed important to national interests.
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.
Throughout the last decade many Emerging Countries have experienced and continue
to experience high rates of inflation. In certain countries inflation has at
times accelerated rapidly to hyperinflationary levels, creating a negative
interest rate environment and sharply eroding the value of outstanding financial
assets in those countries. Increases in inflation could have an adverse affect
on the Portfolio's non-dollar denominated securities and on the issuers of Debt
Obligations generally.
In addition, with respect to certain Emerging Countries, there is a possibility
of expropriation or confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, limitations on the removal of funds or other
assets of the Portfolio, and political or social instability or diplomatic
developments which could affect investments in those countries. Individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position. The securities markets, values of securities, yields and risks
associated with securities markets in different countries may change
independently of each other.
The risk also exists that an emergency situation may arise in one or more
Emerging Countries as a result of which trading of securities may cease or may
be substantially curtailed and prices for the Portfolio's securities in such
markets may not be readily available. The Trust may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Commission. Accordingly, if the Portfolio believes that appropriate
circumstances exist, it will promptly apply to the Commission for a
determination that an emergency is present. During the period commencing from
the Portfolio's identification of such condition until the date of the
Commission action, the Portfolio's securities in the affected markets will be
valued at fair value determined in good faith by or under the direction of the
Board of Trustees.
Reporting Standards. It is likely that none of the Debt Obligations held by the
Portfolio will be registered with the Commission or subject to U.S. regulatory
or reporting requirements. Disclosure requirements in Emerging Countries are
generally not as stringent as in the U.S. and there may be less publicly
available information about issuers in Emerging Countries than about domestic
issuers. Emerging Country issuers are not generally subject to accounting,
auditing and financial reporting standards comparable to those applicable to
domestic issuers.
Investment Practices. Certain of the investment practices in which the Portfolio
may engage have risks associated with them, including possible default by the
other party to the transaction, illiquidity and, to the extent the Investment
Manager's views as to certain market movements are incorrect, the risk that the
use of such strategies could result in losses greater than if they had not been
used. The risks
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associated with illiquidity are particularly acute in situations in which the
Portfolio's operations require cash, such as when the Portfolio redeems for its
shares of beneficial interests or pays distributions, and may result in the
Portfolio borrowing to meet short-term cash requirements or incurring capital
losses on the sale of such investments. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specified currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at the price set at the time of the contract. The
use of forward foreign currency exchange contracts entail certain risks. The
cost to the Portfolio of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Portfolio enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction. Secondary markets generally do not
exist for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the counterparty. Thus, there can be no assurance that the
Portfolio will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, the Portfolio might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Portfolio would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or securities in a segregated account.
Use of put and call options could result in losses to the Portfolio, force the
purchase or sale of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation the Portfolio
could realize on its investments or cause the Portfolio to hold a security it
might otherwise sell. The use of currency transactions could result in the
Portfolio's incurring losses as a result of the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The Portfolio depends upon the reliability and creditworthiness of the
counterparty when it enters into OTC currency or securities options or other
agreements. Investments in indexed securities offer the potential for an
attractive rate of return, but also entail the risk of loss of principal. The
use of options and futures transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio could create the possibility that losses on the hedging instrument
will be greater than gains in the value of the Portfolio's position, thereby
reducing the Portfolio's net asset value. Proxy hedges may result in losses if
the currency used to hedge does not perform similarly to the currency in which
the hedged securities are denominated. With regards to the Portfolio's use of
proxy hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relating to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Portfolio's proxy hedges
and the movements in the exchange rates of the foreign currencies in which the
Portfolio assets that are the subject of such proxy-hedges are denominated.
Non-Diversification. The Portfolio is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Portfolio is not
limited by such Investment Company Act in the proportion of its assets that it
may invest in the securities of a single issuer. The Portfolio's investments
will be limited, however, in order to qualify as a "regulated investment
company" for purposes of the Code. See "Dividends, Distributions and Taxes."
This means, at the close of each quarter of its taxable year, at least 50% of
the value of the Portfolio's assets must consist of cash and cash items, U.S.
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<PAGE>
government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Portfolio has not invested more
than 5% of the value of its total assets in securities of such issuer and as to
which the Portfolio does not hold more than 10% of the outstanding voting
securities of such issuer), and no more than 25% of the value of the Portfolio's
total assets may be invested in the securities of any one issuer (other than
U.S. government securities and securities of other regulated investment
companies), or in two or more issuers which the Portfolio controls and which are
engaged in the same or similar trades or businesses (the "Asset Diversification
Requirement").
Investment in the Portfolio, which is classified as a non-diversified investment
company under the Investment Company Act, may present greater risks to investors
than an investment in a diversified fund. The investment return on a
non-diversified investment company typically is dependent upon the performance
of a smaller number of securities relative to the number of securities held in a
diversified fund. The Portfolio's assumption of large positions in the
obligations of a small number of issuers will affect the value of the securities
it holds to a greater extent than that of a diversified fund in the event of
changes in the financial condition, or in the market's assessment, of the
issuers.
Management of the Portfolio
Board of Trustees
[The Trustees are responsible for the overall management and supervision of the
Portfolio's business.]
The Board of Trustees of the Trust consists of five individuals, three of whom
are not "interested persons" of the Portfolio as defined in the Investment
Company Act. The Trust's Board of Trustees is responsible for deciding matters
of general policy and reviewing actions of the Investment Manager, Distributor
and Transfer Agent. The officers of the Trust conduct and supervise the
Portfolio's daily business operations. The Portfolio's Statement of Additional
Information contains the name and general business experience of each Trustee.
Investment Manager and Administrator
[BSFM is the Portfolio's Investment Manager.]
The Portfolio's investment manager is BSFM, a wholly-owned subsidiary of The
Bear Stearns Companies Inc. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSFM is a registered investment adviser
and offers investment advisory and administrative services to open-end and
closed-end investment funds and other managed pooled investment vehicles
generally with assets totaling approximately $2.8 billion at March 31, 1997.
BSFM has served as an investment adviser since April 3, 1995 and since that time
has served as investment adviser to The Bear Stearns Funds and S&P STARS Fund.
The principal offices of BSFM are located at 245 Park Avenue, New York, New York
10167.
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The principal portfolio manager responsible for the day-to-day management of the
Portfolio is Edward R. Vaimberg. Mr. Vaimberg, a Managing Director of Bear
Stearns, joined Bear Stearns Asset Management, an affiliate of BSFM, in July
1994 as an Associate Director and Global Fixed Income Portfolio Investment
Manager. He was previously employed by Fiduciary Trust Company ("Fiduciary"),
where he served as Senior Vice President and Global Fixed Income Portfolio
Investment Manager from 1991 to 1994. At Fiduciary, Mr. Vaimberg managed global
and international fixed-income portfolios for institutional clients, and was
responsible for interest rate and currency exposures. Prior thereto, Mr.
Vaimberg served as Vice President and International Fixed Income Portfolio
Investment Manager at Merrill Lynch Asset Management (1989-1991) and Senior
Portfolio and Foreign Exchange Analyst at General Motors (1985-1989). Mr
Vaimberg received his B.S. from Cornell University (1981) and an M.B.A. from the
Wharton School (1985).
Under the Investment Management Agreement between the Portfolio and the
Investment Manager, the Investment Manager has sole discretion to purchase and
sell portfolio securities for the Portfolio's investment portfolio and to select
brokers for the execution of such purchases and sales, all within the
Portfolio's objectives, policies and restrictions. BSFM also supervises and
assists in the overall management of the Portfolio's affairs, subject to the
general supervision of the Board of Trustees.
As compensation for the services rendered to the Portfolio by BSFM and the
assumption by BSFM of related expenses, pursuant to the Investment Management
Agreement, the Portfolio pays BSFM a fee computed daily and payable monthly, 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. BSFM has agreed that if, in any fiscal
year, the sum of the Portfolio's expenses exceeds the expense limitations
applicable to the Portfolio imposed by state securities administrators, BSFM
will reimburse the Portfolio its fees under the Investment Management Agreement
or make other arrangements to limit Portfolio expenses to the extent required by
such expense limitations. From time to time, the Investment Manager may waive
receipt of its fees and/or voluntarily assume certain Portfolio expenses, which
would have the effect of lowering the Portfolio's expense ratio and increasing
yield to investors at the time such amounts are waived or assumed, as the case
may be. The Portfolio will not pay the Investment Manager at a later time for
any amounts it may waive, nor will the Portfolio reimburse the Investment
Manager for any amounts it may assume respectively, of the Portfolio until such
time as the average net assets of the Portfolio exceed $50 million or the total
operating expenses of the Portfolio are less than 2.00% and 2.40% of the Class A
shares and Class C shares, respectively, of the Portfolio. The investment
management fees paid by the Portfolio are greater than those paid by most funds,
but are believed by the Investment Manager to be appropriate for fees paid by
funds with a global investment strategy.
The Portfolio has engaged PFPC Inc. (the "Administrator") to provide certain
administrative services; for example, preparation of the Portfolio's Federal,
state and local tax returns, maintenance of the books and records of the
Portfolio required under the Investment Company Act, and qualifying the shares
under applicable state securities laws. Under the terms of the Administrative
Services Agreement between the Administrator and the Trust, as compensation for
the services rendered to the Portfolio by the Administrator and the assumption
by the Administrator of certain related expenses, the Portfolio pays to the
Administrator an annual fee, subject to certain minimum fees and exclusive of
certain multi-class account service charges, computed at the following rate:
0.10% of 1% per annum of the first $200 million of the Portfolio's average daily
net assets, 0.07% of 1% per annum of the next $200 million of the Portfolio's
average daily net assets, 0.05% of 1% per annum of the next $200 million of the
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Portfolio's average daily net assets and 0.03% of 1% per annum of any amounts
over $600 million of the Portfolio's average daily net assets subject to a
minimum fee of $108,000. From time to time, the Administrator may waive all or a
portion of its fees. PFPC has agreed to provide the services under the
Administrative Services Agreement for the period March 1, 1997 until September
30, 1997 for a minimum fee of $75,000 per annum. The Administrator reserves the
right to revoke the voluntary fee waiver at any time. The total costs for the
administrative fees will be borne by each Class based on the proportionate net
assets of each Class.
The Portfolio is responsible to the Investment Manager and the Administrator for
out-of-pocket expenses incurred on behalf of the Portfolio, including, but not
limited to, postage and mailing, telephone, telex, overnight and delivery
service, outside independent pricing services, daily report transmissions, if
any, and record retention/storage incurred by the Investment Manager or
Administrator in connection with their services. All expenses incurred in the
operation of the Portfolio will be borne by the Portfolio, except to the extent
specifically assumed by BSFM. See "Management of the Portfolio -- Expenses" in
the Statement of Additional Information.
Bear Stearns has agreed to permit the Trust to use the name "Bear Stearns" or
derivatives thereof as part of the Portfolio name for as long as the Investment
Management Agreement is in effect.
Distributor
Bear Stearns, located at 245 Park Avenue, New York, New York 10167 serves as
distributor for the Portfolio in the sale of its shares pursuant to an agreement
which is renewable annually. Bear Stearns is entitled to receive the sales load
described under "How to Buy Shares" and payments under the Distribution Plan
described below.
Custodian and Transfer Agent
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian for the Portfolio's assets. PFPC Inc., Bellevue Corporate
Center, 400 Bellevue Parkway, Suite 108, Wilmington, Delaware acts as the
Portfolio's administrator, transfer agent, dividend-paying agent and registrar.
Rules adopted under the Investment Company Act permit the Portfolio to maintain
its securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those rules, the Portfolio's portfolio of securities
and cash invested in securities of foreign countries are held by its
subcustodians, who are approved by the Trustees of the Portfolio in accordance
with the rules of the Commission.
Distribution Plan
[The Portfolio has adopted a Rule 12b-1 Plan under which it pays Bear Stearns at
the annual rate of 0.35% of Class A's average daily net assets and at the annual
rate of 0.75% of Class C's average daily net assets.]
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<PAGE>
The Trust, on behalf of the Portfolio, has adopted an amended and restated
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act. Under the Plan, the Portfolio pays to Bear Stearns a monthly
distribution fee equal to, on an annual basis, 0.35% and 0.75% of the
Portfolio's average daily net assets for Class A shares and Class C shares,
respectively.
Bear Stearns may use the distribution fee for services performed and expenses
incurred by Bear Stearns in connection with the distribution of shares by the
Portfolio and for providing certain services to the shareholders of the
Portfolio. Bear Stearns may pay third parties in respect of these services such
amount as it may determine. The Portfolio understands that these third parties
may also charge fees to their clients who are beneficial owners of Portfolio
shares in connection with their client accounts. These fees would be in addition
to any amounts which may be received by them from Bear Stearns under the Plan.
Service fees are payments to broker-dealers who are members of the NASD for
services rendered to investors, similar to account maintenance fees. The NASD
limit on Rule 12b-1 fees paid by investors of a fund that charges a service fee
is 6.25% of new sales, plus interest. See "Distribution Plan" in the Statement
of Additional Information for a listing of the types of expenses for which Bear
Stearns and Authorized Dealers may be compensated under the Plan. If the fee
received by Bear Stearns exceeds its expenses, Bear Stearns may realize a profit
from these arrangements. The Plan is reviewed and is subject to approval
annually by the Board of Trustees. For the period May 3, 1993 (commencement of
investment operations) through March 31, 1994 and the fiscal year ended March
31, 1995, the total fees paid to Bear Stearns under the prior 12b-1 plan were
$107,662 and $97,893, respectively, pursuant to which the 12b-1 fees thereunder
were 0.25% per annum of the average daily net assets of the Class A shares of
the Portfolio. For the fiscal years ended March 31, 1996 and March 31, 1997,
Bear Stearns earned $99,038 and $110,830 respectively, pursuant to which the
compensation payable thereunder was at a rate of 0.35% per annum of the average
daily net assets of the Class A shares of the Portfolio. For the period July 26,
1995 (commencement of initial public offering) through March 31, 1996 and for
the fiscal year ended March 31, 1997, Bear Stearns earned $452 and $9,356,
respectively, pursuant to which the compensation payable thereunder was at a
rate of 0.75% per annum of the average daily net assets of the Class C shares of
the Portfolio.
In addition, as distributor of the Portfolio, Bear Stearns collects the sales
charges imposed on sales of the Portfolio's shares, and reallows a portion of
such charges to brokers through which the sales are made. For the year ended
March 31, 1997, Bear Stearns retained $110,800 of such charges. In addition,
Bear Stearns has received approximately $2,400 in CDSC upon certain redemptions
by Class C shareholders.
Expenses
All expenses incurred in the operation of the Portfolio will be borne by the
Portfolio, except to the extent specifically assumed by BSFM. See "Management of
the Portfolio-Expenses" in the Statement of Additional Information.
BSFM has undertaken that, if in any fiscal year, certain expenses, including the
investment management fee and fees under the Distribution Plan, exceed 2.00% of
Class A's average daily net assets and 2.40% of Class C's average daily net
assets for the fiscal year, BSFM may waive a portion of its investment
management fee or bear other expenses to the extent of the excess expense.
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How to Buy Shares
General
[An initial investment is $1,000, $500 for retirement plans; subsequent
investments must be at least $250, $100 for retirement plans; specify the Class
you wish to purchase.]
The minimum initial investment in the Portfolio is $1,000 or $500 if the
investment is for Keogh Plans, IRAs and 403(b)(7) Plans with only one
participant. The minimum subsequent investment in the Portfolio is $250. Share
certificates are issued only upon written request. The Portfolio reserves the
right to reject any purchase order. The Portfolio and Bear Stearns reserve the
right to modify the minimum investment requirement, the subsequent investment
requirement, the manner in which shares are offered and the sales load rates
applicable to future purchases of shares.
Class A and Class C shares of the Portfolio may be purchased in any amount
(subject to then effective minimum investment requirement) through Bear Stearns
or through certain investment dealers who are members of the NASD who have sales
agreements with Bear Stearns or who have entered into dealer agreements directly
with Bear Stearns (an "Authorized Dealer") on any Business Day (as defined under
"General Information") at the net asset value next determined after receipt of
an order, plus the then applicable sales load in the case of Class A shares.
If by 4:00 p.m. New York time, a purchase order specifying the Class to be
purchased is received and accepted by Bear Stearns or an Authorized Dealer, the
price will be based on the net asset value computed on the day the purchase
order is received. The settlement date will be the third Business Day after the
trade date. Since Bear Stearns or Authorized Dealers forward investors' funds on
settlement date, they will benefit from the temporary use of the funds if
payment is made prior thereto. Orders placed directly with the Transfer Agent
must be accompanied by payment. Investors will be entitled to receive income
dividends and capital gains distributions if their order is received by the
close of business on the day prior to the record date for such dividends and
distributions.
[Purchases can be made through Bear Stearns account executives, Authorized
Dealers or the Transfer Agent.]
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that checks drawn on foreign banks and checks made payable
to persons or entities other than the Portfolio will not be accepted), Federal
Reserve drafts or by wiring Federal funds with funds held in brokerage accounts
at Bear Stearns or its Authorized Dealers. Checks or Federal Reserve drafts
should be made payable as follows: (i) to Bear Stearns or an investor's
Authorized Dealer or (ii) to "Bear Stearns Investment Trust - Emerging Markets
Debt Portfolio," if purchased directly from the Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attn: Bear Stearns Investment Trust -
Emerging Markets Debt Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
Payment by check or Federal Reserve draft must be received within three business
days of receipt of the purchase order by the Portfolio or Bear Stearns or an
Authorized Dealer. Orders placed directly with the Transfer Agent must be
accompanied by payment. Shareholders may not purchase shares of the Emerging
Markets Debt Portfolio with a check issued by a third party and endorsed over to
the Portfolio. Checks for investment must be made payable to the Emerging
Markets Debt Portfolio. Bear Stearns (or an investor's Authorized Dealer) is
responsible for forwarding payment promptly to the Portfolio. A transaction fee
of $7.50 may be charged for payments by wire. The payment proceeds of a
redemption of shares
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<PAGE>
recently purchased by check may be delayed for a period of time described under
"How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase shares of the Portfolio
through the Transfer Agent. In order to make an initial investment in the
Portfolio, an investor must establish an account with the Portfolio by
furnishing necessary information to the Portfolio. An account with the Portfolio
may be established, by completing and signing the Account Information Form
indicating which Class of shares is being purchased, a copy of which is attached
to this Prospectus, and mailing it, together with a check made payable to the
Portfolio to cover the purchase and/or subsequent purchases to the Transfer
Agent: PFPC Inc., Attn: Bear Stearns Investment Trust - Emerging Markets Debt
Portfolio, P.O. Box 8960, Wilmington, Delaware 19899- 8960. With respect to
Shareholder's subsequent purchases, the Shareholder's account number should
appear on the check.
A Shareholder of the Portfolio may request redemptions of shares of the
Portfolio by telephone if the optional telephone transaction privilege is
elected on the Account Information Form accompanying this Prospectus. It may be
difficult to implement redemptions by telephone in times of drastic economic or
market changes. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, the Portfolio employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Telephone transaction
procedures include the following measures: requiring the appropriate telephone
transaction election be made on the Account Information Form; requiring the
caller to provide the names of the account owners, the account owner's social
security number and name of fund, all of which must match the Portfolio's
records; requiring that the Transfer Agent's service representative complete a
telephone transaction form listing all of the above caller identification
information; requiring that redemption proceeds be sent only by check to the
account owners of record at the address of record, or by wire only to the owners
of record at the bank account of record; sending a written confirmation for each
telephone transaction to the owners of record at the address of record within
three (3) business days of the call; and maintaining tapes of telephone
transactions for six months, if the Portfolio elects to record shareholder
telephone transactions.
For accounts held of record by a broker-dealer, trustee, custodian or an
attorney-in-fact (under a power of attorney), additional documentation or
information regarding the scope of a caller's authority is required. Finally,
for telephone transactions in accounts held jointly, additional information
regarding other account holders is required. The Trust may implement other
procedures from time to time. If reasonable procedures are not implemented, the
Trust may be liable for any loss due to unauthorized or fraudulent transactions.
In all other cases, neither the Portfolio, the Trust nor Bear Stearns will be
responsible for the authenticity of redemption or exchange instructions received
by telephone.
Information concerning purchases through Bear Stearns (or an Authorized Dealer)
should be obtained directly from Bear Stearns, Bear Stearns account executives
or the Authorized Dealer. In the case of purchases made through Bear Stearns (or
the investor's Authorized Dealer), it is the responsibility of Bear Stearns or
such Authorized Dealer to promptly forward payment to the Portfolio for shares
being purchased.
Brokers that do not have dealer agreements with Bear Stearns also may offer to
place orders for the purchase of the shares. Purchases made through such brokers
will be effected at the public offering price next determined after the order is
received by the Transfer Agent. Brokers are responsible for promptly forwarding
the orders to the Transfer Agent. Such a broker may charge the investor a
transaction fee
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as determined by the broker. The fee will be in addition to the sales charge
payable by the investor and may be avoided if shares are purchased through Bear
Stearns, an Authorized Dealer that has a dealer agreement with Bear Stearns or
through the Transfer Agent.
The Portfolio and Bear Stearns each reserves the right to reject any specific
purchase order or to restrict purchases by a particular purchaser (or group of
related purchasers). The Portfolio, Bear Stearns and Authorized Dealers may
reject or restrict purchases of shares by a particular purchaser or group, for
example when a pattern of frequent purchases and sales of shares of the
Portfolio is evident, or if the purchase and sale orders are, or a subsequent
abrupt redemption might be, of a size that would disrupt management of the
Portfolio.
[Net asset value is computed daily as of the close of regular trading on the New
York Stock Exchange.]
Shares of the Portfolio are sold on a continuous basis. The net asset value per
share of each Class of the Portfolio is calculated by the Portfolio's
Administrator as of the close of regular trading of the New York Stock Exchange
("NYSE") (normally 4:00 p.m., New York time) on each Business Day. Net asset
value per share is calculated by dividing the value of the Portfolio's net
assets represented by such Class (i.e., the value of its assets less
liabilities) by the total number of shares of such Class outstanding. Portfolio
securities are valued based on market quotations or, if quotations are not
readily available, at fair value as determined in good faith under procedures
established by the Board of Trustees.
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Class A Shares
[Class A shares include a sales load which may vary depending on the dollar
amount invested.]
Class A shares include a sales load which may vary depending on the dollar
amount invested. The Portfolio receives the net asset value and Bear Stearns
receives the sales load. Bear Stearns collects or remits the sales charges
imposed on purchases of shares and reallows a portion of such charges to brokers
and dealers that have sold such shares in accordance with the schedule set forth
below.
<TABLE>
<CAPTION>
TOTAL SALES LOAD
DEALER
COMMISSION AS
AS A % OF NET A % OF THE
AMOUNT OF PURCHASE AT THE AS A % OF ASSET VALUE OFFERING
PUBLIC OFFERING PRICE OFFERING PRICE PER SHARE PRICE
- ------------------------------------------- -------------- --------- -------------
<S> <C> <C> <C>
Less than $50,000.......................... 3.75% 3.90% 3.25%
$50,000 but less than $100,000 ............ 3.25% 3.36% 2.75%
$100,000 but less than $250,000............ 2.75% 2.83% 2.25%
$250,000 but less than $500,000 ........... 2.25% 2.30% 2.00%
$500,000 but less than $750,000 ........... 2.00% 2.04% 1.75%
$750,000 but less than $1,000,000.......... 1.50% 2.04% 1.25%
$1,000,000 or more......................... 0.00% 0.00% 0.50%
</TABLE>
There is no initial sales charge on purchases of $1,000,000 or more of Class A
shares. However, if an investor purchases Class A shares without an initial
sales charge as part of an investment of at least $1,000,000 and redeems those
shares within one year after purchase, a CDSC of 0.50% will be imposed at the
time of redemption. The terms contained in the section of this Prospectus
entitled "How to Redeem Shares -- Contingent Deferred Sales Charge -- Class C
Shares" are applicable to the Class A shares subject to a CDSC. Letters of
Intent and Rights of Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the same
for all dealers. From time to time Bear Stearns may make or allow additional
payments or promotional incentives to dealers that sell Class A shares. In some
instances, these incentives may be offered only to certain dealers who have sold
or may sell significant amounts of Class A shares. Dealers may receive a larger
percentage of the sales load from Bear Stearns than they receive for selling
most other funds.
Class A shares of the Portfolio may be sold at net asset value to (a) Bear
Stearns, its affiliates or their respective officers, directors or employees
(including retired employees), any partnership of which Bear Stearns is a
general partner, any Trustee or officer of the Trust and designated family
members of any of the above individuals; (b) qualified retirement plans of Bear
Stearns; (c) any employee or registered representative of any Authorized Dealer
or their respective spouses and minor children; (d) trustees or directors of
investment companies for which Bear Stearns or an affiliate acts as sponsor; (e)
any state, county or city, or any instrumentality, department, authority or
agency thereof, which is prohibited by applicable investment laws from paying a
sales load or commission in connection with the purchase of Portfolio shares;
(f) any institutional investment clients including corporate sponsored pension
and profit-sharing plans, other benefit plans and insurance companies; (g) any
pension funds, state and municipal governments or funds, Taft-Hartley plans and
qualified non-profit organizations, foundations and endowments; (h) trust
institutions (including bank trust departments) investing on their own behalf or
on behalf of their clients; and (i) accounts as to which an Authorized Dealer
charges an asset management fee. In order to take advantage of these exemptions,
a purchaser must certify its eligibility for an exemption to Bear Stearns on its
Account Information Form and must certify on such form that it will notify Bear
Stearns if, at the time of any additional purchases, it is no longer eligible
for an exemption. Bear Stearns reserves the right to request additional
certification or information from a purchaser in order to verify that such
purchaser is eligible for an exemption. Bear Stearns reserves the right to limit
the participation in Class A shares of the Portfolio of its employees. Dividends
and distributions reinvested in Class A shares of the Portfolio will be made at
the net asset value per share on the reinvestment date.
Class A shares of the Portfolio may be purchased at net asset value, with the
proceeds from the redemption of shares of an investment company sold with a
sales charge or commission and not distributed by Bear Stearns. However, if such
investor redeems those shares within one year after purchase, a CDSC of 1.00%
will be imposed at the time of redemption. This includes shares of a mutual fund
which were subject to a CDSC upon redemption. The purchase must be made within
60 days of the redemption, and Bear Stearns must be notified by the investor in
writing, or by the investor's investment professional, at the time the purchase
is made. Bear Stearns will offer to pay Authorized Dealers an amount up to 0.50%
of the net asset value of shares purchased by the dealers' clients or customers
in this manner.
Class A shares of the Portfolio may be purchased at net asset value by the
following customers of a broker that operates a master account for purchasing
and redeeming, and otherwise providing shareholder services in respect of, Trust
shares pursuant to agreements with the Trust or Bear Stearns: (i) investment
advisers and financial planners who place trades for their own accounts or for
the accounts of their clients and who charge a management, consulting or other
fee, (ii) clients of such investment advisers and financial planners if such
clients place trades through accounts linked to master accounts of such
investment advisers or financial planners on the books and records of such
broker and (iii) retirement and deferred compensation plans, and trusts used to
fund such plans, including, but not limited to, plans or trusts defined in
Section 401(a), 403(b) or 457 of the Code, and "rabbi trusts", provided, in each
case, the purchase transaction is effected through such broker. The broker may
charge a fee for transactions in the Portfolio shares.
Class C Shares
The public offering price for Class C shares is the next determined net asset
value per shares of that Class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares -- Contingent
Deferred Sales Charge -- Class C Shares."
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Right of Accumulation -- Class A Shares
[Investors in Class A shares may qualify for a reduced sales charge.]
Pursuant to the Right of Accumulation, certain investors are permitted to
purchase Class A shares of the Portfolio at the sales charge applicable to the
total of (a) the dollar amount then being purchased plus (b) the current public
offering price of all Class A shares of the Portfolio and shares of certain
other funds sponsored or advised by Bear Stearns then held by the investor,
including The Bear Stearns Funds and the Money Market Portfolio of The RBB Fund,
Inc., then held by the investor. The following purchases of Portfolio Class A
shares may be aggregated for the purposes of determining the amount of purchase
and the corresponding sales load: (a) individual purchases on behalf of a single
purchaser, the purchaser's spouse and their children under the age of 21 years
including shares purchased in connection with a retirement account exclusively
for the benefit of such individual(s), such as an IRA, and purchases made by a
company controlled by such individual(s); (b) individual purchases by a trustee
or other fiduciary account, including an employee benefit plan (such as
employer-sponsored pension, profit-sharing and stock bonus plans, including
plans under Section 401(k) of the Code, and medical, life and disability
insurance trusts); (c) individual purchases by a trustee or other fiduciary
purchasing shares concurrently for two or more employee benefit plans of a
single employer or of employers affiliated with each other. Subsequent purchases
made under the conditions set forth above will be subject to the minimum
subsequent investment of $250 and will be entitled to the Right of Accumulation.
Letter of Intent -- Class A Shares
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load
applicable to the total number of Class A shares of the Portfolio, and shares of
certain other funds sponsored or advised by Bear Stearns, including The Bear
Stearns Funds and the Money Market Portfolio of The RBB Fund, Inc., purchased in
a 13-month period pursuant to the terms and under the conditions set forth in
the Letter of Intent. A minimum initial purchase of $1,000 is required. The
Transfer Agent will hold in escrow 5% of the amount indicated in the Account
Information Form for payment of a higher sales load if the investor does not
purchase the full amount indicated in the Account Information Form. The escrow
will be released when the investor fulfills the terms of the Letter of Intent by
purchasing the specified amount. If an investor's purchases qualify for a
further sales load reduction, the sales load will be adjusted to reflect the
total purchase at the end of 13 months. If total purchases are less than the
amount specified, the investor will be requested to remit an amount equal to the
difference between the sales load actually paid and the sales load applicable to
the aggregate purchases actually made. If such remittance is not received within
20 days, the Transfer Agent, as attorney-in-fact pursuant to the terms of the
Letter of Intent, will redeem an appropriate number of shares held in escrow to
realize the difference. Checking a box in the Letter of Intent Section of the
Account Information Form does not bind an investor to purchase, or a Portfolio
to sell, the full amount indicated at the sales load in effect at the time of
signing, but the investor must complete the intended purchase to obtain the
reduced sales load. At the time an investor purchases shares of any of the
applicable funds, an investor must indicate its intention to do so under the
Letter of Intent Section of the Account Information Form.
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Systematic Investment Plan
[The Portfolio offers shareholders many convenient features and benefits,
including the Systematic Investment Plan.]
The Systematic Investment Plan permits investors to purchase shares of the
Portfolio (minimum initial investment of $1,000 and minimum subsequent
investments of $100 per transaction) at regular intervals selected by the
investor. Provided the investor's bank or other financial institution allows
automatic withdrawals, Portfolio shares may be purchased by transferring funds
from the account designated by the investor. At the investor's option, the
account designated will be debited in the specified amount, and Portfolio shares
will be purchased once a month, on the twentieth day. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. Investors desiring to participate in the Systematic
Investment Plan should call the Transfer Agent at 1-800-447-1139 to obtain the
appropriate forms. The Systematic Investment Plan does not assure a profit and
does not protect against loss in declining markets. Since the Systematic
Investment Plan involves the continuous investment in the Portfolio regardless
of fluctuating price levels of the Portfolio's shares, investors should consider
their financial ability to continue to purchase through periods of low price
levels. The Portfolio may modify or terminate the Systematic Investment Plan at
any time or charge a service fee. No such fee is currently contemplated.
Shareholder Services
Exchange Privilege
[The Exchange Privilege permits easy purchases of certain other funds sponsored
or advised by Bear Stearns.]
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a Class of the Portfolio, shares of the same Class of certain other funds
sponsored or advised by Bear Stearns, including The Bear Stearns Funds and the
Money Market Portfolio of The RBB Fund Inc., to the extent such shares are
offered for sale in the investor's state of residence. These funds have
different investment objectives which may be of interest to investors. To use
this Privilege, investors should consult their account executive at Bear
Stearns, their account executive, Authorized Dealer or the Transfer Agent to
determine if it is available and whether any conditions are imposed on its use.
To use this Privilege, exchange instructions must be given to the Transfer Agent
in writing or by telephone. A shareholder wishing to make an exchange may do so
by sending a written request to the Transfer Agent at the address given above in
"How to Buy Shares -- General." Shareholders are automatically provided with
telephone exchange privileges when opening an account, unless they indicate on
the account application that they do not wish to use this privilege.
Shareholders holding share certificates are not eligible to exchange shares of a
Portfolio by phone because share certificates must accompany all exchange
requests. To add this feature to an existing account that previously did not
provide for this option, a Telephone Exchange Authorization Form must be filed
with the Transfer Agent. This form is available from the Transfer Agent. Once
this election has been made, the Shareholder may contact the Transfer Agent by
telephone at 1-800-447-1139 to request the exchange. During periods of
substantial economic or market change, telephone exchanges
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may be difficult to complete and shareholders may have to submit exchange
requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own shares of the portfolio or
fund whose shares are being acquired, a new account will be established with the
same registration, dividend and capital gain options and Authorized Dealer of
record as the account from which shares are exchanged, unless otherwise
specified in writing by the Shareholder with all signatures guaranteed by an
eligible guarantor institution as defined above. To participate in the
Systematic Investment Plan or establish automatic withdrawal for the new
account, however, an exchanging shareholder must file a specific written
request. The Exchange Privilege may be modified or terminated at any time, or
from time to time, by the Portfolio on 60 days' notice to the affected portfolio
or fund shareholders. The Portfolio, BSFM and Bear Stearns will not be liable
for any loss, liability, cost or expense for acting upon telephone instructions
that are reasonably believed to be genuine. In attempting to confirm that
telephone instructions are genuine, the Portfolio will use such procedures as
are considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number, recent transactions in the account, and the
account holder's Social Security number, address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns or the
Transfer Agent. Except in the case of qualified retirement plans, the shares
being exchanged must have a current value of at least $250; furthermore, when
establishing a new account by exchange, the shares being exchanged must have a
value of at least the minimum initial investment required for the portfolio or
fund into which the exchange is being made; if making an exchange to an existing
account, the dollar value must equal or exceed the applicable minimum for
subsequent investments. If any amount remains in the investment portfolio from
which the exchange is being made, such amount must not be below the minimum
account value required by the portfolio or fund.
Shares will be exchanged at the next determined net asset value. If an investor
is exchanging all or a portion of his or her Class A shares into shares of the
same Class of any portfolio of The Bear Stearns Funds or shares of the Money
Market Portfolio, no additional sales load will be paid by the investor in
connection with the exchange. No CDSC will be imposed on Class C shares at the
time of an exchange. The charge applicable on redemption of the acquired Class C
shares will be calculated from the date of the initial purchase of the Class C
shares exchanged. To qualify, at the time of the exchange the investor must
notify Bear Stearns, the Authorized Dealer or the Transfer Agent. Any such
qualification is subject to confirmation of the investor's holdings through a
check of appropriate records. No fees currently are charged shareholders
directly in connection with exchanges, although the Portfolio reserves the
right, upon not less than 60 days' written notice, to charge Shareholders a
$5.00 fee in accordance with rules promulgated by the Commission. The Portfolio
reserves the right to reject any exchange request in whole or in part. The
Exchange Privilege may be modified or terminated at any time upon notice to
Shareholders.
The exchange of shares of one portfolio or fund for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may realize a taxable gain
or loss.
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Redirected Distribution Option
[The Redirected Distribution Option permits investment of investors' dividends
and distributions in shares of other funds in the Bear Stearns family.]
The Redirected Distribution Option enables a Shareholder to invest automatically
dividends or dividends and capital gain distributions, if any, paid by the
Portfolio in shares of the same Class of another portfolio or fund advised or
sponsored by Bear Stearns of which the Shareholder is an investor, including The
Bear Stearns Funds and the Money Market Portfolio of The RBB Fund, Inc. Shares
of the other portfolio or fund will be purchased at the then-current net asset
value. If an investor is investing in a Class that charges a CDSC, then shares
purchased will be subject on redemption to the CDSC, if any, applicable to the
purchased shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Portfolio
may modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
General
[The redemption price will be based on the net asset value next computed after
receipt of a redemption request; in certain instances a CDSC will be charged.]
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one Class, any
request for redemption must specify the Class of shares being redeemed. If the
investor fails to specify the Class of shares to be redeemed or if the investor
owns fewer shares of the Class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
from the investor, the investor's Bear Stearns account executive or the
investor's Authorized Dealer. The Portfolio imposes no charges (other than any
applicable CDSC) when shares are redeemed directly through the Distributor.
The Portfolio redeems its shares upon request of a Shareholder on any Business
Day at the net asset value next determined after the receipt of such request in
proper form. Except in certain extraordinary circumstances permitted under the
Investment Company Act, redemption proceeds will be mailed by check to
Shareholders within three (3) days of receipt of a properly executed request. If
shares to be redeemed were purchased by check, the Portfolio may delay
transmittal of redemption proceeds until such time as it has assured itself that
good funds have been collected for the purchase of such shares. This may take up
to fifteen (15) days. Additional documentation regarding a redemption by any
means may be required to effect a redemption when deemed appropriate by Bear
Stearns, any Authorized Dealer or the Transfer Agent. The request for such
redemption will not be considered to have been received in proper form until
such additional documentation has been received. A Shareholder of the Portfolio
may request redemption of shares of the Portfolio by telephone if the optional
telephone transaction privilege is elected on the Account Information Form
accompanying this Prospectus. See "How to Buy Shares."
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The Portfolio may suspend redemption privileges or postpone the date of payment
for more than three days after a redemption order is received during any period
(i) when the NYSE is closed other than customary weekend and holiday closings,
or trading on the NYSE is restricted as determined by the Commission, (ii) when
an emergency exists, as defined by the Commission, which makes it not reasonably
practicable for the Portfolio to dispose of securities owned by it or fairly to
determine the value of its assets, or (iii) as the Commission may otherwise
permit.
The Portfolio reserves the right to redeem the shares of any Shareholder whose
account balance is less than $750 as a result of earlier redemptions. Such
redemptions will not be implemented if the value of a Shareholder's account
falls below the minimum account balance solely as a result of market conditions.
The Trust will give sixty (60) days prior written notice to Shareholders whose
shares are being redeemed to allow them to purchase sufficient additional shares
of the Portfolio to avoid such redemption.
Contingent Deferred Sales Charge -- Class C Shares
[Class C shares of the Portfolio are subject to a CDSC of 1.00% upon redemption
within one year of purchase.]
A CDSC of 1.00% payable to the Distributor is imposed on any redemption of Class
C shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through reinvestment
of dividends or capital gain distributions, plus (ii) increases in the net asset
value of an investor's Class C shares above the dollar amount of all such
investor's payments for the purchase of Class C shares held by the investor at
the time of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above the
total amount of payments for the purchase of Class C shares made during the
preceding year; then of amounts representing shares purchased more than one year
prior to the redemption; and finally, of amounts representing the cost of shares
purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of the Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired five
additional shares through dividend reinvestment. During the first year after the
purchase the investor decided to redeem $500 of his or her investment. Assuming
at the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12 per
share). The CDSC would not be applied to the value of the reinvested dividend
shares and the amount which represents appreciation ($260). Therefore, $240 of
the $500 redemption proceeds ($500 minus $260) would be charged at a rate of
1.00% for a total CDSC of $2.40.
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The CDSC applicable to Class C shares will be waived in connection with (a)
redemptions made within one year after the death or disability, as defined in
Section 72(m)(7) of the Code, of the shareholder, (b) redemptions by employees
participating in Eligible Benefit Plans, (c) redemptions as a result of a
combination of any investment company with the Portfolio by merger, acquisition
of assets or otherwise, (d) a distribution following retirement under a
tax-deferred retirement plan or upon attaining age 70 1/2 in the case of an IRA
or Keogh plan or custodial account pursuant to Section 403(b) of the Code, and
(e) redemptions by such shareholders as the Commission or its staff may permit.
If the Trustees determine to discontinue the waiver of the CDSC, the disclosure
in the Portfolio's prospectus will be revised appropriately. Any Portfolio
shares subject to a CDSC which were purchased prior to the termination of such
waiver will have the CDSC waived as provided in the Portfolio's prospectus at
the time of the purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor must
notify the Transfer Agent or the investor's Bear Stearns account executive or
the investor's Authorized Dealer must notify the Distributor. Any such
qualification is subject to confirmation of an investor's entitlement.
Procedures
[Shareholders may redeem shares in several ways.]
Redemption through Bear Stearns or Authorized Dealers
Clients with a brokerage account may submit redemption requests to their account
executives or Authorized Dealers in person or by telephone, mail or wire. As the
Portfolio's agent, Bear Stearns or Authorized Dealers may honor a redemption
request by repurchasing Portfolio shares from a redeeming Shareholder at the
shares' net asset value next computed after receipt of the request by Bear
Stearns or any Authorized Dealer. Under normal circumstances, within three (3)
days, redemption proceeds will be paid by check or credited to the Shareholder's
brokerage account at the election of the Shareholder. Bear Stearns account
executives or Authorized Dealers are responsible for promptly forwarding
redemption requests to the Transfer Agent. The telephone redemption privilege
may be terminated or modified at any time upon thirty (30) days notice to
Shareholders.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably believed
by the Transfer Agent to be genuine. The Portfolio will require the Transfer
Agent to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Portfolio may be liable for
any losses due to unauthorized or fraudulent instructions. Neither the Portfolio
nor the Transfer Agent will be liable for following telephone instructions
reasonably believed to be genuine.
Redemption Through the Transfer Agent
Portfolio Shareholders who are not clients with a brokerage account who wish to
redeem shares must redeem their shares through the Transfer Agent by mail; other
Shareholders also may redeem Portfolio shares through the Transfer Agent.
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: Bear Stearns Investment Trust -- Emerging Markets Debt
Portfolio, P.O. Box
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8960, Wilmington, Delaware 19899-8960. A redemption request will be executed at
the net asset value next computed after it is received in "good order." "Good
order" means that the request must be accompanied by the following: (1) a letter
of instruction specifying the number of shares or amount of investment to be
redeemed (or that all shares credited to a Portfolio account be redeemed),
signed by all registered owners of the shares in the exact names in which they
are registered, (2) a guarantee of the signature of each registered owner by any
commercial bank, trust company or member of a recognized stock exchange as
described below, and (3) other supporting legal documents for estates, trusts,
guardianships, custodianships, partnerships and corporations if any.
Shareholders are responsible for ensuring that a request for redemption is
received in "good order."
Signature Guarantees
A signature guarantee required in the case of redemptions greater than $25,000
is designed to protect the shareholders and the Portfolios against fraudulent
transactions by unauthorized persons. In certain instances, such as transfer of
ownership or when the registered shareholder(s) requests that redemption
proceeds be sent to a different name of address than the registered name and
address of record on the shareholder account, the Portfolio will require that
the shareholder's signature be guaranteed. When a signature guarantee is
required, each signature must be guaranteed by a domestic bank or trust company,
credit union, broker, dealer, national securities exchange, registered
securities association, clearing agency or savings association as defined by
federal law. The institution providing the guarantee must see a signature ink
stamp or medallion which states "Signature(s) Guaranteed" and be signed in the
name of the guarantor by an authorized person with that person's title and the
date. The Portfolio may reject a signature guarantee if the guarantor is not a
member of or participant in a signature guarantee program. Please note that a
notary public stamp or seal is not acceptable. The Portfolio reserves the right
to amend or discontinue its signature guarantee policy at any time and, with
regard to a particular redemption transaction, to require a signature guarantee
at its discretion.
Additional Information about Redemptions
A Shareholder may have redemption proceeds of $500 or more wired to the
Shareholder's brokerage account or a commercial bank account designated by the
Shareholder. A transaction fee of $7.50 may be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the Shareholder's Bear Stearns account executive, to any Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account. If a Shareholder requests redemption of shares which were purchased
recently, the Portfolio may delay payment until it is assured that good payment
has been received. In the case of purchases by check, this can take up to 15
days.
Because the Portfolio incurs certain fixed costs in maintaining Shareholder
accounts, the Portfolio reserves the right to redeem all Portfolio shares in any
Shareholder account with an aggregate net asset value of less than $750. If the
Portfolio elects to do so, it will notify the Shareholder and provide the
Shareholder the opportunity to increase the amount invested to $750 or more
within (sixty) 60 days of the notice. The Portfolio will not redeem accounts
that fall below $750 solely as a result of a reduction in net asset value per
share.
Shareholders who have redeemed shares may reinstate their Portfolio account
without a sales charge up to the dollar amount redeemed by purchasing shares of
the same Portfolio within sixty (60) days of the redemption. To take advantage
of this reinstatement privilege, Shareholders must notify their Bear Stearns
account executive or Authorized Dealer at the time the privilege is exercised.
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Automatic Withdrawal
Automatic withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for automatic withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Portfolio or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through
Automatic Withdrawal. Purchases of additional shares concurrently with
withdrawals generally are undesirable.
Class C shares withdrawn pursuant to the Automatic Withdrawal will be subject to
any applicable CDSC. Purchases of additional Class A shares where the sales load
is imposed concurrently with withdrawals of Class A shares generally are
undesirable.
Dividends, Distributions and Taxes
[Dividends will be automatically reinvested in additional Portfolio shares at
net asset value unless payment in cash is requested or dividends are redirected
into another fund pursuant to the Redirected Distribution Option.]
The Portfolio declares and pays as dividends quarterly to Shareholders
substantially all of its net investment income (i.e., its income, including both
original issue discount and market discount accretions, other than its net
realized long and short-term capital gains and net realized foreign exchange
gains). Substantially all of the Portfolio's net realized capital gains (net
realized long-term capital gains in excess of net realized short-term capital
losses, including any capital loss carryovers), net realized short-term capital
gains and net realized foreign exchange gains, if any, are expected to be
distributed each year by the Portfolio.
Each dividend and distribution, if any, declared by the Portfolio on its
outstanding shares will, at the election of each Shareholder, be paid in cash or
in additional shares of the Portfolio or redirected into another fund pursuant
to the Redirected Distribution Option. This election should initially be made on
a Shareholder's Account Information Form and may be changed upon written notice
to either Bear Stearns, an Authorized Dealer or the Transfer Agent at any time
prior to the record date for a particular dividend or distribution. If no
election is made, all dividends and distributions will be reinvested in the
Portfolio. The Portfolio distributes net realized securities gains, if any, once
a year, but it may make distributions on a more frequent basis to comply with
the distribution requirements of the Code, in all events in a manner consistent
with the provisions of the Investment Company Act. The Portfolio will not make
distributions from net realized securities gains unless capital loss carryovers,
if any, have been utilized or have expired. Dividends are automatically
reinvested in additional shares of the Portfolio at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
All income dividends and capital gains distributions are automatically paid in
full and fractional shares of the Portfolio, unless the Shareholder requests
that they be paid in cash. Each purchase of shares of the Portfolio is made upon
the condition that the Transfer Agent is thereby automatically appointed as
agent of the investor to receive all dividends and capital gains distributions
on shares owned by the investor. Such dividends and distributions will be paid,
at the net asset value per share, in shares of the
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Portfolio (or in cash if the Shareholder so requests) as of the close of
business on the record date. At any time an investor may request the Transfer
Agent, in writing, to have subsequent dividends and/or capital gains
distributions paid to him or her in cash rather than shares. In order to provide
sufficient time to process the change, such request should be received by the
Transfer Agent at least five (5) business days prior to the record date of the
dividend or distribution. In the case of recently purchased shares for which
registration instructions have not been received on the record date, cash
payments will be made to Bear Stearns or the Authorized Dealer which will be
forwarded to the Shareholder, upon the receipt of proper instructions.
At the time of an investor's purchase of shares of the Portfolio, a portion of
the price per share may be represented by undistributed income of the Portfolio
or unrealized appreciation of the Portfolio's securities. Therefore, subsequent
distributions (or portions thereof) attributable to such items, may be taxable
to the investor even if the distributions (or portions thereof) in reality
represent a return of a portion of the purchase price.
If a Shareholder buys shares immediately prior to the Portfolio's deduction of a
distribution from its net asset value, the Shareholder will pay the full price
for the shares and then receive a portion of the price back in the form of a
taxable distribution.
The Portfolio is not expected to have any federal tax liability; although
investors should expect to be subject to federal, state or local taxes in
respect of their investments in Portfolio shares.
The Portfolio will be treated as a separate entity for tax purposes and intends
to continue to qualify and elect to be treated as a regulated investment company
under Subchapter M of the Code. To qualify as such, the Portfolio must satisfy
certain requirements relating to the sources of its income, diversification of
its assets and distribution of its income to Shareholders. As a regulated
investment company, the Portfolio will not be subject to Federal income or
excise tax on any net investment income and net realized capital gains that are
distributed to its Shareholders in accordance with certain timing requirements
of the Code.
The Code provides for the carryover or some of all of the sales load imposed on
the Portfolio's Class A shares if an investor exchanges such shares for shares
of another fund or portfolio advised or sponsored by Bear Stearns or its
affiliates within 91 days of purchase and such other fund reduces or eliminates
its otherwise applicable sales load for the purpose of the exchange. In this
case, the amount of the sales load charged the investor for such shares up to
the amount of the reduction of the sales load charge on the exchange, is not
included in the basis of such shares for purposes of computing gain or loss on
the exchange, and instead is added to the basis of the fund shares received on
the exchange.
Investors who purchase shares shortly before the record date for a distribution
will pay a per share price that includes the value of the anticipated
distribution and will be taxed on the distribution when received even though the
distribution represents a return of a portion of the purchase price. Redemptions
of shares are taxable events on which a Shareholder may recognize a gain or
loss.
Individuals and certain other classes of Shareholders may be subject to 31%
withholding of Federal income tax on distributions and redemptions if they fail
to furnish the Portfolio with their correct taxpayer identification number and
certain certifications regarding their tax status or if they are otherwise
subject to withholding. Individuals, corporations and other Shareholders that
are not U.S. persons under the
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Code are generally subject to withholding at the rate of 30% (or lower rate
provided by an applicable tax treaty) on dividends and certain other payments
from the Portfolio.
In addition to Federal taxes, a Shareholder may be subject to state, local or
foreign taxes on payments received from the Portfolio. A state tax exemption may
be available to the extent distributions of the Portfolio are derived from
interest on certain U.S. government securities.
For a detailed discussion of certain Federal, state and local tax consequences
of investing in shares of the Portfolio, see "Taxation" in the Statement of
Additional Information. Shareholders are urged to consult their own tax advisers
regarding specific questions as to Federal, state and local taxes as well as to
any foreign taxes.
Performance Information
[The Portfolio may advertise its performance in a number of ways.]
For purposes of advertising, performance for each Class of shares may be
calculated on the basis of average annual total return and/or total return.
These total return figures reflect changes in the price of the shares and assume
that any income dividends and/or capital gains distributions made by the
Portfolio during the measuring period were reinvested in shares of the same
Class. These figures also take into account any applicable distribution and
shareholder servicing fees. As a result, at any given time, the performance of
Class C shares should be expected to be lower than that of Class A shares.
Performance for each class will be calculated separately.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an initial
payment of $1,000 and that the investment was redeemed at the end of a stated
period of time, after giving effect to the reinvestment of dividends and
distributions during the period. The return is expressed as a percentage rate
which, if applied on a compounded annual basis, would result in the redeemable
value of the investment at the end of the period. Advertisements of the
Portfolio's performance will include its average annual total return for one,
five and ten year periods, or for shorter periods depending upon the length of
time during which the Portfolio has operated. Computations of average annual
total return for periods of less than one year represent an annualization of the
Portfolio's actual total return for the applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percentage
rate which is calculated by combining the income and principal changes for a
specified period and dividing by the net asset value (or maximum public offering
price in the case of Class A shares) per share at the beginning of the period.
Class C shares total return advertisements will reflect the deduction of the
CDSC, as appropriate. Advertisements may include the percentage rate of total
return or may include the value of a hypothetical investment at the end of the
period which assumes the application of the percentage rate of total return.
Total return for the Portfolio also may be calculated by using the net asset
value per share at the beginning of the period instead of the maximum offering
price per share at the beginning of the period for Class A shares or without
giving effect to any applicable CDSC at the end of the period for Class C
shares. Calculations based on the net asset value per share do not reflect the
deduction of the sales load on the Portfolio's Class A shares, which, if
reflected, would reduce the performance quoted.
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Quotations of distribution rates are calculated by analyzing the most recent
distribution of net investment income for a monthly, quarterly or other relevant
period and dividing this amount by the average net asset value during the period
for which the distribution rates are being calculated.
The Portfolio may also from time to time advertise total return on a cumulative,
average, year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition to the above, the Portfolio
may from time to time advertise its performance relative to certain performance
rankings and indices.
The investment results of the Portfolio will fluctuate over time, and any
presentation of investment results for any prior period should not be considered
a representation of what an investment in the Portfolio may earn or what the
Portfolio's performance may be in any future period. In addition to information
provided in Shareholder reports, the Portfolio may from time to time, in its
discretion, make a list of the Portfolio's holdings available to investors upon
request. A discussion of the Portfolio's performance will be included in the
Portfolio's annual report to Shareholders which will be made available to
Shareholders upon request and without charge. Performance will vary from time to
time and past results are not necessarily representative of future results.
Investors should remember that performance is a function of portfolio management
in selecting the type and quality of portfolio securities and is affected by
operating expenses. Performance information, such as that described above, may
not provide a basis for comparison with other investments or other investments
companies using a different method of calculating performance.
Comparative performance information may be used from time to time in advertising
or marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Moody's Bond Survey Index and components
thereof, Mutual Fund Values, Mutual Fund Forecaster, Mutual Fund Investing and
other industry publications.
General Information
Shares of the Portfolio
The Portfolio is a series of Bear Stearns Investment Trust, which was organized
under the laws of The Commonwealth of Massachusetts on October 15, 1992 as a
Massachusetts business trust under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Portfolio commenced investment operations on May 3,
1993. Under the Trust Agreement, the Trustees are authorized to issue an
unlimited number of shares of beneficial interest, $.0001 par value per share.
The Portfolio's shares are classified into three distinct classes of shares;
Class A, Class C and Class Y shares. Each share has one vote and shareholders
will vote in the aggregate and not by Class, except as otherwise required by
law. Additional series may be added in the future from time to time. Each share
when issued and paid for as described in this Prospectus, is fully paid and
non-assessable.
Under Massachusetts law, there is a possibility that shareholders of a business
trust could, under certain circumstances, be held personally liable as partners
for the obligations of such trust. The Trust Agreement contains provisions
intended to limit such liability and to provide indemnification out of Trust
property of any Shareholder charged or held personally liable for obligations or
liabilities of the Trust solely by reason of being or having been a Shareholder
of the Trust and not because of such
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Shareholder's acts or omissions or for some other reason. Thus, the risk of a
Shareholder incurring financial loss on account of Shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
Unless otherwise required by the Investment Company Act, ordinarily it will not
be necessary for the Trust to hold annual meetings of Shareholders. As a result,
Trust Shareholders may not consider each year the election of Trustees or the
appointment of independent accountants. However, pursuant to the Trust's
By-Laws, the record holders of at least 20% of the shares outstanding and
entitled to vote at a special meeting may require the Trust to hold such special
meeting of Shareholders for any purpose except that the record holders of at
least 10% of the shares outstanding may call a special meeting for the purpose
of voting upon the question of removal of any Trustee or Trustees and
Shareholders may, under certain circumstances as permitted by the Investment
Company Act, communicate with other Shareholders in connection with requiring a
special meeting of Shareholders. In addition, the Portfolio is required to
assist Shareholder communication in connection with calling of Shareholder
meetings to consider removal of a Trustee. Trust Shareholders may remove a
Trustee by the affirmative vote of a majority of the Trust's outstanding shares.
The Board of Trustees, however, will call a meeting of Shareholders for the
purpose of electing Trustees if, at any time, less than a majority of Trustees
holding office at the time were elected by Shareholders.
The Trust issues certificates representing the Portfolio's shares, and the
Transfer Agent maintains a record of each Shareholder's ownership. Each
Shareholder receives confirmation of purchase and redemption orders from the
Transfer Agent, or directly from Bear Stearns or any Authorized Dealer.
Portfolio shares and any dividends and distributions paid by the Portfolio are
reflected in statements from the Transfer Agent, or directly from Bear Stearns
or any Authorized Dealer.
Rule 18f-2 under the Investment Company Act provides that any matter required to
be submitted under the provisions of the Investment Company Act or applicable
state law or otherwise to the holders of the outstanding voting securities of an
investment company, such as the Trust, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by such matter. Rule 18f-2 further
provides that a portfolio shall be deemed to be affected by a matter unless it
is clear that the interests of such portfolio in the matter are identical or
that the matter does not affect any interest of such portfolio. However, the
Rule exempts the selection of independent accountants and the election of
Trustees from the separate voting requirements of the Rule.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Portfolio at PFPC Inc.,
Attention: Emerging Markets Debt Portfolio, P.O. Box 8960, Wilmington, Delaware
19899-8960, by calling 1-800-447-1139 or by calling Bear Stearns at
1-800-766-4111 or in writing to the Portfolio at PFPC Inc., Attention: Emerging
Markets Debt Portfolio, P.O. Box 8950, Wilmington, Delaware 19899-8960, or by
calling 1- 800-447-1139.
Portfolio Turnover
The Portfolio is free to dispose of its portfolio securities at any time,
subject to compliance with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover
-44-
<PAGE>
desirable in light of the Portfolio's investment objective. Although it is the
policy of the Portfolio generally not to engage in trading for short-term gains,
the Portfolio may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for fixed
income securities of different countries, to seek short-term profits during
periods of fluctuating interest rates, or for other reasons. The portfolio
turnover rate for the Portfolio may vary greatly from year to year. A high rate
of turnover involves correspondingly greater expenses, increased aggregate
brokerage commissions, which must be borne by the Portfolio and its
Shareholders, and the incidence of short-term capital gain (which is taxable to
Shareholders as ordinary income upon distribution to them) and may under certain
circumstances make it more difficult for the Portfolio to qualify as a regulated
investment company under the Code. It may also be affected by sales of portfolio
securities necessary to meet cash requirements for redemptions of shares. The
turnover rate is calculated by dividing the lesser of the dollar amount of sales
or purchases of portfolio securities by the average monthly market value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. For the period May 3, 1993 to March 31, 1994, for
the fiscal year ended March 31, 1995, for the fiscal year ended March 31, 1996,
and for the fiscal year ended March 31, 1997, the portfolio turnover rate for
the Class A shares was 100.85%, 35.01%, 266.46%, and 223.41%, respectively. For
the period July 26, 1995 through March 31, 1996, and for the fiscal year ended
March 31, 1997, for the Class C shares, the portfolio turnover rate was 266.46%
and 223.41%, respectively. The annual portfolio turnover rate for the Portfolio
is expected to be between 250% and 325%. However, the Portfolio's portfolio
turnover rate may exceed 325% when the Investment Manager believes the
anticipated benefits of short-term investments outweigh any increase in
transaction costs or increase in capital gains. These rates should not be
considered as limiting factors.
Reports To Shareholders
Each Shareholder is sent an annual report containing audited financial
statements and a semiannual report. Each Shareholder is also provided with a
printed confirmation for each transaction in the Shareholder's account and an
individual monthly statement. The Portfolio does not generally provide
sub-accounting services.
Additional Information
The term "majority of the outstanding shares" of the Portfolio means the vote of
the lesser of (i) 67% or more of the shares of the Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
As used in this Prospectus, the term "Business Day" refers to those days when
the NYSE is open for business. Currently, the NYSE is closed on New Year's Day,
President's Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Portfolio's official sales literature in connection with the offer of the
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any State in which,
or to any person to whom, such offering may not lawfully be made.
-45-
<PAGE>
APPENDIX A
RATINGS OF CORPORATE DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY
RATINGS
Aaa Fixed-income securities which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Fixed-income securities which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise
what are generally known as high grade fixed-income securities. They
are rated lower than the best fixed-income securities because margins
of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Fixed-income securities which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Fixed-income securities which are rated Baa are considered as medium
grade obligations: i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
fixed-income securities lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Fixed-income securities rated Aaa, Aa, A and Baa are considered
investment grade.
Ba Fixed-income securities which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be
very moderate, and therefore not well safeguarded during both good and
bad times in the future. Uncertainty of position characterizes bonds in
this class.
B Fixed-income securities which are rated B generally lack
characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa Fixed-income securities which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
A-1
<PAGE>
Ca Fixed-income securities which are rated Ca present obligations which
are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Fixed-income securities which are rated C are the lowest rated class of
fixed-income securities, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its municipal fixed-income
security rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
The ratings apply to Municipal Commercial Paper as well as taxable Commercial
Paper. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-l, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
A-2
<PAGE>
STANDARD & POOR'S RATINGS GROUP, a division of the
McGraw-Hill Companies, Inc. ("STANDARD & POOR'S")
FIXED-INCOME SECURITY
RATINGS
A Standard & Poor's fixed-income security rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. The ratings are
based, in varying degrees, on the following considerations: (1) likelihood of
default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the
obligations; (2) nature of and provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
AAA Fixed-income securities rated "AAA" have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Fixed-income securities rated "AA" have a very strong capacity to pay
interest and repay principal and differs from the highest-rated issues
only in small degree.
A Fixed-income securities rated "A" have a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than fixed-income securities in higher-rated
categories.
BBB Fixed-income securities rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for fixed-income securities in this
category than for fixed-income securities in higher-rated categories.
Fixed-income securities rated AAA, AA, A and BBB are considered
investment grade.
BB Fixed-income securities rated "BB" have less near-term vulnerability to
default than other speculative grade fixed-income securities. However,
they face major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to inadequate
capacity or willingness to pay interest and repay principal.
B Fixed-income securities rated "B" have a greater vulnerability to
default but presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or
A-3
<PAGE>
economic conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Fixed-income securities rated "CCC" have a current identifiable
vulnerability to default, and are dependent upon favorable business,
financial and economic conditions to meet timely payments of interest
and repayments of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or implied
"CCC" rating.
C The rating "C" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or implied
"CCC" rating.
CI The rating "CI" is reserved for fixed-income securities on which no
interest is being paid.
D In payment default. The "D" rating is used when payments are not made
on the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Fixed-income securities rated "BB", "B", "CCC", "CC" and "C" are regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest degree of speculation. While such fixed-income securities will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
A-4
<PAGE>
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-l".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
A-5
<PAGE>
THE
BEAR STEARNS
FUNDS
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Manager
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Independent Auditors
Deloitte & Touche LLP
2 World Financial Center
New York, NY 10281
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE EMERGING MARKETS DEBT
PORTFOLIO'S PROSPECTUS AND IN THE EMERGING MARKET DEBT PORTFOLIO'S OFFICIAL
SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE EMERGING MARKETS DEBT
PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
PORTFOLIO. THE EMERGING MARKETS DEBT PORTFOLIO'S PROSPECTUS DOES NOT CONSTITUTE
AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT
LAWFULLY BE MADE.
<PAGE>
PROSPECTUS
Emerging Markets Debt Portfolio
Emerging Markets Debt Portfolio (the "Portfolio") is organized as a separate,
non-diversified portfolio of Bear Stearns Investment Trust (the "Trust"), an
open-end management investment company organized under the laws of The
Commonwealth of Massachusetts. The Portfolio seeks to provide investors with
high current income by investing primarily in Debt Obligations of issuers
located in Emerging Countries. The Portfolio's secondary objective is to provide
investors with capital appreciation. See "Investment Objective and Policies."
There can be no assurance that the Portfolio will achieve its investment
objective.
Investments in securities in Emerging Countries and investments in securities
denominated in foreign currencies, as well as the active management techniques
that the Portfolio may employ, entail risks in addition to those that are
customarily associated with investing in dollar-denominated U.S. debt
securities. In addition, at any one time, substantially all of the Portfolio's
assets may be invested in Debt Obligations that are unrated or below investment
grade. Investments in below investment grade Debt Obligations, commonly known as
"JUNK BONDS," and certain unrated Debt Obligations may involve risks not
associated with investment grade securities, including among others, overall
greater risk of non-payment of principal and interest (default), sensitivity to
general economic conditions and changes in interest rates, greater market price
volatility and less liquid secondary market trading. As a result, the Portfolio
is intended for long-term investors who can accept the risks associated with its
investments and may not be suitable for all investors. Investors should
carefully consider these risks before investing. See "Description of the
Portfolio -- Investment Objective," p. 7; "Description of the Portfolio --
Investment Restrictions," p. 16; and "Risk Factors and Special Considerations,"
p. 16.
By this Prospectus, Class Y Shares of the Portfolio are being offered. Class Y
shares are sold at net asset value without a sales charge to investors whose
minimum investment is $2.5 million. The Portfolio issues other classes of shares
which have sales charges and different expenses which would affect performance.
Investors desiring to obtain information about these other classes of shares
should call 1-800-766-4111 or ask their sales representatives or the Portfolio's
distributor.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies, Inc., serves as investment manager to the Portfolio.
Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the
Portfolio's distributor.
----------------------------
This Prospectus sets forth concisely the information about the Portfolio that a
prospective investor ought to know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 30, 1997, containing further
information about the Portfolio which may be of interest to investors, has been
filed with the Securities and Exchange Commission, which information is
incorporated herein by reference in its entirety. For a free copy, write to the
address or call one of the telephone numbers listed under "General Information"
in this Prospectus.
----------------------------
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank, and are not federally insured by the Federal Insurance Corporation, the
Federal Reserve Board, or any other agency.
The net asset value of funds of this type will fluctuate.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
May 30, 1997
<PAGE>
Table of Contents
-----------------
Page
----
Summary ........................................................... 3
Fee Table........................................................... 6
Description of the Portfolio........................................ 7
Risk Factors and Special Considerations............................. 15
Management of the Portfolio......................................... 22
How to Buy Shares................................................... 25
Shareholder Services................................................ 27
How to Redeem Shares................................................ 29
Dividends, Distributions and Taxes.................................. 31
Performance Information............................................. 33
General Information................................................. 34
Appendix ........................................................... A-1
<PAGE>
Summary
General
The Portfolio is organized as a separate, non-diversified portfolio of Bear
Stearns Investment Trust (the "Trust"), an open-end, management investment
company organized under the laws of The Commonwealth of Massachusetts. By this
Prospectus, only Class Y Shares of the Portfolio are being offered. From time to
time, other portfolios may be established and sold pursuant to other offering
documents.
Investment Objective
The investment objective of the Portfolio is to provide investors with high
current income by investing primarily in Debt Obligations (as defined herein) of
issuers located in Emerging Countries. The Portfolio's secondary objective is to
provide investors with capital appreciation. There can be no assurance that the
Portfolio will achieve its investment objective.
The Portfolio defines "Debt Obligations" to include fixed or floating rate
bonds, notes, debentures, commercial paper, Loans (as defined herein), Brady
Bonds, convertible securities, and other debt securities issued or guaranteed by
governments, agencies or instrumentalities, central banks, commercial banks or
private issuers, including repurchase agreements with respect to obligations of
governments or central banks. See "Description of the Portfolio -- Investment
Objective and Policies." The Portfolio considers "Emerging Countries" to include
any country that is generally considered to be an emerging or developing country
by the World Bank, the International Finance Corporation or the United Nations
and its authorities. The Investment Manager may invest in Debt Obligations that
it determines to be proper investments for the Portfolio notwithstanding any
credit ratings that may be assigned to such securities. At any one time,
substantially all of the Portfolio's assets may be invested in Debt Obligations
that are unrated or below investment grade.
Risk Factors
Investors should carefully consider the risks of investing in securities of
issuers in Emerging Countries and non-dollar denominated securities. Generally,
while the Portfolio offers potential returns higher than those available from
U.S. government securities, there is also a substantially greater risk of loss.
The Portfolio may not be suitable for all investors, and is intended for
long-term investors who can accept the risks associated with its investments.
Investors should carefully consider these risks before investing. See
"Description of the Portfolio -- Investment Objective" and "Risk Factors and
Special Considerations."
Low Rated and Unrated Instruments. At any one time, substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. Low rated debt instruments, commonly known as "JUNK BONDS,"
and certain unrated debt instruments generally offer a higher current yield than
that available from investment grade issues, but involve greater risk. Low rated
and certain unrated securities are especially subject to changes in the
financial condition of their issuers and to price fluctuation in response to
changes in interest rates.
Discount Obligations. As a result of the Portfolio holding securities purchased
at a discount, the Portfolio may be required to sell securities to meet required
dividend distributions to Shareholders. Under adverse market conditions, this
may result in Shareholders receiving a portion of their original purchase price
as a taxable dividend and could further negatively impact net asset value.
Political and Economic Factors. Investing in Debt Obligations of Emerging
Countries involves considerations and potential risks relating to political and
economic developments abroad. Governments
-3-
<PAGE>
of many Emerging Countries have exercised and continue to exercise substantial
influence over many aspects of the private sector. Accordingly, government
actions in the future could have a significant effect on economic conditions in
Emerging Countries, which could affect the value of securities in the
Portfolio's portfolio.
Foreign Exchange Risk. The value of non-dollar denominated securities of issuers
in Emerging Countries is affected by changes in currency exchange rates or
exchange control regulations. Foreign currency exchange rates are determined by
forces of supply and demand on the foreign exchange markets. These forces are
affected by the international balance of payments, economic and financial
conditions, government intervention, speculation and other factors. Many of the
currencies of Emerging Countries have experienced significant devaluations
relative to the U.S. dollar and major adjustments have been made in certain of
them at times. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Portfolio's assets denominated
in that currency and thereby impact upon the Portfolio's total return on such
assets. A decline in the exchange rate would reduce the value of certain
portfolio securities. In addition, if the exchange rate for the currency in
which the Portfolio receives interest payments declines against the U.S. dollar
before such interest is paid as dividends to Shareholders, the Portfolio may
have to sell securities to obtain sufficient cash to pay such dividends.
Sovereign Debt. Investments in sovereign debt involve special risks. The issuer
of the debt or 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
recourse in the event of a default.
Investing in Securities Markets of Emerging Countries. Certain of the risks
associated with investments generally are heightened for investments in Emerging
Countries. For example, securities markets in Emerging Countries may be less
liquid, more volatile and less subject to governmental regulation than U.S.
securities markets. There may be less publicly available information about
issuers in Emerging Countries than about domestic issuers.
Investment Practices. The Portfolio may employ investment techniques involving
risks different from those associated with investing solely in dollar
denominated fixed income securities of U.S. issuers. Losses resulting from the
use of such strategies would reduce the Portfolio's net asset value, and
possibly income, and the losses can be greater than if the strategies had not
been used.
Non-Diversification. Since the Portfolio is "non-diversified" under the
Investment Company Act of 1940, as amended (the "Investment Company Act") it is
subject only to certain tax diversification requirements. The Portfolio may,
with respect to 50% of its assets, invest up to 25% of its assets in the
securities of any one issuer (except that this limitation does not apply to U.S.
Government securities). With respect to the remaining 50% of its assets, the
Portfolio may not invest more than 5% of its assets in the securities of any one
issuer (except the U.S. Government). To the extent that the Portfolio is
non-diversified under the Investment Company Act, it will be more susceptible to
adverse developments affecting any single issuer of portfolio securities.
Management of the Portfolio
Bear Stearns Funds Management Inc. ("BSFM" or the "Investment Manager") serves
as the Portfolio's investment manager pursuant to an Investment Management
Agreement.
For its investment advisory and management services, the Investment Manager
receives from the Portfolio a monthly fee equal on an annual basis to a
percentage of the Portfolio's average daily net assets. The maximum fee payable
to the Investment Manager is 1.15% of the Portfolio's net assets up to $50
million, 1.0% of the Portfolio's average daily net assets of more than $50
million but not in excess of $100
-4-
<PAGE>
million and 0.70% of the Portfolio's average daily net assets above $100
million. The investment management fees paid by the Portfolio are greater than
those paid by most funds, but are believed by the Investment Manager to be
appropriate for fees paid by funds with a global investment strategy. See
"Management of the Portfolio." Bear Stearns serves as the distributor for the
Portfolio in the sale of its shares.
Brown Brothers Harriman & Co. (the "Custodian") acts as the custodian of the
Portfolio's assets and may employ subcustodians outside the United States
approved by the Trustees of the Portfolio in accordance with regulations of the
Securities and Exchange Commission (the "Commission"). Under the Transfer Agency
Agreement with the Portfolio, PFPC Inc. (the "Transfer Agent" or the
"Administrator") provides transfer agency services and responds to inquiries
from the Shareholders.
The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
-5-
<PAGE>
Fee Table
Shareholder Transaction Expenses Class Y
Maximum Sales Load Imposed on Purchases
(as a % of offering price).......................................... None
Maximum Deferred Sales Charge Imposed on Redemptions (as a
percentage of the amount subject to charge) ........................ None
Annual Portfolio Operating Expenses
(as a percentage of average daily net assets)
Management Fees (after fee waiver)*................................. 0.11%
Distribution (Rule 12b-1) Fees (b).................................. None
Other Expenses (after expense reimbursements)*...................... 1.54%
Total Portfolio Operating Expenses (after fee waiver and expense
reimbursement)*..................................................... 1.65%
Example:
You would pay the following expenses on a hypothetical $1,000 investment
assuming (1) a 5% annual return and the reinvestment of dividends and (2)
redemption of all shares at the end of each time period:
1 Year ............................................. $ 16.78
3 Years............................................... $ 52.03
5 Years............................................... $ 89.69
10 Years.............................................. $195.45
* Based on estimated expenses for the current fiscal year. The Investment
Manager has undertaken to waive its compensation and assume its
expenses (except the brokerage fees, extraordinary items and taxes)
provided in the Investment Management Agreement to maintain total
operating expenses to the extent that Total Portfolio Operating
Expenses exceed 1.65%. The waiver of compensation will automatically
expire at such time as the Portfolio has average net assets of $50
million or total operating expenses of the Portfolio are less than
2.00% per annum of the average daily net assets, unless the Investment
Manager in its sole discretion determines to continue the waiver of
compensation. Without such waiver, the investment management fees would
be equal on an annual basis 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 less than $100 million, and
0.70% of the Portfolio's average daily net assets above $100 million.
Without such waiver by the Investment Manager, total portfolio
operating expenses would be equal on an annual basis to .245% of
average net assets.
The amounts listed in the example should not be considered as
representative of future expenses and actual expenses may be greater or less
than those indicated. Moreover, while the example assumes a 5% annual return,
the Portfolio's actual performance will vary and may result in an actual return
greater or less than 5%.
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses of the Portfolio that an investor in the Portfolio
will bear directly or indirectly, the payment of which will reduce investors'
annual return. The example assumes fees are paid at the rates provided in the
table.
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In addition to the expenses noted above, a transaction fee of $7.50 may be
charged for payments of redemption proceeds by wire. See "How to Redeem Shares."
For a description of the expense reimbursement or waiver arrangements in effect,
see "Management of the Portfolio."
Actual fees and expenses may be greater or less than those indicated. Moreover,
while the example assumes a 5% annual return, the Portfolio's actual performance
will vary and may result in an actual return greater or less than 5%.
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Description of the Portfolio
General
[The Portfolio is a series of Bear Stearns Investment Trust.]
Emerging Markets Debt Portfolio (the "Portfolio") is organized as a separate,
non-diversified portfolio of Bear Stearns Investment Trust (the "Trust"), an
open-end management investment company organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992. The Portfolio commenced
investment operations on May 3, 1993. By this Prospectus, only Class Y shares of
the Portfolio are being offered. From time to time, other portfolios may be
established and sold pursuant to other offering documents. See "General
Information."
Investment Objective
[The Portfolio seeks to provide investors with high current income by investing
primarily in Debt Obligations of issuers in Emerging Countries.]
The Portfolio seeks to provide investors with high current income by investing
primarily in Debt Obligations of issuers in Emerging Countries. The Portfolio's
secondary objective is to provide investors with capital appreciation. The
Portfolio considers "Emerging Countries" to include any country that is
generally considered to be an emerging or developing country by the World Bank,
the International Finance Corporation or the United Nations and its authorities.
The countries that will not be considered Emerging Countries include Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy,
Japan, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, United
Kingdom, and United States. The Portfolio primarily invests in a combination of
(a) high-yield dollar-denominated instruments and (b) local currency instruments
in Emerging Countries where the relationship between interest rates and
anticipated foreign exchange movements relative to the U.S. dollar is expected
to result in a high dollar rate of return. Although the Portfolio's primary
investment objective is current income, the Portfolio also intends to take
advantage of opportunities to realize capital appreciation from its investments
when such opportunities arise. Investing in local currency and
dollar-denominated medium and long term debt in Emerging Countries offers the
potential for capital appreciation due to interest rate and currency exchange
fluctuations and improving credit quality. No assurance can be given that the
Portfolio's investment objective will be achieved.
The Portfolio's investment objective may not be changed without the approval of
a majority (as defined in the Investment Company Act) of the outstanding voting
securities of the Portfolio.
Investment Policies
The investment policies of the Portfolio are non-fundamental and may be changed
without a vote of the shareholders of the Portfolio. The Portfolio's investment
policies are designed to enable it to capitalize on attractive investment
opportunities which exist in Emerging Countries as a result of worldwide
economic integration and the rapidly changing political and economic environment
affecting the debt of Emerging Countries.
The Portfolio may invest at least 80% of its total assets in Debt Obligations
(defined below) of issuers in Emerging Countries. The Portfolio intends to focus
its investments in countries in Asia, Eastern
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Europe, Latin America and Africa. The Portfolio may invest up to 20% of its
total assets in Debt Obligations of issuers that are not considered to be
issuers in Emerging Countries.
The Portfolio may invest at least 30% of its total assets in Debt Obligations of
issuers in Latin America. The Portfolio considers "Latin America" to include the
following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama,
Paraguay, Peru, Uruguay and Venezuela.
At least 70% of the Portfolio's total assets are invested in U.S. dollar
denominated instruments. Up to 30% of the Portfolio's assets may be invested in
Debt Obligations denominated in local currencies provided that no more than 20%
of the Portfolio's assets are expected to be invested in Debt Obligations
denominated in the currency of any one country. To the extent the Portfolio
invests in non-dollar denominated securities, the Portfolio will be subject to
risks relating to fluctuations in currency exchange rates and the possible
imposition of exchange control regulations (e.g., currency blockage) or other
foreign or U.S. laws or restrictions applicable to such investments. See "Risk
Factors and Special Considerations."
Under normal circumstances, the Portfolio invests at least 70% of its total
assets in Debt Obligations of issuers in at least three Emerging Countries. The
Portfolio may not invest more than 40% of its assets in Debt Obligations of
issuers located in any one country. Investing the Portfolio's assets in
securities of issuers located in Emerging Countries will subject the Portfolio
to the risks of adverse social, political or economic events which may occur in
such foreign countries (see "Risk Factors and Special Considerations"). When the
Investment Manager believes unusual circumstances warrant a defensive posture,
the Portfolio temporarily may invest up to all of its assets in cash (U.S.
dollars) or U.S. government securities.
The Portfolio considers an issuer to be located in an Emerging Country if (i)
the issuer derives 50% or more of its total revenues from either goods produced,
sales made or services performed in Emerging Countries, or (ii) the issuer is
organized under the laws of, and with a principal office in, an Emerging
Country.
The Investment Manager may invest in Debt Obligations that it determines to be
suitable investments for the Portfolio notwithstanding any credit ratings that
may be assigned to such securities. At any one time substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. The Portfolio will purchase non-performing securities and some
of these securities may be comparable to securities rated as low as D by
Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies, Inc.
("S&P") or C by Moody's Investors Service, Inc. ("Moody's") (the lowest credit
ratings of such agencies). A substantial portion of the Portfolio's holdings of
Debt Obligations are expected to trade at substantial discounts from face value.
The ratings of Moody's and S&P represent their respective opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are general
and are not absolute standards of quality. The ratings do not necessarily
reflect the current or future composition of the Portfolio. A description of the
ratings of the various securities in which the Portfolio may invest appears in
Appendix A to this Prospectus.
Debt Obligations in which the Portfolio may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed interest
rates. The average maturity of the Portfolio's investments will vary based upon
the Investment Manager's assessment of economic and market conditions. Because
the Portfolio intends to hold fixed-rate instruments, some of which may have
long maturities, the value of the securities held by the Portfolio, and thus the
net asset value of the shares of the Portfolio, generally will vary inversely to
changes in prevailing interest rates. Thus, if interest rates have increased
from the time a debt or other fixed income security was purchased, such
security, if sold,
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might be sold at a price less than its cost. Conversely, if interest rates have
declined from the time such a security was purchased, such security, if sold,
might be sold at a price greater than its cost.
Debt markets in Emerging Countries presently consist of a wide variety of
instruments issued by developing countries, related institutions and companies.
The Portfolio intends to invest in two broad classes of securities: dollar
denominated instruments traded in secondary markets outside of the Emerging
Countries which have issued the securities, and non-dollar denominated
securities (as defined herein) which are traded in the country of issue and/or
in secondary markets.
A substantial portion of the dollar denominated Debt Obligations in which the
Portfolio intends to invest had their origin in syndicated bank loans made
during the 1970s and early 1980s. As a consequence of the substantial volatility
in commodity prices, and the dramatic increase in interest rates in the early
1980s, many emerging countries defaulted on these loans. Much of the debt owed
by governments to commercial banks was subsequently restructured, involving the
exchange of outstanding bank indebtedness for Brady Bonds (as described below).
Brady Bonds, remaining outstanding bank loans and a relatively small but growing
number of newly issued government, agency and corporate bond issues make up the
large and growing debt market in Emerging Countries. The investment vehicles
which the Investment Manager is expected to acquire or utilize on behalf of the
Portfolio are described below.
Brady Bonds. "Brady Bonds" are debt securities issued in an exchange of
outstanding commercial bank loans to public and private entities in Emerging
Countries in connection with sovereign debt restructurings, under a plan,
introduced by former U.S. Secretary of the Treasury Nicholas F. Brady, known as
the Brady Plan. Agreements implemented under the Brady Plan are designed to
reduce the debt service burden of heavily indebted nations, in exchange for
various forms of credit enhancement coupled with economic policy reforms
designed to improve the debtor country's ability to service its external
obligations. The Brady Plan only sets forth the guiding principles for debt
reduction and economic reform, emphasizing that solutions must be negotiated on
a case by case basis between debtor nations and their creditors. As a result,
the financial packages offered by each country differ.
Debt reduction is generally carried out through the exchange of outstanding
commercial bank debt for various types of bonds, which may include (i) bonds
issued at 100% of face value of such debt, (ii) bonds issued at a discount to
face value of such debt, (iii) bonds offering fixed or floating rates of
interest, (iv) bonds bearing a below market rate of interest which increases
over time, and (v) bonds issued in exchange for the advancement of new money by
existing lenders. Credit enhancement may take the form of collateralizing the
principal with U.S. Treasury zero coupon bonds with a maturity equal to the
final maturity of such bonds. Collateral purchases are financed by the
International Monetary Fund ("IMF"), the World Bank and the debtor nation's
reserves. In addition, the first two or three interest payments on certain types
of Brady Bonds may be collateralized by cash or securities agreed upon by
creditors.
As a pre-condition to issuing Brady Bonds, debtor nations are generally required
to agree to the implementation of certain domestic monetary and fiscal reform
measures with the World Bank or the IMF. Such measures have included the
liberalization of trade and foreign investments, the privatization of
state-owned enterprises and the setting of targets for public spending and
borrowing. These policies and programs seek to improve the debtor's ability to
service its external obligations and promote its growth and development.
Brady Bonds have been issued by a number of Emerging Countries, primarily in
Latin America. Several other Emerging Countries are currently negotiating or
have reached agreement with their creditors in sovereign debt restructuring that
will result in the issuance of Brady Bonds. For purposes of applicable tax and
Investment Company Act rules and regulations, Brady Bonds are not considered
U.S. government securities.
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The Portfolio may invest in either collateralized or uncollateralized Brady
Bonds. Brady Bonds are issued in various currencies (primarily U.S. dollars) and
are actively traded in the over-the-counter ("OTC") secondary market for debt of
Emerging Country issuers. Because of the large size of most Brady Bond issues,
Brady Bonds are generally highly liquid instruments. Brady Bonds may be
collateralized or uncollateralized, may carry floating or fixed rates of
interest, and may have maturities of up to 30 years. The most common are 30-year
collateralized fixed-rate "par bonds" and floating-rate "discount bonds," which
are collateralized as to principal by U.S. Treasury zero coupon bonds having the
same maturity as the Brady Bonds, and carry at least one year's rolling
interest-rate guarantee in the form of cash or marketable securities.
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly they do not have a long payment history. There can be no assurance
that the Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings. For
a discussion of the risks involved in investing in Brady Bonds, see "Risk
Factors and Special Considerations -- Sovereign Debt."
Loans. The Portfolio may invest up to 20% of its total assets in Loans. The
Portfolio defines "Loans" as fixed and floating rate loans arranged through
private negotiations between one or more financial institutions and an obligor
in an Emerging Country. Generally, the Loans purchased by the Portfolio will be
floating-rate debts which have been outstanding for several years, may have been
restructured and trade at a substantial discount to face value. Such Loans trade
in the international OTC secondary market.
The Portfolio may invest in Loans in the form of participations in or
assignments of Loans or portions of Loans from third parties. A loan assignment
results in the passing of title in the Loan to the Portfolio, along with all of
its rights and obligations. In a participation, a financial institution will
generally sell the Portfolio the right to receive payments of principal,
interest and any fees due under the Loan. Participations typically will result
in the Portfolio having a contractual relationship only with lenders and not
with borrowers. As a result, the Portfolio generally will have no right to
enforce compliance by the borrower with the terms of the Loan, and the Portfolio
will assume the credit risk of both the borrower and the lender that is selling
the participation. The Portfolio will acquire participations only if the seller
of the participation is determined by the Investment Manager to be creditworthy.
Although Loans are traded among certain financial institutions, some of the
Loans the Portfolio may invest in will be considered illiquid. The
characteristics of the Loans are reviewed to determine their liquidity. The
Trustees have adopted guidelines and delegated to the Investment Manager the
function of monitoring and determining the liquidity of Loans, although the
Board of Trustees retains ultimate responsibility for any determination
regarding a liquid market for the Loans. The Portfolio will not invest in Loans
determined to be illiquid by the Board of Trustees if any such investment,
together with any other illiquid assets held by the Portfolio, amounts to more
than 15% of its net assets.
Non-Dollar Denominated Securities. The Portfolio may invest up to 30% of its
total assets in non-dollar denominated securities provided that no more than 20%
of the Portfolio's assets are expected to be invested in Debt Obligations
denominated in the currency of any one country. Investments in non-dollar
denominated securities will include fixed and/or floating rate instruments,
including discount notes, commercial paper, debentures and other debt securities
issued by public or private sector entities. Such investments may also include
debt securities which are payable in local currency in amounts calculated with
reference to the U.S. dollar. The Portfolio will invest in short term or
floating rate non-dollar denominated securities when the Investment Manager
believes that the relationship between local interest rates, inflation and
currency exchange rates will result in a high dollar return.
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The relative performance of various countries' fixed income markets historically
has reflected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in various markets from
time to time. In addition, the performance of non-dollar denominated securities
will depend on, among other things, the strength of the foreign currency against
the U.S. dollar. Appreciation in the value of the foreign currency generally can
be expected to increase, and declines in the value of foreign currencies
relative to the U.S. dollar will depress, the value of the Portfolio's
non-dollar denominated securities. Currently, because of high inflation and
other factors, the currencies of the countries in which the Portfolio intends to
invest are generally expected to depreciate against the U.S. dollar. However, to
the extent that local interest rates in such countries exceed the rate of
currency devaluation, the potential for attractive returns in dollars exists.
The Investment Manager evaluates currencies on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth rate forecasts,
balance of payments status and economic policies) as well as technical and
political data, but will not generally be involved in active currency
forecasting. The Portfolio may or may not hedge or cross hedge its foreign
currency exposure. See "Description of the Portfolio -- Investment Practices".
Convertible Securities. The Portfolio may invest up to 10% of its total assets
in convertible securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. Convertible debt
securities have characteristics of both fixed income and equity investments. The
value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other debt securities
of comparable maturity and quality that are not convertible) and its "conversion
value" (the value of the option to convert the security into the underlying
common stock). The Portfolio intends to invest only in convertible securities
which have a low conversion value and which, absent any potential gain from
conversion or increase in conversion value, are expected to provide the
Portfolio with returns similar to those of non-convertible debt securities of
similar maturity and quality. The Portfolio does not intend to convert any
convertible securities it may own into equity, however, it may do so for
temporary purposes. If a convertible security held by the Portfolio is called
for redemption, the Portfolio will be required to permit the issuer to redeem
the security, convert it into the underlying stock or sell it to a third party.
Any of these actions could have an adverse effect on the Portfolio's ability to
achieve its investment objective.
Repurchase Agreements. The Portfolio may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Portfolio, and which typically
involves the acquisition by the Portfolio of debt securities from a selling
financial institution, such as a bank, savings and loan association or
broker-dealer. In a repurchase agreement, the Portfolio purchases a debt
security from a seller which undertakes to repurchase the security at a
specified resale price on an agreed future date (ordinarily a week or less). The
resale price generally exceeds the purchase price by an amount which reflects an
agreed-upon market interest rate for the term of the repurchase agreement. The
principal risk is that, if the seller defaults, the Portfolio might suffer a
loss to the extent the proceeds from the sale of the underlying securities and
other collateral held by the Portfolio in connection with the related repurchase
agreement are less than the repurchase price. Repurchase agreements maturing in
more than seven days are considered by the Portfolio to be illiquid.
When-Issued Securities; When, As and If Issued Securities; and Delayed Delivery
Transactions. The Portfolio may purchase securities on a when-issued basis.
When-issued transactions arise when securities are purchased by the Portfolio
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Portfolio at the time of
entering into the transaction. The Portfolio may also purchase securities on a
forward commitment basis. In a forward commitment transaction, the Portfolio
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. The Portfolio may enter into offsetting contracts for
the forward sale
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of other securities that it owns. Although the Portfolio would generally
purchase securities on a when-issued forward commitment basis with the intention
of actually acquiring securities for its portfolio, the Portfolio may dispose of
a when-issued security or forward commitment prior to settlement if the
Investment Manager deems it appropriate to do so.
The issuance of some of the securities in which the Portfolio may invest depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buyout or debt restructuring ("when, as and
if issued securities"). As a result, the period from the trade date to the
issuance date may be considerably longer than a typical when issued trade. Each
when issued transaction specifies a date upon which the commitment to enter into
the relevant transaction will terminate if the securities have not been issued
on or before such date. In some cases, however, the securities may be issued
prior to such termination date, but may not be deliverable until a period of
time thereafter. If the anticipated event does not occur and the securities are
not issued, the Portfolio would be entitled to receive any funds committed for
the purchase, but the Portfolio may have foregone investment opportunities
during the term of the commitment.
There is no overall limit on the percentage of the Portfolio's assets which may
be committed to the purchase of securities on a when issued basis, however, the
Portfolio may only invest a maximum of 15% of its assets in when, as and if
issued securities. An increase in the percentage of the Portfolio's assets
committed to such purchase of securities on a when-issued basis may increase the
volatility of its net asset value.
The Portfolio will hold and maintain in a segregated account until the
settlement date liquid assets in an amount sufficient to meet the purchase price
to the extent required by the Investment Company Act. The purchase of securities
on a when-issued forward commitment basis involves a risk of loss if the value
of the security to be purchased declines prior to the settlement date.
Investment in Other Funds. In accordance with the Investment Company Act, the
Portfolio may invest a maximum of up to 10% of the value of its total assets in
securities of other investment companies, and the Portfolio may own up to 3% of
the total outstanding voting stock of any one investment company. In addition,
up to 5% of the Portfolio's total assets may be invested in the securities of
any one investment company. The Portfolio may invest in both investment
companies that are registered under the Investment Company Act as well as those
that are not required to be so registered. As stated above, investment in other
investment companies or vehicles may be the sole or most practical means by
which the Portfolio can participate in certain securities markets. Such
investment may involve the payment of substantial premiums above the value of
such issuers' portfolio securities, and is subject to limitations under the
Investment Company Act and market availability. There can be no assurance that
vehicles or funds for investing in certain Emerging Countries will be available
for investment, particularly in the early stages of the Portfolio's operations.
In addition, special tax considerations may apply. The Portfolio does not intend
to invest in such vehicles or funds unless, in the judgment of the Investment
Manager, the potential benefits of such investment justify the payment of any
applicable premium or sales charge. As an investor in an investment company, the
Portfolio would bear its ratable share of that investment company's expenses,
including its administrative and advisory fees. At the same time, the Portfolio
would continue to pay its own investment management fees and other expenses,
however, the Investment Manager has agreed to waive its fees to the extent
necessary to comply with state securities laws.
Borrowing and Leverage. The Portfolio may solely, for temporary or emergency
purposes, borrow in an amount up to 10% of the Portfolio's total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing. The Portfolio may not purchase securities when borrowings
exceed 5% of the Portfolio's total assets. If market fluctuations in the value
of the Portfolio's portfolio holdings or other factors cause the ratio of the
Portfolio's total assets to outstanding borrowings to fall
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below 300%, within three days of any such event the Portfolio may be required to
sell portfolio securities to restore the 300% asset coverage, even though from
an investment standpoint such sales might be disadvantageous. Borrowings may be
utilized to meet share redemptions of the Portfolio or to pay dividends and
distributions to Shareholders of the Portfolio, in instances where the Portfolio
does not desire to liquidate its portfolio holdings. The Portfolio expects that
some of its borrowings may be made on a secured basis. In such situations,
either the custodian will segregate the pledged assets for the benefit of the
lender or arrangements will be made with a suitable subcustodian, which may
include the lender.
Borrowings create leverage, a speculative factor. To the extent the income
derived from the assets obtained with borrowed funds exceeds the interest and
other expenses that the Portfolio will have to pay, the Portfolio's net income
will be greater than if borrowing were not used. Conversely, if the income from
the assets obtained with borrowed funds is not sufficient to cover the cost of
borrowing, the net income of the Portfolio will be less than if borrowing were
not used, and therefore the amount available for distribution to Shareholders as
dividends will be reduced.
Restricted and Illiquid Securities. The Portfolio may purchase securities that
are not registered or are offered in an exempt non-public offering ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), including securities offered and sold to "qualified institutional buyers"
under Rule 144A under the Securities Act. The Portfolio will not invest more
than 15% of its net assets in illiquid investments, which include repurchase
agreements maturing in more than seven days, securities that are not readily
marketable and restricted securities that are not eligible for sale under Rule
144A. Restricted securities eligible for sale under Rule 144A are also subject
to this 15% limitation, unless the Board of Trustees (or the Investment Manager
pursuant to delegated authority) determines, based upon a continuing review of
the trading markets for the specific restricted securities sold under Rule 144A,
that such restricted securities are liquid. The Board of Trustees has adopted
guidelines and delegated to the Investment Manager the function of determining
and monitoring the liquidity of Rule 144A securities, although the Board of
Trustees retains ultimate responsibility for any determination regarding whether
a liquid market exists for Rule 144A securities. The liquidity of Rule 144A
securities will be monitored by the Investment Manager and, if as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Portfolio's holdings of illiquid securities will be reviewed to
determine what, if any, action is required to assure that the Portfolio does not
exceed its applicable percentage limitation for investments in illiquid
securities. In reaching liquidity decisions, the Investment Manager may
consider, inter alia, the following factors: (1) the unregistered nature of the
security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (4) dealer undertakings to make a market in the
security; and (5) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). Investing in Rule 144A
securities could have the effect of increasing the level of portfolio
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
Lending of Portfolio Securities. The Portfolio may, in seeking to increase its
income, lend securities in its portfolio representing up to 33 1/3% of its total
assets, taken at market value, to securities firms and financial institutions
deemed creditworthy by the Investment Manager. Securities loans are made to
broker-dealers or institutional investors pursuant to agreements requiring that
the loans continuously be secured by collateral at least equal at all times to
the value of the securities lent plus any accrued interest, "marked to market"
on a daily basis. The collateral received will consist of cash, U.S. short term
government securities, bank letters of credit or such other collateral as may be
permitted under the Portfolio's investment program and by regulatory agencies
and approved by the Board of Trustees. While the securities loan is outstanding,
the Portfolio will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. The Portfolio has a
right to call each loan and obtain the securities on five
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business days' notice. The risks in lending securities, as with other extensions
of secured credit, consist of possible delay in receiving additional collateral
or in recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. The creditworthiness of firms to which the
Portfolio lends its portfolio securities will be monitored on an ongoing basis
by the Investment Manager pursuant to procedures adopted and reviewed on an
ongoing basis by the Board of Trustees.
Indexed Securities. The Portfolio may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically,
provide for a maturity value that depends on the price of gold, resulting in a
security whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determined by reference
to the values of one or more specified foreign currencies, and may offer higher
yields than U.S. dollar-denominated securities of equivalent issuers.
Currency-indexed securities may be positively or negatively indexed; that is,
their maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are similar to a
put on the underlying currency. Currency-indexed securities may also have prices
that depend on the values of a number of different foreign currencies relative
to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instruments to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Active Management. The Portfolio is designed to be actively managed. The
Portfolio will attempt to maximize returns by adjusting the portfolio in
response to numerous factors affecting Debt Obligations, including political and
economic developments, changing credit quality, interest rates, currency
exchange rates, and other factors. Because the Portfolio can purchase floating
rate securities and securities with short to intermediate term maturities, the
Investment Manager can adjust the Portfolio's holdings in an effort to maximize
returns in almost any interest rate environment. In addition, the Portfolio's
ability to invest in securities with any maturities of up to thirty years allows
its Investment Manager to adjust the Portfolio's investments as interest rates
change to take advantage of the most attractive segments of the yield curve.
Temporary Investments. Pending investment or for temporary defensive purposes
(such as when the Investment Manager believes instability or unfavorable
conditions exist in Emerging Countries), the Portfolio may make investments of
up to 100% of its total assets in U.S. government securities with maturities of
less than a year and certain short-term high quality debt instruments. The
short-term instruments in which the Portfolio may invest include, but are not
limited to: U.S. government securities, money market funds that invest primarily
in U.S. government securities and repurchase agreements in respect of these
securities, to the extent possible. The U.S. government securities in which the
Portfolio may invest include direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and obligations issued by U.S. government
agencies and instrumentalities, including securities that are supported by the
full faith and credit of the United States and securities that are supported
primarily or solely by the creditworthiness of the issuer (such as securities of
the Federal Home Loan Banks, the Student Loan Marketing Association and the
Tennessee Valley Authority).
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Other. Certain of the securities in which the Portfolio may invest may be
considered "derivative securities." See "Description of the Portfolio -- Indexed
Securities" and "Investment Practices." New forms of securities continue to be
developed. The Portfolio may invest in such securities to the extent consistent
with its investment objectives and investment policies, subject to Federal and
state law and regulatory requirements and prior shareholder notification.
Investment Practices
[The Portfolio may engage in a variety of investment practices to enhance income
or hedge its investments.]
The Portfolio may engage in certain forward, futures, options, forward foreign
exchange contracts, interest rate swaps and other strategies to attempt to
reduce the overall risk of its investments (hedge), adjust investment exposure,
enhance income, or to replicate a fixed income return in markets which present
an attractive interest rate environment but which restrict foreign investment in
fixed income securities; however, the instruments necessary to engage in such
investment practices may not generally be available or may not provide a perfect
hedge and also entail certain risks. See "Risk Factors."
The Portfolio may engage in currency management strategies and hedging
strategies, including among others, proxy hedging, cross-hedging, settlement
hedging, transaction hedging and position hedging. A detailed discussion of
these various investment practices, the limitations on the portion of the
Portfolio's assets that may be used in connection with the investment practices
and the risks associated with such investment practices are described in
Appendix A to the Statement of Additional Information. There can be no assurance
that BSFM's use of currency management strategies will be advantageous to the
Portfolio or that it will hedge at appropriate times. See "Risk Factors".
The Portfolio intends to use such investment practices as a complement to its
fundamental investment practices based on the judgment of the Investment Manager
to the extent that they are consistent with the Portfolio's investment
objective.
Except as otherwise stated under "Investment Restrictions," the Portfolio's
investment policies and practices are not fundamental and may be changed without
a vote of the Shareholders.
Investment Restrictions
[Certain of the Portfolio's investment restrictions are fundamental and can be
changed only by shareholder vote.]
The Portfolio is subject to certain investment restrictions which, as described
in more detail in the Statement of Additional Information, have been adopted by
the Trust on behalf of the Portfolio as fundamental policies that cannot be
changed without the approval of a majority of the outstanding shares of the
Portfolio. Among other restrictions, with respect to 50% of its assets, the
Portfolio may not invest more than 25% of its total assets in the securities of
any one issuer except that this limitation will not be applicable to the
purchase of U.S. government securities. With respect to the remaining 50% of the
Portfolio's assets, no more than 5% of its assets may be invested in the
securities of any one issuer other than the U.S. government at the end of any
fiscal quarter and the Portfolio will not own more than 10% of the outstanding
voting securities of a single issuer. See "Risk Factors and Special
Considerations -- Non-Diversification." In addition, the Portfolio may not
invest more than 10% of the value of its total assets in securities of issuers
having a record, together with predecessors, of less than three years of
continuous operation. This restriction does not apply to obligations issued or
guaranteed by the U.S.
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<PAGE>
government, its agencies or instrumentalities. For further discussion of
investment restrictions of the Portfolio, see "Investment Limitations" in the
Statement of Additional Information.
Risk Factors and Special Considerations
[No investment is free from risk. Investing in the Portfolio will subject
investors to certain risks which should be considered.]
Investors should carefully consider the risks of investing in securities of
issuers in Emerging Countries and non-dollar denominated securities. Generally,
while the Portfolio offers potential returns higher than those available from
U.S. government securities, there is also a substantially greater risk of loss.
The Portfolio may not be suitable for all investors, and is intended for
long-term investors who can accept the risks associated with its investments.
See "Description of the Portfolio -- Investment Practices."
Low Rated and Unrated Instruments. At any one time, substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. Investments in lower-quality and comparable unrated
obligations will be more dependent on the Investment Manager's credit analysis
than would be the case with investments in investment-grade debt obligations.
The Investment Manager considers both quantitative and qualitative factors in
evaluating the creditworthiness of individual issuers and employs its own credit
research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Investment Manager also relies, in part, on credit ratings
compiled by internationally recognized statistical rating organizations. The
Investment Manager continually monitors the Portfolio's investments and
carefully evaluates whether to dispose of or to retain lower-quality and
comparable unrated securities whose credit ratings or credit quality may have
changed.
Issuers of high-yield securities are vulnerable to real or perceived economic
changes (for instance, an economic downturn or prolonged period of rising
interest rates), political changes or adverse developments specific to the
issuer. Adverse economic, political or other developments may impair the
issuer's ability to service principal and interest obligations, to meet
projected business goals and to obtain additional financing, particularly if the
issuer is highly leveraged. In the event of a default, the Portfolio would
experience a reduction of its income and could expect a decline in the market
value of the defaulted securities.
The market prices of high-yield securities structured as zero coupon or
pay-in-kind securities are generally affected to a greater extent by interest
rate changes and tend to be more volatile than securities which pay interest
periodically.
The Portfolio may have difficulty disposing of certain high yield, high risk
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield, high risk securities is generally not
as liquid as the secondary market for higher rated securities. Reduced secondary
market liquidity may have an adverse impact on market price and the Portfolio's
ability to dispose of particular issues when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.
Debt Obligations of the type in which the Portfolio will invest substantially
all of its assets are generally considered to have a credit quality rated below
investment grade by internationally recognized credit rating organizations such
as Moody's and S&P. Securities below investment grade are the equivalent of high
yield, high risk bonds, commonly known as "JUNK BONDS." Investment grade is
generally considered to be debt securities rated BBB or higher by S&P or Baa or
higher by Moody's. The highest
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rated debt securities (securities rated Aaa by Moody's or AAA by S&P) carry the
smallest degree of investment risk and the capacity to pay interest and repay
principal is very strong. Non-investment grade debt securities (securities rated
Ba1 or lower by Moody's or BB+ or lower by S&P) are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve major risk
exposure to adverse business, financial or economic conditions. Some of the Debt
Obligations held by the Portfolio may be comparable to securities rated as low
as C by Moody's or D by S&P, the lowest rating assigned by these agencies. These
securities are considered to have extremely poor prospects of ever attaining any
real investment grade standing, and to have a current identifiable vulnerability
to default, and the issuers and/or guarantors of these securities are considered
to be unlikely to have the capacity to pay interest and repay principal when due
in the event of adverse business, financial or economic conditions and/or to be
in default or not current in the payment of interest or principal. The lowest
ratings will be used when payments are not made on the date due even if the
applicable grace period has not expired, unless such payments are expected to be
made during such grace period. Additionally, these ratings will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties that could affect the market value
of a security. A description of fixed-income securities ratings is contained in
Appendix A to this Prospectus.
Of the Portfolio's total net assets as of March 31, 1997, 91.10% consisted of
portfolio investments and 8.90% consisted of other assets in excess of
liabilities. The percentage of the Portfolio's investments invested in
securities rated by S&P and Moody's as of March 31, 1997 are as follows:
Percentage of
S&P Moody's Total Investments
Ratings Ratings Rated*
------- ------- ------
BBB Baa 4.92%
B Ba -0-%
BB B 35.98%
BB Ba 23.70%
B B 35.40%
NR NR -0-%
Based on the weighted average ratings of all investments held during the
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1997),
the percentage of the Portfolio's total investments in securities rated by S&P
or Moody's applicable rating category (AAA, A, BB, or B by S&P or Aaa, A, Ba or
B by Moody's) by monthly dollar-weighted average is set forth below. It should
be noted that this information reflects the average composition of the
Portfolio's assets during the most recent period and is not necessarily
representative of the Portfolio's assets as of the end of such period, the
current fiscal period or at any time in the future.
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<PAGE>
Percentage of
S&P Moody's Total Investments
Ratings Ratings Rated*
------- ------- ------
BBB Baa 5.08%
BB Ba - 0 -%
BB B 39.41%
B B 27.10%
B Ba 28.41%
NR NR - 0 -%
- --------------------------------
*Equivalent Unrated -- This category represents the comparable quality of
unrated securities as determined by the Investment Manager. For foreign
government obligations not individually rated by an internationally recognized
statistical rating organization, the Portfolio assigns a rating based on the
rating of the sovereign credit of the issuing government.
Debt Obligations in which the Portfolio may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed rates. Changes
in interest rates generally will cause the value of debt securities held by the
Portfolio to vary inversely to changes in prevailing interest rates. The
Portfolio's investments in fixed-rate debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
short-term obligations. Brady Bonds and other Debt Obligations acquired at a
discount are subject to greater fluctuations of market value in response to
changing interest rates than Debt Obligations of comparable maturities which are
not subject to a discount.
Discount Obligations. The Portfolio expects to invest in both short-term and
long-term Debt Obligations purchased at a discount, for example, zero coupon
securities. The amount of original issue discount and/or market discount on
obligations purchased by the Portfolio may be significant, and accretion of
market discount together with original issue discount, will cause the Portfolio
to realize income prior to the receipt of cash payments with respect to these
securities. See "Taxation" in the Statement of Additional Information for a
discussion of original issue discount and market discount. In order to
distribute income realized by the Portfolio and thereby maintain its
qualification as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended (the "Code"), the Portfolio may be required to
liquidate portfolio securities that it might otherwise have continued to hold,
use its cash assets or borrow funds on a temporary basis necessary to declare
and pay a distribution to Shareholders. Under adverse market conditions, this
may result in Shareholders receiving a portion of their original purchase price
as a taxable dividend and could further negatively impact net asset value.
Political and Economic Factors. Investing in Debt Obligations of Emerging
Countries involves risks relating to political and economic developments abroad.
The value of the Portfolio's investments will be affected by commodity prices,
inflation, interest rates, taxation, social instability, and other political,
economic or diplomatic developments in or affecting the Emerging Countries in
which the Portfolio has invested. In many cases, governments of Emerging
Countries continue to exercise a significant degree of control over the economy,
and government actions concerning the economy may adversely effect
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<PAGE>
issuers within that country. Government actions relative to the economy, as well
as economic developments generally, may also effect a given country's
international foreign currency reserves. Fluctuations in the level of these
reserves affect the amount of foreign exchange readily available for external
debt payments and thus could have a bearing on the capacity of Emerging Country
issuers to make payments on their debt obligations regardless of their financial
condition. In addition, there is a possibility of expropriation or confiscatory
taxation, imposition of withholding taxes on dividend or interest payments, or
other similar developments which could affect investments in those countries.
While the Investment Manager intends to manage the Portfolio in a manner that
will minimize the exposure to such risks, there can be no assurance that adverse
political changes will not cause the Portfolio to suffer a loss of interest or
principal on any of its holdings. The Portfolio will treat investments of the
Portfolio that are subject to repatriation restrictions of more than seven (7)
days as illiquid securities.
Foreign Exchange Risk. Many of the currencies of Emerging Countries have
experienced significant devaluations relative to the dollar, and major
adjustments have been made in certain of them at times. The Portfolio may invest
up to 30% of its assets in Debt Obligations denominated in local currencies. To
the extent the Portfolio had invested in non-dollar denominated securities, a
decline in the value of such currency would reduce the value of certain
portfolio securities and the net asset value of the Portfolio. In addition, if
the exchange rate for the currency in which the Portfolio receives interest
payments declines against the U.S. dollar before such interest is paid as
dividends to Shareholders, the Portfolio may have to sell portfolio securities
to obtain sufficient cash to pay such dividends.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention or failure to intervene by U.S. or foreign governments or central
banks or by currency controls or political developments in the U.S. or abroad.
To the extent that a substantial portion of the Portfolio's total assets,
adjusted to reflect the Portfolio's net position after giving effect to currency
transactions, is denominated in currencies of foreign countries, the Portfolio
will be more susceptible to the risk of adverse economic and political
developments within those countries.
Sovereign Debt. Investing in Debt Obligations of governmental issuers in
Emerging Countries involves economic and political risks. While the Investment
Manager intends to manage the Portfolio in a manner that will minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause the Portfolio to suffer a loss of interest or principal on any of
its holdings. The governmental entity that controls the servicing of obligations
of those issuers may not be willing or able to repay the principal and/or
interest when due in accordance with the terms of the obligations. A
governmental entity's willingness or ability to repay principal and interest
when due in a timely manner may be affected by, among other factors, its cash
flow situation, the market value of the debt, the relative size of the debt
service burden to the economy as a whole, the governmental entity's dependence
on expected disbursements from third parties, the governmental entity's policy
toward the IMF and the political constraints to which the governmental entity
may be subject. As a result, governmental entities may default on their
obligations. Holders of certain Emerging Country Debt Obligations may be
requested to participate in the restructuring and rescheduling of these
obligations and to extend further loans to their issuers. The interests of
holders of Emerging Country Debt Obligations could be adversely affected in the
course of restructuring arrangements or by certain other factors referred to
below.
Sovereign obligors in developing and Emerging Countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. The issuers of the sovereign
debt securities in which the Portfolio expects to invest have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to
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defaults on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit to finance interest payments. Holders of
certain foreign sovereign debt securities may be requested to participate in the
restructuring of such obligations and to extend further loans to their issuers.
There can be no assurance that the Brady Bonds and other foreign sovereign debt
securities in which the Portfolio may invest will not be subject to similar
restructuring arrangements or to requests for new credit which may adversely
affect the Portfolio's holdings.
Sovereign debt issued by issuers in many Emerging Countries generally is deemed
to be the equivalent in terms of quality to securities rated below investment
grade by Moody's and S&P. Such securities are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve major risk
exposure to adverse conditions. Some of such sovereign debt may be comparable to
securities rated D by S&P or C by Moody's.
Investing in Securities Markets of Emerging Countries. Most securities markets
in Emerging Countries may have substantially less volume and are subject to less
government supervision than U.S. securities markets and securities of many
issuers in Emerging Countries may be less liquid and more volatile than
securities of comparable domestic issuers. In addition, there is generally less
government regulation of securities exchanges, securities dealers, and listed
and unlisted companies in Emerging Countries than in the United States.
Markets in Emerging Countries also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Portfolio is uninvested
and no return is earned thereon. The inability of the Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of securities due to
settlement problems could result either in losses to the Portfolio due to
subsequent declines in value of the security or, if the Portfolio has entered
into a contract to sell the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign securities are
generally higher than costs associated with transactions in U.S. securities.
Such transactions also involve additional costs for the purchase or sale of
foreign currency.
Foreign investment in certain Emerging Country Debt Obligations is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain Emerging Country Debt Obligations and
increase the costs and expenses of the Portfolio. Certain Emerging Countries
require prior governmental approval of investments by foreign persons, limit the
amount of investment by foreign persons in a particular company, limit the
investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain Emerging Countries may also restrict investment
opportunities in issuers in industries deemed important to national interests.
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.
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<PAGE>
Throughout the last decade many Emerging Countries have experienced and continue
to experience high rates of inflation. In certain countries inflation has at
times accelerated rapidly to hyperinflationary levels, creating a negative
interest rate environment and sharply eroding the value of outstanding financial
assets in those countries. Increases in inflation could have an adverse affect
on the Portfolio's non-dollar denominated securities and on the issuers of Debt
Obligations generally.
In addition, with respect to certain Emerging Countries, there is a possibility
of expropriation or confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, limitations on the removal of funds or other
assets of the Portfolio, and political or social instability or diplomatic
developments which could affect investments in those countries. Individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position. The securities markets, values of securities, yields and risks
associated with securities markets in different countries may change
independently of each other.
The risk also exists that an emergency situation may arise in one or more
Emerging Countries as a result of which trading of securities may cease or may
be substantially curtailed and prices for the Portfolio's securities in such
markets may not be readily available. The Trust may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Commission. Accordingly, if the Portfolio believes that appropriate
circumstances exist, it will promptly apply to the Commission for a
determination that an emergency is present. During the period commencing from
the Portfolio's identification of such condition until the date of the
Commission action, the Portfolio's securities in the affected markets will be
valued at fair value determined in good faith by or under the direction of the
Board of Trustees.
Reporting Standards. It is likely that none of the Debt Obligations held by the
Portfolio will be registered with the Commission or subject to U.S. regulatory
or reporting requirements. Disclosure requirements in Emerging Countries are
generally not as stringent as in the U.S. and there may be less publicly
available information about issuers in Emerging Countries than about domestic
issuers. Emerging Country issuers are not generally subject to accounting,
auditing and financial reporting standards comparable to those applicable to
domestic issuers.
Investment Practices. Certain of the investment practices in which the Portfolio
may engage have risks associated with them, including possible default by the
other party to the transaction, illiquidity and, to the extent the Investment
Manager's views as to certain market movements are incorrect, the risk that the
use of such strategies could result in losses greater than if they had not been
used. The risks associated with illiquidity are particularly acute in situations
in which the Portfolio's operations require cash, such as when the Portfolio
redeems for its shares of beneficial interests or pays distributions, and may
result in the Portfolio borrowing to meet short-term cash requirements or
incurring capital losses on the sale of such investments. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. The use of forward foreign currency exchange contracts entail
certain risks. The cost to the Portfolio of engaging in forward currency
contracts varies with factors such as the currency involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees or
commissions are involved. When the Portfolio enters into a forward currency
contract, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract. Failure by the counterparty
to do so would result in the loss of any expected benefit of the transaction.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Portfolio will in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in
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<PAGE>
the event of insolvency of the counterparty, the Portfolio might be unable to
close out a forward currency contract at any time prior to maturity. In either
event, the Portfolio would continue to be subject to market risk with respect to
the position, and would continue to be required to maintain a position in
securities denominated in the foreign currency or to maintain cash or securities
in a segregated account. Use of put and call options could result in losses to
the Portfolio, force the purchase or sale of portfolio securities at inopportune
times or for prices higher than (in the case of put options) or lower than (in
the case of call options) current market values, limit the amount of
appreciation the Portfolio could realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions could result in the Portfolio's incurring losses as a result of the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The Portfolio depends upon the
reliability and creditworthiness of the counterparty when it enters into OTC
currency or securities options or other agreements. Investments in indexed
securities offer the potential for an attractive rate of return, but also entail
the risk of loss of principal. The use of options and futures transactions
entails certain special risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Portfolio could create the possibility that losses on
the hedging instrument will be greater than gains in the value of the
Portfolio's position, thereby reducing the Portfolio's net asset value. Proxy
hedges may result in losses if the currency used to hedge does not perform
similarly to the currency in which the hedged securities are denominated. With
regard to the Portfolio's use of proxy hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relating to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying the Portfolio's proxy hedges and the movements in the exchange rates
of the foreign currencies in which the Portfolio assets that are the subject of
such proxy-hedges are denominated.
Non-Diversification. The Portfolio is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Portfolio is not
limited by such Investment Company Act in the proportion of its assets that it
may invest in the securities of a single issuer. The Portfolio's investments
will be limited, however, in order to qualify as a "regulated investment
company" for purposes of the Code. See "Dividends, Distributions and Taxes."
This means, at the close of each quarter of its taxable year, at least 50% of
the value of the Portfolio's assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Portfolio has not invested more
than 5% of the value of its total assets in securities of such issuer and as to
which the Portfolio does not hold more than 10% of the outstanding voting
securities of such issuer), and no more than 25% of the value of the Portfolio's
total assets may be invested in the securities of any one issuer (other than
U.S. government securities and securities of other regulated investment
companies), or in two or more issuers which the Portfolio controls and which are
engaged in the same or similar trades or businesses (the "Asset Diversification
Requirement").
Investment in the Portfolio, which is classified as a non-diversified investment
company under the Investment Company Act, may present greater risks to investors
than an investment in a diversified fund. The investment return on a
non-diversified investment company typically is dependent upon the performance
of a smaller number of securities relative to the number of securities held in a
diversified fund. The Portfolio's assumption of large positions in the
obligations of a small number of issuers will affect the value of the securities
it holds to a greater extent than that of a diversified fund in the event of
changes in the financial condition, or in the market's assessment, of the
issuers.
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Management of the Portfolio
Board of Trustees
[The Trustees are responsible for the overall management and supervision of the
Portfolio's business.]
The Board of Trustees of the Trust consists of five individuals, three of whom
are not "interested persons" of the Portfolio as defined in the Investment
Company Act. The Trust's Board of Trustees is responsible for deciding matters
of general policy and reviewing actions of the Investment Manager, Distributor
and Transfer Agent. The officers of the Trust conduct and supervise the
Portfolio's daily business operations. The Portfolio's Statement of Additional
Information contains the name and general business experience of each Trustee.
Investment Manager and Administrator
[BSFM is the Portfolio's Investment Manager.]
The Portfolio's investment manager is BSFM, a wholly-owned subsidiary of The
Bear Stearns Companies Inc. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSFM is a registered investment adviser
and offers investment advisory and administrative services to open-end and
closed-end investment funds and other managed pooled investment vehicles
generally with assets totaling approximately $2.8 billion at March 31, 1997.
BSFM has served as an investment adviser since April 3, 1995 and since that time
has served as investment adviser to The Bear Stearns Funds and S&P STARS Fund.
The principal offices of BSFM are located at 245 Park Avenue, New York, New York
10167.
The principal portfolio manager responsible for the day-to-day management of the
Portfolio is Edward R. Vaimberg. Mr. Vaimberg, a Managing Director of Bear
Stearns, joined Bear Stearns Asset Management, an affiliate of BSFM, in July
1994 as an Associate Director and Global Fixed Income Portfolio Investment
Manager. He was previously employed by Fiduciary Trust Company ("Fiduciary"),
where he served as Senior Vice President and Global Fixed Income Portfolio
Investment Manager from 1991 to 1994. At Fiduciary, Mr. Vaimberg managed global
and international fixed-income portfolios for institutional clients, and was
responsible for interest rate and currency exposures. Prior thereto, Mr.
Vaimberg served as Vice President and International Fixed Income Portfolio
Investment Manager at Merrill Lynch Asset Management (1989-1991) and Senior
Portfolio and Foreign Exchange Analyst at General Motors (1985-1989). Mr.
Vaimberg received his B.S. from Cornell University (1981) and an M.B.A. from the
Wharton School (1985).
Under the Investment Management Agreement between the Portfolio and the
Investment Manager, the Investment Manager has sole discretion to purchase and
sell portfolio securities for the Portfolio's investment portfolio and to select
brokers for the execution of such purchases and sales, all within the
Portfolio's objectives, policies and restrictions. BSFM also supervises and
assists in the overall management of the Portfolio's affairs, subject to the
general supervision of the Board of Trustees.
As compensation for the services rendered to the Portfolio by BSFM and the
assumption by BSFM of related expenses, pursuant to the Investment Management
Agreement, the Portfolio pays BSFM a fee computed daily and payable monthly, 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
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<PAGE>
$100 million. BSFM has agreed that if, in any fiscal year, the sum of the
Portfolio's expenses exceeds the expense limitations applicable to the Portfolio
imposed by state securities administrators, BSFM will reimburse the Portfolio
its fees under the Investment Management Agreement or make other arrangements to
limit Portfolio expenses to the extent required by such expense limitations.
From time to time, the Investment Manager may waive receipt of its fees and/or
voluntarily assume certain Portfolio expenses, which would have the effect of
lowering the Portfolio's expense ratio and increasing yield to investors at the
time such amounts are waived or assumed, as the case may be. The Portfolio will
not pay the Investment Manager at a later time for any amounts it may waive, nor
will the Portfolio reimburse the Investment Manager for any amounts it may
assume. The investment management fees paid by the Portfolio are greater than
those paid by most funds, but are believed by the Investment Manager to be
appropriate for fees paid by funds with a global investment strategy.
The Portfolio has engaged PFPC Inc. (the "Administrator") to provide certain
administrative services; for example, preparation of the Portfolio's Federal,
state and local tax returns, maintenance of the books and records of the
Portfolio required under the Investment Company Act, and qualifying the shares
under applicable state securities laws. Under the terms of the Administrative
Services Agreement between the Administrator and the Trust, as compensation for
the services rendered to the Portfolio by the Administrator and the assumption
by the Administrator of certain related expenses, the Portfolio pays to the
Administrator an annual fee, subject to certain minimum fees and exclusive of
certain multi-class account service charges, computed at the following rate:
0.10% of 1% per annum of the first $200 million of the Portfolio's average daily
net assets, 0.07% of 1% per annum of the next $200 million of the Portfolio's
average daily net assets, 0.05% of 1% per annum of the next $200 million of the
Portfolio's average daily net assets and 0.03% of 1% per annum of any amounts
over $600 million of the Portfolio's average daily net assets, subject to a
minimum annual fee of $108,000. From time to time, the Administrator may waive
all or a portion of its fees. PFPC has agreed to provide the services under the
Administrative Services Agreement for the period March 1, 1997 until September
30, 1997 for a minimum fee of $75,000 per annum. The Administrator reserves the
right to revoke the voluntary fee waiver at any time.
The Portfolio is responsible to the Investment Manager and the Administrator for
out-of-pocket expenses incurred on behalf of the Portfolio, including, but not
limited to, postage and mailing, telephone, telex, overnight and delivery
service, outside independent pricing services, daily report transmissions, if
any, and record retention/storage incurred by the Investment Manager or
Administrator in connection with their services. All expenses incurred in the
operation of the Portfolio will be borne by the Portfolio, except to the extent
specifically assumed by BSFM. See "Management of the Portfolio-Expenses" in the
Statement of Additional Information.
Bear Stearns has agreed to permit the Trust to use the name "Bear Stearns" or
derivatives thereof as part of the Portfolio name for as long as the Investment
Management Agreement is in effect.
Distributor
Bear Stearns, located at 245 Park Avenue, New York, New York 10167 serves as
distributor for the Portfolio in the sale of its shares pursuant to an agreement
which is renewable annually.
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Custodian and Transfer Agent
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian for the Portfolio's assets. PFPC Inc., Bellevue Corporate
Center, 400 Bellevue Parkway, Suite 108, Wilmington, Delaware 19809 acts as the
Portfolio's administrator, transfer agent, dividend-paying agent and registrar.
Rules adopted under the Investment Company Act permit the Portfolio to maintain
its securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those rules, the Portfolio's portfolio of securities
and cash invested in securities of foreign countries are held by its
subcustodians, who are approved by the Trustees of the Portfolio in accordance
with the rules of the Commission.
Expense Limitation
The Investment Manager has undertaken until such time as it gives investors at
least 60 days' notice to the contrary that, if in any fiscal year, certain
expenses, including the investment management fee exceed 1.65% of the average
daily net assets of the Portfolio--Class Y for the fiscal year, the Investment
Manager may waive a portion of its investment management fee or bear other
expenses to the extent of the excess expense.
How to Buy Shares
General
The minimum initial investment is $2.5 million. Subsequent investments may be
made in any amount. Share certificates are issued only upon written request. The
Portfolio reserves the right to reject any purchase order. The Portfolio and
Bear Stearns reserve the right to modify the minimum investment requirement, the
subsequent investment requirement, the manner in which shares are offered and
the sales load rates applicable to future purchases of shares. Investments by
employees of Bear Stearns and its affiliates are not subject to the minimum
investment requirement. In addition, accounts under the discretionary management
of Bear Stearns and its affiliates are not subject to the minimum investment
requirement.
Purchases of the shares of the Portfolio may be purchased through Bear Stearns
or through certain investment dealers who are members of the NASD who have sales
agreements with Bear Stearns or who have entered into dealer agreements directly
with Bear Stearns (an "Authorized Dealer") on any Business Day (as defined under
"General Information"). Purchases of the Portfolio's shares also may be made
directly through the Transfer Agent. Investors must specify that Class Y is
being purchased.
Purchases are effected at Class Y's net asset value per share next determined
after a purchase order is received by Bear Stearns, an Authorized Dealer or the
Transfer Agent (the "trade date"). The settlement date will be the third
Business Day after the trade date. Investors who make payment before the
settlement date may permit the payment to be held in their brokerage accounts or
may designate a temporary investment for payment until the settlement date. If a
temporary investment is not designated, Bear Stearns or the Authorized Dealers
will benefit from the temporary use of the funds if payment is made prior
thereto.
[Purchases can be made through Bear Stearns account executives, Authorized
Dealers or the Transfer Agent.]
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Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that checks drawn on foreign banks and checks made payable
to persons or entities other than the Portfolio will not be accepted), Federal
Reserve drafts or by wiring Federal funds with funds held in brokerage accounts
at Bear Stearns or its Authorized Dealers. Checks or Federal Reserve drafts
should be made payable as follows: (i) to Bear Stearns or an investor's
Authorized Dealer or (ii) to "Bear Stearns Investment Trust - Emerging Markets
Debt Portfolio - Class Y," if purchased directly from the Portfolio, and should
be directed to the Transfer Agent: PFPC Inc., Attn: Bear Stearns Investment
Trust - Emerging Markets Debt Portfolio - Class Y, P.O. Box 8960, Wilmington,
Delaware 19899-8960. Payment by check or Federal Reserve draft must be received
within three business days of receipt of the purchase order by the Portfolio or
Bear Stearns or an Authorized Dealer. Orders placed directly with the Transfer
Agent must be accompanied by payment. Shareholders may not purchase shares of
the Emerging Markets Debt Portfolio with a check issued by a third party and
endorsed over to the Portfolio. Checks for investment must be made payable to
the Emerging Markets Debt Portfolio. Bear Stearns (or an investor's Authorized
Dealer) is responsible for forwarding payment promptly to the Portfolio. A
transaction fee of $7.50 may be charged for payments by wire. The payment
proceeds of a redemption of shares recently purchased by check may be delayed
for a period of time described under "How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase shares of the Portfolio
through the Transfer Agent. In order to make an initial investment in the
Portfolio, an investor must establish an account with the Portfolio by
furnishing necessary information to the Portfolio. An account with the Portfolio
may be established, by completing and signing the Account Information Form
indicating which class of shares are being purchased, a copy of which is
attached to this Prospectus, and mailing it, together with a check made payable
to the Portfolio to cover the purchase and/or subsequent purchases, to the
Transfer Agent: PFPC Inc., Attn: Bear Stearns Investment Trust - Emerging
Markets Debt Portfolio - Class Y, P.O. Box 8960, Wilmington, Delaware
19899-8960. With respect to Shareholder's subsequent purchases, the
Shareholder's account number should appear on the check.
A Shareholder of the Portfolio may request redemptions of shares of the
Portfolio by telephone if the optional telephone transaction privilege is
elected on the Account Information Form accompanying this Prospectus. It may be
difficult to implement redemptions by telephone in times of drastic economic or
market changes. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, the Portfolio employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Telephone transaction
procedures include the following measures: requiring the appropriate telephone
transaction election be made on the Account Information Form; requiring the
caller to provide the names of the account owners, the account owner's social
security number and name of fund, all of which must match the Portfolio's
records; requiring that the Transfer Agent's service representative complete a
telephone transaction form listing all of the above caller identification
information; requiring that redemption proceeds be sent only by check to the
account owners of record at the address of record, or by wire only to the owners
of record at the bank account of record; sending a written confirmation for each
telephone transaction to the owners of record at the address of record within
three (3) business days of the call; and maintaining tapes of telephone
transactions for six months, if the Portfolio elects to record shareholder
telephone transactions.
For accounts held of record by a broker-dealer, trustee, custodian or an
attorney-in-fact (under a power of attorney), additional documentation or
information regarding the scope of a caller's authority is required. Finally,
for telephone transactions in accounts held jointly, additional information
regarding other account holders is required. The Trust may implement other
procedures from time to time. If reasonable procedures are not implemented, the
Trust may be liable for any loss due to unauthorized or
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fraudulent transactions. In all other cases, neither the Portfolio, the Trust
nor Bear Stearns will be responsible for the authenticity of redemption or
exchange instructions received by telephone.
Information concerning purchases through Bear Stearns (or an Authorized Dealer)
should be obtained directly from Bear Stearns, Bear Stearns account executives
or the Authorized Dealer. In the case of purchases made through Bear Stearns (or
the investor's Authorized Dealer), it is the responsibility of Bear Stearns or
such Authorized Dealer to promptly forward payment to the Portfolio for shares
being purchased.
Brokers that do not have dealer agreements with Bear Stearns also may offer to
place orders for the purchase of the shares. Purchases made through such brokers
will be effected at the public offering price next determined after the order is
received by the Transfer Agent. Brokers are responsible for promptly forwarding
the orders to the Transfer Agent. Such a broker may charge the investor a
transaction fee as determined by the broker.
The Portfolio and Bear Stearns each reserves the right to reject any specific
purchase order or to restrict purchases by a particular purchaser (or group of
related purchasers). The Portfolio, Bear Stearns and Authorized Dealers may
reject or restrict purchases of shares by a particular purchaser or group, for
example when a pattern of frequent purchases and sales of shares of the
Portfolio is evident, or if the purchase and sale orders are, or a subsequent
abrupt redemption might be, of a size that would disrupt management of the
Portfolio.
[Net asset value is computed daily as of the close of regular trading on the New
York Stock Exchange.]
Shares of the Portfolio are sold on a continuous basis. The net asset value per
share is calculated by the Portfolio's Administrator as of the close of regular
trading of the New York Stock Exchange ("NYSE") (normally 4:00 p.m., New York
time) on each Business Day. The net asset value per share of Class Y is
calculated by dividing the value of the Portfolio's net assets represented by
Class Y (i.e., the value of its assets less liabilities) by the total number of
Class Y outstanding. Portfolio securities are valued based on market quotations
or, if quotations are not readily available, at fair value as determined in good
faith under procedures established by the Board of Trustees.
Shareholder Services
Exchange Privilege
[The Exchange Privilege permits easy purchases of other funds sponsored or
advised by Bear Stearns.]
The Exchange Privilege enables an investor to purchase, in exchange for Class Y
shares of the Portfolio, Class Y shares of certain other funds sponsored or
advised by Bear Stearns, including The Bear Stearns Funds and the Money Market
Portfolio of The RBB Fund Inc., to the extent such shares are offered for sale
in the investor's state of residence. These funds have different investment
objectives which may be of interest to investors. To use this Privilege,
investors should consult their account executive at Bear Stearns, their account
executive, Authorized Dealer or the Transfer Agent to determine if it is
available and whether any conditions are imposed on its use.
To use this Privilege, exchange instructions must be given to the Transfer Agent
in writing or by telephone. A shareholder wishing to make an exchange may do so
by sending a written request to the Transfer Agent at the address given above in
"How to Buy Shares -- General." Shareholders are
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automatically provided with telephone exchange privileges when opening an
account, unless they indicate on the account application that they do not wish
to use this privilege. Shareholders holding share certificates are not eligible
to exchange shares of a Portfolio by phone because share certificates must
accompany all exchange requests. To add this feature to an existing account that
previously did not provide for this option, a Telephone Exchange Authorization
Form must be filed with the Transfer Agent. This form is available from the
Transfer Agent. Once this election has been made, the Shareholder may contact
the Transfer Agent by telephone at 1-800-447-1139 to request the exchange.
During periods of substantial economic or market change, telephone exchanges may
be difficult to complete and shareholders may have to submit exchange requests
to the Transfer Agent in writing.
If the exchanging shareholder does not currently own Class Y shares of the
portfolio or fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
Authorized Dealer of record as the account from which shares are exchanged,
unless otherwise specified in writing by the Shareholder with all signatures
guaranteed by an eligible guarantor institution as defined above. The exchange
privilege may be modified or terminated at any time, or from time to time, by
the Portfolio on 60 days' notice to the affected portfolio or fund shareholders.
The Portfolio, BSFM and Bear Stearns will not be liable for any loss, liability,
cost or expense for acting upon telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Portfolio will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to account
registration (such as the name in which an account is registered, the account
number, recent transactions in the account, and the account holder's Social
Security number, address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. When establishing a new account by
exchange, the Class Y shares being exchanged must have a value of at least the
minimum initial investment required for the portfolio or fund into which the
exchange is being made; if making an exchange to an existing account, the dollar
value must equal or exceed the applicable minimum for subsequent investments. If
any amount remains in the investment portfolio from which the exchange is being
made, such amount must not be below the minimum account value required by the
portfolio or fund.
Class Y shares will be exchanged at the next determined net asset value. No fees
currently are charged shareholders directly in connection with exchanges,
although the Portfolio reserves the right, upon not less than 60 days' written
notice, to charge Shareholders a $5.00 fee in accordance with rules promulgated
by the Commission. The Portfolio reserves the right to reject any exchange
request in whole or in part. The Exchange Privilege may be modified or
terminated at any time upon notice to Shareholders.
The exchange of Class Y shares of one portfolio or fund for Class Y shares of
another is treated for Federal income tax purposes as a sale of the shares given
in exchange by the shareholder and, therefore, an exchanging shareholder may
realize a taxable gain or loss.
Redirected Distribution Option
[The Redirected Distribution Option permits investment of investors' dividends
and distributions in shares of other funds in the Bear Stearns family.]
The Redirected Distribution Option enables a Shareholder to invest automatically
dividends or dividends and capital gain distributions, if any, paid by the
Portfolio in Class Y shares of another portfolio or fund
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advised or sponsored by Bear Stearns of which the Shareholder is an investor,
including The Bear Stearns Funds and the Money Market Portfolio of The RBB Fund,
Inc. Shares of the other portfolio or fund will be purchased at the then-current
net asset value.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Portfolio
may modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
General
[The redemption price will be based on the net asset value next computed after
receipt of a redemption request.]
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one Class, any
request for redemption must specify the Class of shares being redeemed. If the
investor fails to specify the Class of shares to be redeemed or if the investor
owns fewer shares of the Class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
from the investor, the investor's Bear Stearns account executive or the
investor's Authorized Dealer. The Portfolio imposes no charges when shares are
redeemed directly through the Distributor.
The Portfolio redeems its shares upon request of a Shareholder on any Business
Day at the net asset value next determined after the receipt of such request in
proper form. Except in certain extraordinary circumstances permitted under the
Investment Company Act, redemption proceeds will be mailed by check to
Shareholders within three (3) days of receipt of a properly executed request. If
shares to be redeemed were purchased by check, the Portfolio may delay
transmittal of redemption proceeds until such time as it has assured itself that
good funds have been collected for the purchase of such shares. This may take up
to fifteen (15) days. Additional documentation regarding a redemption by any
means may be required to effect a redemption when deemed appropriate by Bear
Stearns, any Authorized Dealer or the Transfer Agent. The request for such
redemption will not be considered to have been received in proper form until
such additional documentation has been received. A Shareholder of the Portfolio
may request redemption of shares of the Portfolio by telephone if the optional
telephone transaction privilege is elected on the Account Information Form
accompanying this Prospectus. See "How to Buy Shares."
The Portfolio may suspend redemption privileges or postpone the date of payment
for more than three days after a redemption order is received during any period
(i) when the NYSE is closed other than customary weekend and holiday closings,
or trading on the NYSE is restricted as determined by the Commission, (ii) when
an emergency exists, as defined by the Commission, which makes it not reasonably
practicable for the Portfolio to dispose of securities owned by it or fairly to
determine the value of its assets, or (iii) as the Commission may otherwise
permit.
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The Portfolio reserves the right to redeem the shares of any Shareholder whose
account balance is less than $750 as a result of earlier redemptions. Such
redemptions will not be implemented if the value of a Shareholder's account
falls below the minimum account balance solely as a result of market conditions.
The Trust will give sixty (60) days prior written notice to Shareholders whose
shares are being redeemed to allow them to purchase sufficient additional shares
of the Portfolio to avoid such redemption.
Procedures
[Shareholders may redeem shares in several ways.]
Redemption through Bear Stearns or Authorized Dealers
Clients with a brokerage account may submit redemption requests to their account
executives or Authorized Dealers in person or by telephone, mail or wire. As the
Portfolio's agent, Bear Stearns or Authorized Dealers may honor a redemption
request by repurchasing Portfolio shares from a redeeming Shareholder at the
shares' net asset value next computed after receipt of the request by Bear
Stearns or any Authorized Dealer. Under normal circumstances, within three (3)
days, redemption proceeds will be paid by check or credited to the Shareholder's
brokerage account at the election of the Shareholder. Bear Stearns account
executives or Authorized Dealers are responsible for promptly forwarding
redemption requests to the Transfer Agent. The telephone redemption privilege
may be terminated or modified at any time upon thirty (30) days notice to
Shareholders.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably believed
by the Transfer Agent to be genuine. The Portfolio will require the Transfer
Agent to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Portfolio may be liable for
any losses due to unauthorized or fraudulent instructions. Neither the Portfolio
nor the Transfer Agent will be liable for following telephone instructions
reasonably believed to be genuine.
Redemption Through the Transfer Agent
Portfolio Shareholders who are not clients with a brokerage account who wish to
redeem shares must redeem their shares through the Transfer Agent by mail; other
Shareholders also may redeem Portfolio shares through the Transfer Agent.
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: Bear Stearns Investment Trust -- Emerging Markets Debt
Portfolio - Class Y Shares, P.O. Box 8960, Wilmington, Delaware 19899-8960. A
redemption request will be executed at the net asset value next computed after
it is received in "good order." "Good order" means that the request must be
accompanied by the following: (1) a letter of instruction specifying the number
of shares or amount of investment to be redeemed (or that all shares credited to
a Portfolio account be redeemed), signed by all registered owners of the shares
in the exact names in which they are registered, (2) a guarantee of the
signature of each registered owner by any commercial bank, trust company or
member of a recognized stock exchange, and (3) other supporting legal documents
for estates, trusts, guardianships, custodianships, partnerships and
corporations if any. Shareholders are responsible for ensuring that a request
for redemption is received in "good order."
Signature Guarantees
A signature guarantee required in the case of redemptions greater than $25,000
is designed to protect the shareholders and the Portfolio against fraudulent
transactions by unauthorized persons. In certain instances, such as transfer of
ownership or when the registered shareholder(s) requests that redemption
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proceeds be sent to a different name of address than the registered name and
address of record on the shareholder account, the Portfolio will require that
the shareholder's signature be guaranteed. When a signature guarantee is
required, each signature must be guaranteed by a domestic bank or trust company,
credit union, broker, dealer, national securities exchange, registered
securities association, clearing agency or savings association as defined by
federal law. The institution providing the guarantee must see a signature ink
stamp or medallion which states "Signature(s) Guaranteed" and be signed in the
name of the guarantor by an authorized person with that person's title and the
date. The Portfolio may reject a signature guarantee if the guarantor is not a
member of or participant in a signature guarantee program. Please note that a
notary public stamp or seal is not acceptable. The Portfolio reserves the right
to amend or discontinue its signature guarantee policy at any time and, with
regard to a particular redemption transaction, to require a signature guarantee
at its discretion.
Additional Information about Redemptions
A Shareholder may have redemption proceeds of $500 or more wired to the
Shareholder's brokerage account or a commercial bank account designated by the
Shareholder. A transaction fee of $7.50 may be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the Shareholder's Bear Stearns account executive, to any Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account. If a Shareholder requests redemption of shares which were purchased
recently, the Portfolio may delay payment until it is assured that good payment
has been received. In the case of purchases by check, this can take up to 15
days.
Because the Portfolio incurs certain fixed costs in maintaining Shareholder
accounts, the Portfolio reserves the right to redeem all Portfolio shares in any
Shareholder account with an aggregate net asset value of less than $750. If the
Portfolio elects to do so, it will notify the Shareholder and provide the
Shareholder the opportunity to increase the amount invested to $750 or more
within 60 days of the notice. The Portfolio will not redeem accounts that fall
below $750 solely as a result of a reduction in net asset value per share.
Shareholders who have redeemed shares may reinstate their Portfolio account
without a sales charge up to the dollar amount redeemed by purchasing shares of
the same Portfolio within sixty (60) days of the redemption. To take advantage
of this reinstatement privilege, Shareholders must notify their Bear Stearns
account executive or Authorized Dealer at the time the privilege is exercised.
Dividends, Distributions and Taxes
[Dividends will be automatically reinvested in additional Portfolio shares at
net asset value unless payment in cash is requested or dividends are redirected
into another fund pursuant to the Redirected Distribution Option.]
The Portfolio declares and pays as dividends quarterly to Shareholders
substantially all of its net investment income (i.e., its income, including both
original issue discount and market discount accretions, other than its net
realized long and short-term capital gains and net realized foreign exchange
gains). Substantially all of the Portfolio's net realized capital gains (net
realized long-term capital gains in excess of net realized short-term capital
losses, including any capital loss carryovers), net realized short-term capital
gains and net realized foreign exchange gains, if any, are expected to be
distributed each year by the Portfolio.
Each dividend and distribution, if any, declared by the Portfolio on its
outstanding shares will, at the election of each Shareholder, be paid in cash or
in additional shares of the Portfolio or redirected into another fund pursuant
to the Redirected Distribution Option. This election should initially be made on
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a Shareholder's Account Information Form and may be changed upon written notice
to either Bear Stearns, an Authorized Dealer or the Transfer Agent at any time
prior to the record date for a particular dividend or distribution. If no
election is made, all dividends and distributions will be reinvested in the
Portfolio.
The Portfolio distributes net realized securities gains, if any, once a year,
but it may make distributions on a more frequent basis to comply with the
distribution requirements of the Code, in all events in a manner consistent with
the provisions of the Investment Company Act. The Portfolio will not make
distributions from net realized securities gains unless capital loss carryovers,
if any, have been utilized or have expired. Dividends are automatically
reinvested in additional Class Y shares of the Portfolio at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
All income dividends and capital gains distributions are automatically paid in
full and fractional shares of the Portfolio, unless the Shareholder requests
that they be paid in cash. Each purchase of shares of the Portfolio is made upon
the condition that the Transfer Agent is thereby automatically appointed as
agent of the investor to receive all dividends and capital gains distributions
on shares owned by the investor. Such dividends and distributions will be paid,
at the net asset value per share, in shares of the Portfolio (or in cash if the
Shareholder so requests) as of the close of business on the record date. At any
time an investor may request the Transfer Agent, in writing, to have subsequent
dividends and/or capital gains distributions paid to him or her in cash rather
than shares. In order to provide sufficient time to process the change, such
request should be received by the Transfer Agent at least five (5) business days
prior to the record date of the dividend or distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to Bear Stearns or the
Authorized Dealer which will be forwarded to the Shareholder, upon the receipt
of proper instructions.
At the time of an investor's purchase of shares of the Portfolio, a portion of
the price per share may be represented by undistributed income of the Portfolio
or unrealized appreciation of the Portfolio's securities. Therefore, subsequent
distributions (or portions thereof) attributable to such items, may be taxable
to the investor even if the distributions (or portions thereof) in reality
represent a return of a portion of the purchase price.
If a Shareholder buys shares immediately prior to the Portfolio's deduction of a
distribution from its net asset value, the Shareholder will pay the full price
for the shares and then receive a portion of the price back in the form of a
taxable distribution.
The Portfolio is not expected to have any federal tax liability; although
investors should expect to be subject to federal, state or local taxes in
respect of their investments in Portfolio shares.
The Portfolio will be treated as a separate entity for tax purposes and intends
to continue to qualify and elect to be treated as a regulated investment company
under Subchapter M of the Code. To qualify as such, the Portfolio must satisfy
certain requirements relating to the sources of its income, diversification of
its assets and distribution of its income to Shareholders. As a regulated
investment company, the Portfolio will not be subject to Federal income or
excise tax on any net investment income and net realized capital gains that are
distributed to its Shareholders in accordance with certain timing requirements
of the Code.
The Code provides for the carryover or some of all of the sales load imposed on
the Portfolio's Class A shares if an investor exchanges such shares for shares
of another fund or portfolio advised or sponsored by Bear Stearns or its
affiliates within 91 days of purchase and such other fund reduces or eliminates
its otherwise applicable sales load for the purpose of the exchange. In this
case, the amount of the sales load charged the investor for such shares up to
the amount of the reduction of the sales load charge on the
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exchange, is not included in the basis of such shares for purposes of computing
gain or loss on the exchange, and instead is added to the basis of the fund
shares received on the exchange.
Investors who purchase shares shortly before the record date for a distribution
will pay a per share price that includes the value of the anticipated
distribution and will be taxed on the distribution when received even though the
distribution represents a return of a portion of the purchase price. Redemptions
of shares are taxable events on which a Shareholder may recognize a gain or
loss.
Individuals and certain other classes of Shareholders may be subject to 31%
withholding of Federal income tax on distributions and redemptions if they fail
to furnish the Portfolio with their correct taxpayer identification number and
certain certifications regarding their tax status or if they are otherwise
subject to withholding. Individuals, corporations and other Shareholders that
are not U.S. persons under the Code are generally subject to withholding at the
rate of 30% (or lower rate provided by an applicable tax treaty) on dividends
and certain other payments from the Portfolio.
In addition to Federal taxes, a Shareholder may be subject to state, local or
foreign taxes on payments received from the Portfolio. A state tax exemption may
be available to the extent distributions of the Portfolio are derived from
interest on certain U.S. government securities.
For a detailed discussion of certain Federal, state and local tax consequences
of investing in shares of the Portfolio, see "Taxation" in the Statement of
Additional Information. Shareholders are urged to consult their own tax advisers
regarding specific questions as to Federal, state and local taxes as well as to
any foreign taxes.
Performance Information
[The Portfolio may advertise its performance in a number of ways.]
For purposes of advertising, performance for Class Y shares may be calculated on
the basis of average annual total return and/or total return. These total return
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by the Portfolio during the
measuring period were reinvested in Class Y shares.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an initial
payment of $1,000 and that the investment was redeemed at the end of a stated
period of time, after giving effect to the reinvestment of dividends and
distributions during the period. The return is expressed as a percentage rate
which, if applied on a compounded annual basis, would result in the redeemable
value of the investment at the end of the period. Advertisements of the
Portfolio's performance will include its average annual total return for one,
five and ten year periods, or for shorter periods depending upon the length of
time during which the Portfolio has operated. Computations of average annual
total return for periods of less than one year represent an annualization of the
Portfolio's actual total return for the applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percentage
rate which is calculated by combining the income and principal changes for a
specified period and dividing by the net asset value per share at the beginning
of the period. Advertisements may include the percentage rate of total return or
may include the value of a hypothetical investment at the end of the period
which assumes the application of the percentage rate of total return.
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<PAGE>
Quotations of distribution rates are calculated by analyzing the most recent
distribution of net investment income for a monthly, quarterly or other relevant
period and dividing this amount by the average net asset value during the period
for which the distribution rates are being calculated.
The Portfolio may also from time to time advertise total return on a cumulative,
average, year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition to the above, the Portfolio
may from time to time advertise its performance relative to certain performance
rankings and indices.
The investment results of the Portfolio will fluctuate over time, and any
presentation of investment results for any prior period should not be considered
a representation of what an investment in the Portfolio may earn or what the
Portfolio's performance may be in any future period. In addition to information
provided in Shareholder reports, the Portfolio may from time to time, in its
discretion, make a list of the Portfolio's holdings available to investors upon
request. A discussion of the Portfolio's performance will be included in the
Portfolio's annual report to Shareholders which will be made available to
Shareholders upon request and without charge.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance is
a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance
information, such as that described above, may not provide a basis for
comparison with other investments or other investment companies using a
different method of calculating performance.
Comparative performance information may be used from time to time in advertising
or marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Moody's Bond Survey Index and components
thereof, Mutual Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and
other industry publications.
General Information
Shares of the Portfolio
The Portfolio is a series of Bear Stearns Investment Trust, which was organized
under the laws of The Commonwealth of Massachusetts on October 15, 1992 as a
Massachusetts business trust under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Portfolio commenced investment operations on May 3,
1993. Under the Trust Agreement, the Trustees are authorized to issue an
unlimited number of shares of beneficial interest, $.0001 par value per share.
The Portfolio's shares are classified into three distinct classes of shares,
Class A , Class C and Class Y shares. Each share has one vote and shareholders
will vote in the aggregate and not by Class, except as otherwise required by
law. Additional series may be added in the future from time to time. Each share
when issued and paid for as described in this Prospectus, is fully paid and
non-assessable.
Under Massachusetts law, there is a possibility that shareholders of a business
trust could, under certain circumstances, be held personally liable as partners
for the obligations of such trust. The Trust Agreement contains provisions
intended to limit such liability and to provide indemnification out of Trust
property of any Shareholder charged or held personally liable for obligations or
liabilities of the Trust solely by reason of being or having been a Shareholder
of the Trust and not because of such Shareholder's acts or omissions or for some
other reason. Thus, the risk of a Shareholder incurring financial loss on
account of Shareholder liability is limited to circumstances in which the Trust
itself would be unable to meet its obligations.
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<PAGE>
Unless otherwise required by the Investment Company Act, ordinarily it will not
be necessary for the Trust to hold annual meetings of Shareholders. As a result,
Trust Shareholders may not consider each year the election of Trustees or the
appointment of independent accountants. However, pursuant to the Trust's
By-Laws, the record holders of at least 20% of the shares outstanding and
entitled to vote at a special meeting may require the Trust to hold such special
meeting of Shareholders for any purpose except that the record holders of at
least 10% of the shares outstanding may call a special meeting for the purpose
of voting upon the question of removal of any Trustee or Trustees and
Shareholders may, under certain circumstances as permitted by the Investment
Company Act, communicate with other Shareholders in connection with requiring a
special meeting of Shareholders. In addition, the Portfolio is required to
assist Shareholder communication in connection with calling of Shareholder
meetings to consider removal of a Trustee. Trust Shareholders may remove a
Trustee by the affirmative vote of a majority of the Trust's outstanding shares.
The Board of Trustees, however, will call a meeting of Shareholders for the
purpose of electing Trustees if, at any time, less than a majority of Trustees
holding office at the time were elected by Shareholders.
The Trust issues certificates representing the Portfolio's shares, and the
Transfer Agent maintains a record of each Shareholder's ownership. Each
Shareholder receives confirmation of purchase and redemption orders from the
Transfer Agent, or directly from Bear Stearns or any Authorized Dealer.
Portfolio shares and any dividends and distributions paid by the Portfolio are
reflected in statements from the Transfer Agent, or directly from Bear Stearns
or any Authorized Dealer.
Rule 18f-2 under the Investment Company Act provides that any matter required to
be submitted under the provisions of the Investment Company Act or applicable
state law or otherwise to the holders of the outstanding voting securities of an
investment company, such as the Trust, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by such matter. Rule 18f-2 further
provides that a portfolio shall be deemed to be affected by a matter unless it
is clear that the interests of such portfolio in the matter are identical or
that the matter does not affect any interest of such portfolio. However, the
Rule exempts the selection of independent accountants and the election of
Trustees from the separate voting requirements of the Rule.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Portfolio at PFPC Inc.,
Attention: Emerging Markets Debt Portfolio, P.O. Box 8950, Wilmington, Delaware
19899, by calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-4111.
Portfolio Turnover
The Portfolio is free to dispose of its portfolio securities at any time,
subject to compliance with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Portfolio's investment objective. Although it is the policy of the Portfolio
generally not to engage in trading for short-term gains, the Portfolio may
engage in active short-term trading to benefit from yield disparities among
different issues of securities or among the markets for fixed income securities
of different countries, to seek short-term profits during periods of fluctuating
interest rates, or for other reasons. The portfolio turnover rate for the
Portfolio may vary greatly from year to year. A high rate of turnover involves
correspondingly greater expenses, increased aggregate brokerage commissions,
which must be borne by the Portfolio and its Shareholders, and the incidence of
short-term capital gain (which is taxable to Shareholders as ordinary income
upon distribution to them) and may under certain circumstances make it more
difficult for the Portfolio to qualify as a regulated investment company under
the Code. It may also be affected by sales of portfolio securities necessary to
meet cash requirements for redemptions of shares. The turnover rate is
calculated by dividing the
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<PAGE>
lesser of the dollar amount of sales or purchases of portfolio securities by the
average monthly market value of the Portfolio's securities, excluding securities
having a maturity at the date of purchase of one year or less. For the period
May 3, 1993 to March 31, 1994, for the fiscal year ended March 31, 1995, for the
fiscal year ended March 31, 1996, and for the fiscal year ended March 31, 1997,
the portfolio turnover rate for the Class A shares was 100.85%, 35.01%, 266.46%,
and 223.41%, respectively. For the period July 26, 1995 through March 31, 1996,
and for the fiscal year ended March 31, 1997, for the Class C shares, the
portfolio turnover rate was 266.46% and 223.41%, respectively. The annual
portfolio turnover rate for the Portfolio is expected to be between 250% and
325%. However, the Portfolio's portfolio turnover rate may exceed 325% when the
Investment Manager believes the anticipated benefits of short-term investments
outweigh any increase in transaction costs or increase in capital gains. These
rates should not be considered as limiting factors.
Reports To Shareholders
Each Shareholder is sent an annual report containing audited financial
statements and a semiannual report. Each Shareholder is also provided with a
printed confirmation for each transaction in the Shareholder's account and an
individual monthly statement. The Portfolio does not generally provide
sub-accounting services.
Additional Information
The term "majority of the outstanding shares" of the Portfolio means the vote of
the lesser of (i) 67% or more of the shares of the Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
As used in this Prospectus, the term "Business Day" refers to those days when
the NYSE is open for business. Currently, the NYSE is closed on New Year's Day,
President's Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Portfolio's official sales literature in connection with the offer of the
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any State in which,
or to any person to whom, such offering may not lawfully be made.
Shareholder Inquiries
Shareholder inquiries may be addressed to Bear Stearns at 245 Park Avenue, New
York, New York 10167, your Bear Stearns account executive or any Authorized
Dealer or by calling the Transfer Agent toll-free at 1-800-766-4111.
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<PAGE>
APPENDIX A*
RATINGS OF CORPORATE DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY
RATINGS
Aaa Fixed-income securities which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Fixed-income securities which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise
what are generally known as high grade fixed-income securities. They
are rated lower than the best fixed-income securities because margins
of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Fixed-income securities which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Fixed-income securities which are rated Baa are considered as medium
grade obligations: i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
fixed-income securities lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Fixed-income securities rated Aaa, Aa, A and Baa are considered
investment grade.
Ba Fixed-income securities which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be
very moderate, and therefore not well safeguarded during both good and
bad times in the future. Uncertainty of position characterizes bonds in
this class.
B Fixed-income securities which are rated B generally lack
characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa Fixed-income securities which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
- --------
* Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
A-1
<PAGE>
Ca Fixed-income securities which are rated Ca present obligations which
are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Fixed-income securities which are rated C are the lowest rated class of
fixed-income securities, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its municipal fixed-income
security rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
The ratings apply to Municipal Commercial Paper as well as taxable Commercial
Paper. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-l, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
A-2
<PAGE>
STANDARD & POOR'S RATINGS GROUP, a division of the
McGraw-Hill Companies, Inc. ("STANDARD & POOR'S")
FIXED-INCOME SECURITY
RATINGS
A Standard & Poor's fixed-income security rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. The ratings are
based, in varying degrees, on the following considerations: (1) likelihood of
default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the
obligations; (2) nature of and provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
AAA Fixed-income securities rated "AAA" have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Fixed-income securities rated "AA" have a very strong capacity to pay
interest and repay principal and differs from the highest-rated issues
only in small degree.
A Fixed-income securities rated "A" have a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than fixed-income securities in higher-rated
categories.
BBB Fixed-income securities rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for fixed-income securities in this
category than for fixed-income securities in higher-rated categories.
Fixed-income securities rated AAA, AA, A and BBB are considered
investment grade.
BB Fixed-income securities rated "BB" have less near-term vulnerability to
default than other speculative grade fixed-income securities. However,
they face major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to inadequate
capacity or willingness to pay interest and repay principal.
B Fixed-income securities rated "B" have a greater vulnerability to
default but presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay interest
and repay principal.
CCC Fixed-income securities rated "CCC" have a current identifiable
vulnerability to default, and are dependent upon favorable business,
financial and economic conditions to meet timely payments
A-3
<PAGE>
of interest and repayments of principal. In the event of adverse
business, financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or implied
"CCC" rating.
C The rating "C" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or implied
"CCC" rating.
CI The rating "CI" is reserved for fixed-income securities on which no
interest is being paid.
D In payment default. The "D" rating is used when payments are not made
on the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Fixed-income securities rated "BB", "B", "CCC", "CC" and "C" are regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest degree of speculation. While such fixed-income securities will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-l".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
A-4
<PAGE>
THE
BEAR STEARNS
FUNDS
245 Park Avenue
New York, NY 10167
1.800.766.4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Manager
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Independent Auditors
Deloitte & Touche LLP
2 World Financial Center
New York, NY 10281
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE EMERGING MARKETS DEBT
PORTFOLIO'S PROSPECTUS AND IN THE EMERGING MARKET DEBT PORTFOLIO'S OFFICIAL
SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE EMERGING MARKETS DEBT
PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
PORTFOLIO. THE EMERGING MARKETS DEBT PORTFOLIO'S PROSPECTUS DOES NOT CONSTITUTE
AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT
LAWFULLY BE MADE.
<PAGE>
Emerging Markets Debt Portfolio
a separate portfolio of Bear Stearns Investment Trust
Class A, Class C and Class Y
STATEMENT OF ADDITIONAL INFORMATION
(May 30, 1997)
Emerging Markets Debt Portfolio (the "Portfolio"), formerly known as
Emerging Markets Debt Fund, is organized as a separate, non-diversified
portfolio of Bear Stearns Investment Trust (the "Trust"), an open-end management
investment company. The Portfolio's investment objective is to seek high current
income by investing primarily in a portfolio of Debt Obligations of issuers
located in Emerging Countries. The Portfolio's secondary objective is to provide
investors with capital appreciation.
This Statement of Additional Information is not a Prospectus. The
information contained herein supplements and should be read only in conjunction
with the current relevant Prospectus for the Portfolio, dated May 30, 1997 (the
"Prospectus"). A copy of such Prospectus may be obtained without charge from
Bear, Stearns & Co. Inc. ("Bear Stearns"), 245 Park Avenue, New York, New York
10167, or at 1-800-766-4111, your Bear Stearns account executive, any Authorized
Dealer or the Transfer Agent at 1-800-447-1139. This Statement of Additional
Information has been incorporated into the Prospectus. Capitalized terms used
herein and not otherwise defined have the same meanings as are given to such
terms in the Prospectus.
TABLE OF CONTENTS
Prospectus
Page Page
---- ----
GENERAL...............................................1 10,8
INVESTMENT OBJECTIVE AND POLICIES.....................1 10,8
INVESTMENT PRACTICES..................................7 18,15
RISK FACTORS AND SPECIAL CONSIDERATIONS...............7 19,16
INVESTMENT LIMITATIONS...............................14 19,16
MANAGEMENT OF THE PORTFOLIO..........................16 26,23
DISTRIBUTION PLAN....................................23 28,--
PORTFOLIO TRANSACTIONS...............................24 --
PURCHASE AND REDEMPTION INFORMATION..................26 29,25
SHARES OF THE PORTFOLIO..............................28 45,34
NET ASSET VALUE......................................29 32,27
PERFORMANCE AND YIELD INFORMATION....................29 43,33
CODE OF ETHICS.......................................31 --
TAXATION.............................................32 41,31
SPECIAL TAX CONSIDERATIONS...........................36 41,31
MISCELLANEOUS........................................39 45,34
FINANCIAL STATEMENTS.................................40
APPENDIX A - INVESTMENT PRACTICES...................A-1
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION IN
CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIO OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE PORTFOLIO OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
This Statement of Additional Information is dated May 30, 1997.
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<PAGE>
GENERAL
Emerging Markets Debt Portfolio (the "Portfolio"), formerly known as
Emerging Markets Debt Fund, is organized as a separate, non-diversified
portfolio of Bear Stearns Investment Trust (the "Trust"), an open-end management
investment company organized under the laws of The Commonwealth of Massachusetts
on October 15, 1992. The Portfolio commenced investment operations on May 3,
1993.
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of, and techniques used by,
the Portfolio and should be read in conjunction with the Prospectus section
entitled "Investment Objective and Policies."
General. The Portfolio seeks to provide investors with high current
income by investing primarily in a portfolio of Debt Obligations of issuers
located in Emerging Countries. The Portfolio's secondary objective is to provide
investors with capital appreciation. The following information relates to and
supplements the description of the Portfolio's investment policies contained in
its Prospectus.
Investments. The investment vehicles which the Portfolio's investment
manager, Bear Stearns Funds Management Inc. ("BSFM" or the "Investment Manager")
is expected to acquire or utilize on behalf of the Portfolio are described
below:
Brady Bonds. "Brady Bonds" are debt securities issued in exchange of
outstanding commercial bank loans to Emerging Countries public and private
entities in connection with sovereign debt restructurings under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady, known as
the Brady Plan. The Portfolio may invest in either collateralized or
uncollateralized Brady Bonds. U.S. dollar-denominated, collateralized Brady
Bonds, which generally have maturities of up to 30 years and may be fixed rate
"par" bonds or floating rate "discount" bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
Brady Bonds. Interest payments on such bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults by Emerging Countries
public and private entities with respect to their commercial bank loans,
investments in Brady Bonds may be viewed as speculative. In the case of
"discount bonds," the collateral for interest is adjusted at regular intervals
to allow for changes in interest rates. For purposes of applicable tax and the
Investment Company Act of 1940, as amended (the "Investment Company Act"), rules
and regulations, Brady Bonds are not considered U.S. government securities.
The Portfolio is not limited with respect to the percentage of its
Brady Bond investments that may be issued by any specific country, except to the
extent necessary to satisfy the Asset Diversification Requirement described
under "Taxation - General Tax Consequences to the Portfolio and its
Shareholder."
Loans. The Portfolio may invest up to 20% of its total assets in Loans.
The Portfolio may invest in dollar-denominated fixed and floating rate loans
("Loans") arranged through private negotiations between one or more financial
institutions and an obligor in the Emerging Country. In connection with
purchasing participations, the Portfolio generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan ("Loan Agreement"), nor any rights of setoff against the borrower, and the
Portfolio may not directly benefit from any collateral supporting the Loan in
which it has purchased the participation. As a result, the Portfolio will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling a
participation, the Portfolio may be treated as a general creditor
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<PAGE>
of the lender and may not benefit from any set-off between the lender and the
borrower. The Portfolio will acquire participations only if the lender
interpositioned between the Portfolio and the borrower is determined by the
Investment Manager to be creditworthy. When the Portfolio purchases assignments
from lenders, the Portfolio will acquire direct rights against the borrower of
the Loan. However, since assignments are arranged through private negotiations
between potential assignees and potential assignors, the rights and obligations
acquired by the Portfolio as the purchaser of an assignment may differ from, and
be more limited than, those held by the assigning lender.
In addition, certain of the Loans in which the Portfolio may purchase
participations may be or may become subject to agreements to restructure the
obligations. These agreements occasionally require the owners of the obligations
to contribute additional capital. In such cases, the Portfolio as a participant,
may be required to contribute its pro-rata portion of the funds demanded even
though it may have insufficient assets to make such contribution. If this were
to occur, the Portfolio could be forced to liquidate loan participations or
sub-participations at unfavorable prices to avoid the new money obligations.
Non-Dollar Denominated Securities. The Portfolio may invest up to 30%
of its total assets in non-dollar denominated securities provided that no more
than 20% of the Portfolio's assets are expected to be invested in Debt
Obligations denominated in the local currency of any one country.
Convertible Securities. The Portfolio may invest up to 10% of its total
assets in convertible securities. A convertible security entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities have characteristics similar to
non-convertible debt securities in that they ordinarily provide a stable stream
of income with generally higher yields than those of common stocks of the same
or similar issuers. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to comparable
non-convertible securities. While no securities investment is completely without
risk, investments in convertible securities generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security. Convertible securities have unique
investment characteristics in that they generally (1) have higher yields than
common stocks, but lower yields than comparable non-convertible securities, (2)
are less subject to fluctuation in value than the underlying stock since they
have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. The
investment value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. Generally, the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price of
the convertible security will be increasingly influenced by its conversion
value. A convertible security generally will sell at a premium over its
conversion value by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security. The
Portfolio only intends to invest in convertible securities where the value of
the option is minimal and the convertible security trades on the basis of its
coupon.
Repurchase Agreements. The Portfolio may agree to purchase securities
from a bank or recognized securities dealer and simultaneously commit to resell
the securities to the bank or dealer at an agreed-upon date and price reflecting
a market rate of interest unrelated to the coupon rate or maturity of the
purchased securities ("Repurchase Agreements"). The Portfolio would maintain
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to would be, in effect, secured by such securities. If the value of such
securities were less than the repurchase price, plus interest, the other party
to the Repurchase Agreement would be required to provide additional collateral
so that at all times the collateral is at least equal to the repurchase price
plus accrued interest. The Investment Manager will consider the creditworthiness
of a seller in determining whether to have the Portfolio enter into a Repurchase
Agreement. There are no percentage limits on the Portfolio's ability to enter
into Repurchase Agreements. The Portfolio will not invest more than 15% of its
net assets in Repurchase Agreements maturing in more than seven
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(7) days. Repurchase Agreements carry certain risks associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Portfolio if the other
party to the Repurchase Agreement becomes bankrupt or otherwise fails to deliver
the securities. Repurchase Agreements are considered to be loans by the
Portfolio under the Investment Company Act.
Reverse Repurchase Agreements. The Portfolio may also enter into
reverse repurchase agreements with the same parties with whom it may enter into
Repurchase Agreements. Reverse repurchase agreements involve the sale of
securities held by the Portfolio pursuant to the Portfolio's agreement to
repurchase them at a mutually agreed upon date, price and rate of interest. At
the time the Portfolio enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with an approved custodian
containing cash or liquid high-grade debt securities having a value not less
than the repurchase price (including accrued interest). Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale may decline below the price of the securities the Portfolio has
sold but is obligated to repurchase. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Portfolio's obligation to repurchase the securities, and
the Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision. The Portfolio also may enter
into "dollar rolls," in which the Portfolio sells fixed income securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Portfolio would forgo principal and
interest paid on such securities. The Portfolio would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the cash proceeds of the initial
sale. Reverse repurchase agreements are considered to be borrowings under the
Investment Company Act and may be entered into only for temporary or emergency
purposes.
When-Issued Securities; When, As and If Issued Securities; and Delayed
Delivery Transactions. The Portfolio may purchase securities on a when-issued
basis, and it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Portfolio with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Portfolio at the time of entering into the
transaction. The issuance of some of the securities in which the Portfolio may
invest depends upon the occurrence of a subsequent event, such as approval of a
merger, corporate reorganization, leveraged buyout or debt restructuring ("when,
as and if issued securities"). If the anticipated event does not occur and the
securities are not issued, the Portfolio would be entitled to receive any funds
committed for the purchase, but the Portfolio may have foregone investment
opportunities during the term of the commitment. There is no overall limit on
the percentage of the Portfolio's assets that may be committed to the purchase
of securities on a when issued basis, however, the Portfolio may only invest a
maximum of 15% of its assets in when, as and if issued securities. The Portfolio
will maintain a segregated account with its custodian of cash or liquid assets
in an aggregate amount, equal to the amount of its commitment in connection with
such purchase transactions to the extent required by the Investment Company Act.
If necessary, additional assets will be placed in the account daily so that the
value of the account will equal or exceed the amount of the Portfolio's purchase
commitment. The Portfolio's liquidity and ability to manage its assets might be
affected when it sets aside cash or assets to cover such commitments. When the
Portfolio engages in when-issued transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in the Portfolio
incurring a loss or missing an opportunity to obtain a price considered to be
advantageous. An increase in the percentage of the Portfolio's assets committed
to the purchase of securities on a "when-issued" basis may increase the
volatility of its net asset value.
Investment in Other Funds. In accordance with the Investment Company
Act, the Portfolio may invest a maximum of up to 10% of the value of its total
assets in securities of other investment companies, and the Portfolio may own up
to 3% of the total outstanding voting stock of any one investment company. In
addition, up to 5% of the value of the Portfolio's total assets may be invested
in the securities of any one investment company.
Standby Commitment Agreements. The Portfolio may from time to time
enter into standby commitment agreements. Such agreements commit the Portfolio,
for a stated period of time, to purchase a stated amount of a fixed income
security which may be issued and sold to the Portfolio at the option of the
issuer. The price and coupon of the security is fixed at the time of the
commitment. At the time of entering into the agreement the
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Portfolio is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.5% of the aggregate
purchase price of the security that the Portfolio has committed to purchase. The
Portfolio will enter into such agreements only for the purpose of investing in
the security underlying the commitment at a yield and price that is considered
advantageous to the Portfolio. The Portfolio will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restriction on resale, will not exceed 10% of its
assets taken at the time of the acquisition of such commitment or security. The
Portfolio will at all times maintain a segregated account with its custodian of
cash or liquid assets in U.S. dollars or non-U.S. currencies in an aggregate
amount equal to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Because the issuance
of the security underlying the commitment is at the option of the issuer, the
Portfolio may bear the risk of a decline in the value of such security and may
not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will be adjusted by the amount of the commitment fee. In the event the security
is not issued, the commitment fee will be recorded as income on the expiration
date of the standby commitment.
Restricted and Illiquid Securities. The Portfolio may not invest more
than 15% of its net assets in illiquid securities (including repurchase
agreements which have a maturity of longer than seven (7) days), including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. Securities that have
legal or contractual restrictions on resale but have a readily available market
are not considered illiquid for purposes of this limitation.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven (7) days. Securities which have not been
registered under the Securities Act are referred to as privately placed or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven (7) days. A mutual fund might also have to register
such restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
Restricted securities include those that are subject to restrictions
contained in the securities laws of other countries. However, securities that
are freely marketable in the country in which they are principally traded would
not be considered illiquid. The Portfolio will treat any securities that are
held in countries with restrictions on repatriation of more than seven (7) days,
as well as any securities issued in connection with debt conversion programs
that are restricted as to the remittance of invested capital or profits, as
illiquid securities for purposes of the 15% limitation. Where registration is
required, the Portfolio may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse after the decision to dispose of
the securities is made and the date the Portfolio may be permitted to sell a
security under an effective registration statement. In addition, such
transaction may entail greater transaction costs. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than the one that prevailed at the date of the determination to
make a disposition.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities,
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municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Rule 144A under the Securities Act establishes a "safe harbor" from the
registration requirements of the Securities Act for resales to qualified
institutional buyers of certain securities otherwise subject to restriction on
resale to the general public. The Investment Manager anticipates that the market
for certain restricted securities will expand further under Rule 144A as a
result of the development of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc. (the "NASD").
The Portfolio may purchase Rule 144A securities without regard to the
limitation on investment in illiquid securities, provided a determination is
made that such securities have a readily available trading market. The
Investment Manager will determine the liquidity of Rule 144A securities under
the supervision of the Board of Trustees. The liquidity of Rule 144A securities
will be monitored by the Investment Manager, and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities will be reviewed to determine what,
if any, action is required to assure that the Portfolio does not exceed the
applicable 15 percent limitation for investments in illiquid securities. In
reaching liquidity decisions, the Investment Manager may consider, inter alia,
the following factors: (1) the unregistered nature of the security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
Borrowing and Leverage. The Portfolio may solely for temporary or
emergency purposes borrow in an amount equal to approximately 10% of the
Portfolio's total assets (including the amount borrowed) less all liabilities
and indebtedness other than the borrowing and may use the proceeds of such
borrowings. The Portfolio may not purchase securities when borrowings exceed 5%
of the Portfolio's total assets. If market fluctuations in the value of the
Portfolio's holdings or other factors cause the ratio of the Portfolio's total
assets to outstanding borrowings to fall below 300%, within three days of any
such event the Portfolio may be required to sell securities to restore the 300%
asset coverage, even though from an investment standpoint such sales might be
disadvantageous. Borrowings may be utilized to meet share redemptions of the
Portfolio or to pay distributions and dividends to the Portfolio's Shareholders
in instances where the Portfolio does not desire to liquidate its holdings.
Borrowing by the Portfolio will create an opportunity for increased net income
but, at the same time, will involve special risk considerations. For example,
leveraging might exaggerate changes in the net asset value of Portfolio shares
and in the yield on the Portfolio's investments. Although the principal of such
borrowing will be fixed, the Portfolio's assets may change in value during the
time the borrowing is outstanding.
Lending of Portfolio Securities. The Portfolio may, in seeking to
increase its income, lend securities in its holdings representing up to 33 1/3%
of its total assets, taken at market value, to securities firms and financial
institutions deemed creditworthy by the Investment Manager. The Portfolio will
not lend its securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale. The risks
in lending securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. The creditworthiness of firms to which the Portfolio lends its
securities will be monitored on an ongoing basis by the Investment Manager
pursuant to procedures adopted and reviewed on an ongoing basis by the Board of
Trustees.
Indexed Securities. The Portfolio may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. The
performance of indexed securities depends to a great extent on the performance
of the security, currency, or other instruments to which they are indexed, and
may also be influenced by interest rate changes in the United States and abroad.
At the same time, indexed securities are subject to the credit risks associated
with the issuer of the security,
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and their values may decline substantially if the issuer's credit-worthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. government agencies. New forms of such securities
continue to be developed. The Portfolio may invest in such securities to the
extent consistent with its investment objectives.
Other Investment Policies And Practices of The Portfolio
Non-Diversified Status. The Portfolio is classified as non-diversified
within the meaning of the Investment Company Act, which means that the Portfolio
is not limited by such Investment Company Act in the proportion of its assets
that it may invest in securities of a single issuer. The Portfolio's investments
will be limited, however, in order to qualify as a "regulated investment
company" for the purposes of Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). See "Taxation." To qualify, the Portfolio will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25% of the market
value of the Portfolio's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of the Portfolio's total assets
will be invested in the securities of a single issuer and the Portfolio will not
own more than 10% of the outstanding voting securities of single issuer. To the
extent that the Portfolio assumes large positions in the securities of a small
number of issuers, the Portfolio's return may fluctuate to a greater extent than
that of a diversified company as a result of changes in the financial condition
or in the market's assessment of the issuers.
Limitations on Futures and Options Transactions. The Trust has filed a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the Commodity Futures Trading Commission ("CFTC") and the
National Futures Association, which regulate trading in the futures markets.
Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
notice of eligibility includes the following representations:
(a) The Portfolio will use commodity futures contracts and options
solely for bona fide hedging purposes within the meaning of CFTC regulations;
provided that the Portfolio may hold long positions in commodity futures
contracts or options that do not fall within the definition of bona fide hedging
transactions if the positions are used as part of the Portfolio management
strategy and are incidental to the Portfolio's activities in the underlying cash
market, and the underlying commodity value of the positions at all times will
not exceed the sum of (i) cash or U.S. dollar-denominated high quality, short
term money market instruments set aside in an identifiable manner, plus margin
deposits, (ii) cash proceeds from existing investments due in 30 days, and (iii)
accrued profits on the positions held by a futures commission merchant; and
(b) The Portfolio will not enter into any commodity futures contracts
or options if, as a result, the sum of initial margin deposits on commodity
futures contracts or options the Portfolio has purchased, after taking into
account unrealized profits and losses on such contracts, would exceed 5% of the
Portfolio's total assets.
Temporary Investments. Pending investment or for temporary defensive
purposes (such as when the Investment Manager believes instability or
unfavorable conditions exist in Emerging Countries), the Portfolio may invest up
to 100% of its total assets in U.S. government securities with maturities of
less than one year and certain short-term high quality debt instruments. The
short-term instruments in which the Portfolio may invest include, but are not
limited to: U.S. government securities, money market funds that invest primarily
in U.S. government securities and repurchase agreements in respect of these
securities. The U.S. government securities in which the Portfolio may invest
include direct obligations of the U.S. Treasury (such as Treasury bills, notes
and bonds) and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by the full faith and
credit of the United States and securities that are supported primarily or
solely by the creditworthiness of the issuer (such as securities of the Federal
Home Loan Banks, the Student Loan Marketing Association and the Tennessee Valley
Authority).
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INVESTMENT PRACTICES
The Portfolio may engage in certain forward, futures, options, forward
foreign exchange contracts, interest rate swaps and other strategies to attempt
to reduce the overall risk of its investments (hedge), adjust investment
exposure, enhance income, or to replicate a fixed income return in markets which
present an attractive interest rate environment but which restrict foreign
investment in fixed income securities; however, the instruments necessary to
engage in such investment practices may not generally be available or may not
provide a perfect hedge and also entail certain risks.
The Portfolio intends to use such investment practices as a complement
to its fundamental investment strategies based on the judgment of the Investment
Manager. The Investment Manager may utilize these investment practices to the
extent that they are consistent with the Portfolio's investment objective and
permitted by the Portfolio's investment limitations and applicable regulatory
authorities. A detailed discussion of these various investment practices, the
limitations on the portion of the Portfolio's assets that may be used in
connection with the investment practices and the risks associated with such
investment practices are described in Appendix A to this Statement of Additional
Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Portfolio involves risk factors and special
considerations, such as those described below:
Low Rated and Unrated Instruments. At any one time, substantially all
of the Portfolio's assets may be invested in Debt Obligations that are unrated
or below investment grade. Debt Obligations of the type in which the Portfolio
will invest substantially all of its assets are generally considered to have a
credit quality rated below investment grade by internationally recognized credit
rating organizations such as Moody's and S&P. Securities below investment grade
are the equivalent of high yield, high risk bonds, commonly known as "JUNK
BONDS." Investment grade is generally considered to be debt securities rated BBB
by S&P or Baa or higher by Moody's. Non-investment grade debt securities (that
is, securities rated Ba1 or lower by Moody's or BB+ or lower by S&P) are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse conditions. Some of the Debt
Obligations held by the Portfolio may be comparable to securities rated as low
as C by Moody's or D by S&P, the lowest ratings assigned by these agencies.
These securities are considered to have extremely poor prospects of ever
attaining any real investment grade standing, and to have a current identifiable
vulnerability to default, and the issuers and/or guarantors of these securities
are considered to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions and/or to be in default or not current in the payment of interest or
principal.
Low rated and unrated Debt Obligations generally offer a higher current
yield than that available from higher grade issues, but involve greater risk.
Low rated and unrated securities are especially subject to adverse changes in
general economic conditions, to changes in the financial condition of their
issuers and to price fluctuation in response to changes in interest rates.
During periods of economic downturn or rising interest rates, issuers of low
rated and unrated instruments may experience financial stress that could
adversely affect their ability to make payments of principal and interest, to
meet projected business goals and to obtain additional financing. If the issuer
of a bond defaults, the Portfolio may incur additional expenses to seek
recovery. The foreign issuer may not be willing or able to repay the principal
interest of such obligations and/or when it becomes due, due to factors such as
debt service, cash flow situation, the extent of its foreign reserves, and the
availability of sufficient foreign exchange on the date a payment is due. The
risk of loss due to default by the issuer is significantly greater for the
holders of low rated and unrated debt securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer. In addition,
in recent years some of the Latin American countries in which the Portfolio
expects to invest have defaulted on their sovereign debt.
The Portfolio may have difficulty disposing of certain high yield, high
risk securities because there may be a thin trading market for such securities.
The secondary trading market for high yield, high risk securities is
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generally not as liquid as the secondary market for higher rated securities.
Reduced secondary market liquidity may have an adverse impact on market price
and the Portfolio's ability to dispose of particular issues when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer.
Low rated and unrated Debt Obligations frequently have call or
redemption features which would permit an issuer to repurchase the security from
the Portfolio. If a call were exercised by the issuer during a period of
declining interest rates, the Portfolio likely would have to replace such called
security with a lower yielding security, thus decreasing the net investment
income to the Portfolio and dividends to Shareholders.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of low rated
and unrated securities especially in a market characterized by a low volume of
trading. Factors adversely affecting the market value of high yield, high risk
securities are likely to adversely affect the Portfolio's net asset value. In
addition, the Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default on a portfolio holding or participate
in the restructuring of the obligation.
The Portfolio is subject to restrictions on the maturities of Debt
Obligations it holds, those maturities may range from overnight to 30 years.
Changes in interest rates generally will cause the value of debt securities held
by the Portfolio to vary inversely to changes in prevailing interest rates. The
Portfolio's investments in fixed-rate debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
short-term obligations. Brady Bonds and other Debt Obligations acquired at a
discount are subject to greater fluctuations of market value in response to
changing interest rates than Debt Obligations of comparable maturities which are
not subject to a discount.
Discount Obligations. The Portfolio may invest in certain zero coupon
securities and other obligations purchased with market discount. Zero coupon
securities pay no interest to holders prior to maturity. A portion of the
original issue discount on zero coupon securities and the market discount on
market discount obligations will be included currently in the Portfolio's
income. Accordingly, for the Portfolio to qualify for tax treatment as a
regulated investment company under Part I of Subchapter M of the Code, see
"Taxation," the Portfolio may be required to distribute currently as a dividend
an amount that is greater than the total amount of cash it currently actually
receives. As a result, the Portfolio may be required to sell securities to make
such distributions. Under adverse market conditions, this may result in
Shareholders receiving a portion of their original purchase price as a taxable
dividend and could further negatively impact net asset value. Also, the
Portfolio will be unable to purchase additional income producing securities with
cash used to make such distributions and its current income ultimately may be
reduced as a result. Zero coupon securities and other Debt Obligations in which
the Portfolio may invest usually trade at a deep discount from their face or par
value and will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities that make
current distributions of interest in cash.
Political and Economic Factors. Investing in Debt Obligations of
Emerging Countries involves risks relating to political and economic
developments abroad. The value of the Portfolio's investments will be affected
by commodity prices, inflation, interest rates, taxation, social instability,
and other political, economic or diplomatic developments in or affecting the
Emerging Countries in which the Portfolio has invested. In many cases,
governments of Emerging Countries continue to exercise a significant degree of
control over the economy, and government actions concerning the economy may
adversely affect issuers within that country. Government actions relative to the
economy, as well as economic developments generally, may also affect a given
country's international foreign currency reserves. Fluctuations in the level of
these reserves affect the amount of foreign exchange readily available for
external debt payments and thus could have a bearing on the capacity of Emerging
Country issuers to make payments on their debt obligations regardless of their
financial condition. In addition, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, or other similar developments which could affect investments in those
countries. While the Investment Manager intends to manage the Portfolio in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the Portfolio to suffer a loss of
interest or principal on any of its holdings.
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The Portfolio will treat investments of the Portfolio that are subject to
repatriation restrictions of more than seven (7) days as illiquid securities.
Foreign Exchange Risk. Up to 30% of the Portfolio's assets may be
invested in non-dollar denominated Debt Obligations, and the value of the assets
of the Portfolio as measured in U.S. dollars will therefore be affected by
changes in foreign currency exchange rates. Many of the currencies of Emerging
Countries have experienced significant devaluations relative to the dollar, and
major adjustments have been made in certain of them at times. To the extent the
Portfolio has invested in non-dollar denominated securities, a decline in the
value of such currency would reduce the value of certain portfolio securities
and the net asset value of the Portfolio. In addition, if the exchange rate for
the currency in which the Portfolio receives interest payments declines against
the U.S. dollar before such interest is paid as dividends to Shareholders, the
Portfolio may have to sell portfolio securities to obtain sufficient cash to pay
such dividends.
If non-U.S. dollar-denominated securities are not hedged, a decline in
the value of currencies in which such securities are denominated or on which an
issuer's revenues are based against the U.S. dollar will result in a
corresponding decline in the U.S. dollar value of the Portfolio's assets. These
declines will in turn affect the Portfolio's income and credit. The Portfolio
will compute its income on the date of its receipt by the Portfolio at the
exchange rate in effect with respect to the relevant currency on that date. If
the value of a currency declines relative to the U.S. dollar between the date
income is received and the date the Portfolio makes distributions, the amount
available for distributions to the Portfolio's Shareholders could be reduced. If
the exchange rate against the U.S. dollar of a currency in which a portfolio
security of the Portfolio is denominated declines between the time the Portfolio
incurs expenses in U.S. dollars and the time expenses are paid, the amount of
the currency required to be converted into U.S. dollars in order to pay expenses
in U.S. dollars would be greater than the equivalent amount in the currency of
the expenses at the time they are incurred. A decline in the value of non-U.S.
currencies relative to the U.S. dollar may also result in foreign currency
losses that reduce distributable net investment income.
Currency exchange rates generally are determined by the forces of
supply and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or anticipated changes in interest
rates and other complex factors. Currency exchange rates also can be affected
unpredictably by intervention or failure to intervene by U.S. or foreign
governments or central banks or by currency controls or political developments
in the U.S. or abroad. The Portfolio may employ certain investment practices to
hedge its foreign currencies exposure; however, the instruments necessary to
engage in such practices may not generally be available or may not provide a
perfect hedge and may also entail certain risks.
To the extent that a substantial portion of the Portfolio's total
assets, adjusted to reflect the Portfolio's net position after giving effect to
currency transactions, is denominated in currencies of foreign countries, the
Portfolio will be more susceptible to the risk of adverse economic and political
developments within those countries.
Sovereign Debt. Investments in sovereign debt involve special risks.
The issuer of the debt or 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.
Investing in Debt Obligations of governmental issuers in Emerging
Countries involves economic and political risks. The governmental entity that
controls the servicing of obligations of those issuers may not be willing or
able to repay the principal and/or interest when due in accordance with the
terms of the obligations. A governmental entity's willingness or ability to
repay principal and interest when due in a timely manner may be affected by,
among other factors, its cash flow situation, the market value of the debt, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's dependence on expected disbursements from third parties,
the governmental entity's policy toward the International Monetary Fund and the
political constraints to which the governmental entity may be subject. As a
result, governmental entities may default on their obligations. Holders of
certain Emerging Country Debt Obligations may be requested to participate in the
restructuring and rescheduling of these obligations and to extend further loans
to their issuers. The interests of
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<PAGE>
holders of Emerging Country Debt Obligations could be adversely affected in the
course of restructuring arrangements or by certain other factors referred to
below.
Sovereign debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat limited. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank loans to the same sovereign entity
may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect the
Portfolio's investments. Political changes or a deterioration of a country's
domestic economy or balance of trade may affect the willingness of countries to
service their sovereign debt. While the Investment Manager intends to manage the
Portfolio in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse political changes will not cause the Portfolio to
suffer a loss of interest or principal on any of its holdings.
Investors should also be aware that certain sovereign debt instruments
in which the Portfolio may invest involve great risk. Sovereign debt issued by
issuers in many Emerging Countries generally is deemed to be the equivalent in
terms of quality to securities rated below investment grade by Moody's and S&P.
Such securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Some of such sovereign debt may be comparable to securities rated D by S&P or C
by Moody's. The Portfolio may have difficulty disposing of certain sovereign
debt obligations because there may be a limited trading market for such
securities. Because there is no liquid secondary market for many of these
securities, the Portfolio anticipates that such securities could be sold only to
a limited number of dealers or institutional investors. The lack of a liquid
secondary market may have an adverse impact on the market price of such
securities and the Portfolio's ability to dispose of particular issues when
necessary to meet the Portfolio's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
The lack of a liquid secondary market for certain securities also may make it
more difficult for the Portfolio to obtain accurate market quotations for
purposes of valuing the Portfolio's investments and calculating its net asset
value. When and if available, fixed income securities may be purchased by the
Portfolio at a discount from face value. However, the Portfolio does not intend
to hold such securities to maturity for the purpose of achieving potential
capital gains, unless current yields on these securities remain attractive. From
time to time the Portfolio may purchase securities not paying interest at the
time acquired if, in the opinion of the Investment Manager, such securities have
the potential for future income or capital appreciation.
Investing in Securities Markets of Emerging Countries. Most securities
markets in Emerging Countries may have substantially less volume and are subject
to less government supervision than U.S. securities markets. Securities of many
issuers in Emerging 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 Countries than in the United States.
Markets in Emerging Countries also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions. Delays in settlement could result in temporary periods when a
portion of the assets of the Portfolio
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is uninvested and no cash is earned thereon. The inability of the Portfolio to
make intended security purchases due to settlement problems could cause the
Portfolio to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result either in losses to
the Portfolio due to subsequent declines in value of the portfolio security or,
if the Portfolio has entered into a contract to sell the security, could result
in possible liability to the purchaser. Costs associated with transactions in
foreign securities are generally higher than costs associated with transactions
in U.S. securities. Such transactions also involve additional costs for the
purchase or sale of foreign currency.
Foreign investment in certain Emerging Country Debt Obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain Emerging Country Debt
Obligations and increase the costs and expenses of the Portfolio. Certain
Emerging Countries require prior governmental approval of investments by foreign
persons, limit the amount of investment by foreign persons in a particular
company, limit the investment by foreign persons only to a specific class of
securities of a company that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain Emerging Countries may also
restrict investment opportunities in issuers in industries deemed important to
national interests.
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.
In the course of investment in Emerging Country Debt Obligations, the
Portfolio will be exposed to the direct or indirect consequences of political,
social and economic changes in one or more Emerging Countries. Political changes
in Emerging Countries may affect the willingness of an Emerging Country
governmental issuer to make or provide for timely payments of its obligations.
The country's economic status, as reflected, among other things, in its
inflation rate, the amount of its external debt and its gross domestic product,
also affects its ability to honor its obligations. While the Portfolio will
manage its assets in a manner that will seek to minimize the exposure to such
risks, there can be no assurance that adverse political, social or economic
changes will not cause the Portfolio to suffer a loss of value in respect of the
securities in the Portfolio's portfolio.
The risk also exists that an emergency situation may arise in one or
more Emerging Countries as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Portfolio's securities in such
markets may not be readily available. The Trust may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "Commission"). Accordingly, if the
Portfolio believes that appropriate circumstances exist, it will promptly apply
to the Commission for a determination that an emergency is present. During the
period commencing from the Portfolio's identification of such condition until
the date of the Commission action, the Portfolio's securities in the affected
markets will be valued at fair value determined in good faith by or under the
direction of the Board of Trustees.
Volume and liquidity in most foreign bond markets are less than in the
United States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although the Portfolio endeavors to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers, dealers and listed
companies than in the United States. Mail service between the United States and
foreign countries may be slower or less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. In addition, with respect to
certain Emerging Countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect the Portfolio's investments in those countries.
Moreover, individual Emerging Country economics may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
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<PAGE>
The Portfolio may have limited legal recourse in the event of a default
with respect to certain Debt Obligations it holds. If the issuer of a
fixed-income security owned by the Portfolio defaults, the Portfolio may incur
additional expenses to seek recovery. Debt Obligations issued by Emerging
Country governments differ from debt obligations of private entities; remedies
from defaults on Debt Obligations issued by Emerging Country governments, unlike
those on private debt, must be pursued in the courts of the defaulting party
itself. The Portfolio's ability to enforce its rights against private issuers
may be limited. Notwithstanding the fact that most loan agreements are governed
by New York or English law, the ability to attach assets to enforce a judgment
may be limited. Legal recourse is therefore somewhat diminished. Bankruptcy,
moratorium and other similar laws applicable to private issuers of Debt
Obligations may be substantially different from those of other countries. The
political context, expressed as an Emerging Country governmental issuer's
willingness to meet the terms of the debt obligation, for example, is of
considerable importance. In addition, no assurance can be given that the holders
of commercial bank debt may not contest payments to the holders of Debt
Obligations in the event of default under commercial bank loan agreements.
Income from securities held by the Portfolio could be reduced by a
withholding tax at the source or other taxes imposed by the Emerging Countries
in which the Portfolio makes its investments. The Portfolio's net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Portfolio or to entities in which the Portfolio has invested. The
Investment Manager will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the taxes
will not be subject to change.
Most Emerging Countries have experienced substantial, and in some
periods extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain Emerging Countries.
In an attempt to control inflation, wage and price controls have been imposed in
certain countries.
Emerging Country governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain Emerging Country governmental issuers have
not been able to make payments of interest on or principal of Debt Obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many Emerging Countries have exercised and continue to
exercise substantial influence over many aspects of the private sector through
the ownership or control of many companies, including some of the largest in any
given country. As a result, government actions in the future could have a
significant effect on economic conditions in Emerging Countries, which in turn,
may adversely affect companies in the private sector, general market conditions
and prices and yields of certain of the securities in the Portfolio's
investments. Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have occurred
frequently over the history of certain Emerging Countries and could adversely
affect the Portfolio's assets should these conditions recur.
The ability of Emerging Country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An Emerging Country whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an Emerging Country's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that Emerging Countries receive payment for their exports
in currencies other than dollars or non-Emerging Countries currencies, their
ability to make debt payments denominated in dollars or non-Emerging Countries
currencies could be affected.
To the extent that an Emerging Country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of Emerging Countries to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of Emerging
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Country governmental issuers to make payments on their obligations. In addition,
the cost of servicing Emerging Country Debt Obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of Emerging Countries to repay
Debt Obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of Emerging Countries to make payments on these debt
obligations.
Reporting Standards. It is likely that none of the Debt Obligations
held by the Portfolio will be registered with the Commission or subject to U.S.
regulatory or reporting requirements. Disclosure requirements in Emerging
Countries are generally not as stringent as in the U.S., and there may be less
publicly available information about issuers in Emerging Countries than about
domestic issuers. Emerging Country issuers are not generally subject to
accounting, auditing and financial reporting standards comparable to those
applicable domestic issuers.
Since foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a U.S. company. In addition to
the relative lack of publicly available information about issuers in Emerging
Countries, the national income accounting, auditing and financial reporting
standards and practices of Emerging Countries may not be equivalent to those
employed in the U.S. and may differ in fundamental areas, such as accounting for
inflation. For instance, inflation accounting rules in some Emerging Countries,
require, for companies that keep accounting records in the local currency, for
both tax and accounting purposes, that certain assets and liabilities be
restated on the company's balance sheet in order to express items in terms of
currency of constant purchasing power. Thus, inflation accounting may indirectly
generate losses or profits for certain Emerging Country companies.
Investment Practices. Certain of the investment practices in which the
Portfolio may engage have risks associated with them, including possible default
by the other party to the transaction, illiquidity and, to the extent the
Investment Manager's views as to certain market movements are incorrect, the
risk that the use of such strategies could result in losses greater than if they
had not been used. Use of put and call options could result in losses to the
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or for prices higher than (in the case of put options) or lower than (in
the case of call options) current market values, limit the amount of
appreciation the Portfolio could realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions could result in the Portfolio's incurring losses as a result of the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The Portfolio depends upon the
reliability and creditworthiness of the counterparty when it enters into OTC
currency or securities options or other agreements. The use of options and
futures transactions entails certain special risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of the Portfolio could create the
possibility that losses on the hedging instrument will be greater than gains in
the value of the Portfolio's position. In addition, futures and options markets
could not be liquid in all circumstances and certain over-the-counter options
could have no markets. As a result, in certain markets, the Portfolio might not
be able to close out a transaction without incurring substantial losses, if at
all. Although the use of futures and options transactions for hedging should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time it will tend to limit any potential gain that might
result from an increase in value of the position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options in which case the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of such strategies would reduce the Portfolio's net asset value, and
possibly income, and the losses can be greater than if the strategies had not
been used. The use of forward foreign currency exchange contracts entails
certain risks. See "Investment Practices" described in Appendix A to this
Statement of Additional Information.
Non-Diversification. Investment in the Portfolio, which is classified
as a non-diversified investment company under the Investment Company Act, may
present greater risks to investors than an investment in a diversified fund. The
investment return on a non-diversified investment company typically is dependent
upon the
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performance of a smaller number of securities relative to the number of
securities held in a diversified fund. The Portfolio's assumption of large
positions in the obligations of a small number of issuers will affect the value
of the securities it holds to a greater extent than that of a diversified fund
in the event of changes in the financial condition, or in the market's
assessment, of the issuers.
Illiquid and Restricted Securities. Investments of the Portfolio's
assets in "illiquid securities," i.e., securities that are restricted in their
transfer or for which market quotations are otherwise not readily available or
repurchase agreements over seven (7) days, may restrict the ability of the
Portfolio to dispose of its investments in a timely fashion and for a favorable
price. The risks associated with illiquidity are particularly acute in
situations in which the Portfolio's operations require cash, such as when the
Portfolio redeems for shares of beneficial interests or pays distributions, and
may result in the Portfolio borrowing to meet short-term cash requirements or
incurring capital losses on the sale of such investments.
Clearance and Settlement Procedures. Emerging Countries' securities
exchange transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in clearance and settlement could result
in temporary periods when assets of the Portfolio are uninvested and no return
is earned thereon. Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. The inability of the Portfolio to make
intended security purchases due to settlement problems could cause the Portfolio
to miss attractive investment opportunities. Inability to dispose of a Portfolio
security due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in the value of the Portfolio security or,
if the Portfolio has entered into a contract to sell the security, could result
in possible liability to the purchaser.
Operating Expenses. The costs attributable to foreign investing that
the Portfolio must bear frequently are higher than those attributable to
domestic investing. For example, the cost of maintaining custody of foreign
securities exceeds custodian costs for domestic securities. Investment income on
certain foreign securities in which the Portfolio may invest may be subject to
foreign withholding or other taxes that could reduce the return on those
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign tax to which the
Portfolio would be subject. See "Taxation."
Other Factors. The net asset value of the shares of beneficial interest
will change with changes in the value of the Portfolio's holdings. Because the
Portfolio will invest primarily in debt securities, the net asset value of the
shares of beneficial interest could be expected to change as general levels of
interest rates fluctuate. Generally, when interest rates increase, the value of
debt securities held by the Portfolio can be expected to decrease and when
interest rates decrease, the value of the debt securities held by the Portfolio
can be expected to increase.
INVESTMENT LIMITATIONS
The Trust has adopted the following investment restrictions, none of
which may be changed with respect to the Portfolio without the approval of the
holders of a majority of the outstanding voting securities of the Portfolio. As
defined in the Investment Company Act, "a majority of the outstanding voting
securities" of the Portfolio means the vote (a) of 67% or more of the shares
present at a meeting of Shareholders of the Portfolio, if the holders of more
than 50% of the Portfolio's outstanding shares are present or voting by proxy at
the meeting, or (b) of more than 50% of the outstanding shares of the Portfolio,
whichever is less. For the purposes of the limitations, any limitation which
involves a maximum percentage shall not be considered violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Portfolio.
The Portfolio may not:
(1) Borrow money, except from banks, and only if after such borrowing
there is asset coverage of at least 300% for all borrowings of the Portfolio; or
mortgage, pledge or hypothecate its assets except in connection with
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such borrowings. This restriction shall not prevent the Portfolio from entering
into reverse repurchase agreements, provided that reverse repurchase agreements
and any other transactions constituting borrowing by the Portfolio may not
exceed 10% of the Portfolio's total assets. In the event that the asset coverage
for the Portfolio's borrowings falls below 300%, the Portfolio will reduce
within three days the amount of its borrowings in order to provide for 300%
asset coverage. (For the purpose of this restriction, collateral arrangements
with respect to the writing of options, and, if applicable, futures contracts,
and collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets and neither such arrangements nor the purchase
or sale of futures are deemed to be the issuance of a senior security for
purposes of Investment Limitation No. 8.)
(2) Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation is not applicable to investments in
obligations of the U.S. Government or any of its agencies or instrumentalities.
(3) Make short sales of securities, except short sales against-the-box,
or maintain a short position. (The Portfolio does not currently intend to make
short sales against-the-box.)
(4) Underwrite securities of other issuers, except insofar as the
Portfolio may be deemed to be an underwriter under the Securities Act in selling
portfolio securities.
(5) Purchase, hold or deal in real estate, including limited
partnership interests, or oil, gas or other mineral leases, although the
Portfolio may purchase and sell securities that are secured by real estate or
interests therein and may purchase mortgage-related securities and may hold and
sell real estate acquired by the Portfolio as a result of the ownership of
securities.
(6) Purchase or sell commodities or commodity contracts, except that
the Portfolio may (a) purchase and sell futures contracts, including those
relating to securities, currencies and indices, and (b) purchase and sell
currencies or securities on a forward commitment or delayed-delivery basis.
(7) Make loans, except that the Portfolio may (a) purchase and hold
debt instruments (including bonds, debentures or other debt instruments or
interests therein, government obligations, short-term commercial paper,
certificates of deposit and bankers acceptances) in accordance with its
investment objectives and policies, (b) invest in Loans, participations and
assignments, (c) enter into repurchase agreements with respect to portfolio
securities, and (d) make loans of portfolio securities.
(8) Issue any senior security (as such term is defined in Section 18(f)
of the Investment Company Act) except as otherwise permitted in Investment
Limitations Nos. (1), (3) and (7); and in the case of Investment Limitations
Nos. (3) and (7) provided the coverage requirements enunciated by the SEC are
followed.
(9) Invest more than 10% of the value of its total assets in securities
of issuers having a record, together with predecessors, of less then three years
of continuous operation.
(10) Make investments for the purpose of exercising control or
management. Investments by the Portfolio in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making of
investments for the purpose of exercising control or management.
Except for the percentage restrictions applicable to the borrowing of
money, if a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in market
values of portfolio securities or amount of total or net assets will not be
considered a violation of any of the foregoing restrictions.
For purposes of the Portfolio's concentration policy contained in
limitation (2) above, for so long as the staff of the Commission considers
securities issued or guaranteed as to principal and interest by any single
foreign government or any supranational organization in the aggregate to be
securities of issuers in the same industry, the Portfolio intends to comply with
such Commission staff position.
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In order to permit the sale of shares of the Portfolio in certain
states, the Portfolio may make commitments more restrictive than the investment
policies and limitations above. If the Portfolio determines that any such
commitment is no longer in its best interests, it will revoke the commitment by
terminating sales of its shares in the state involved. In addition, the
Portfolio may be subject to investment restrictions imposed by countries in
which it invests directly or indirectly.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Portfolio has adopted an investment policy pursuant
to which it will not purchase or sell OTC options if, as a result of such
transaction, the market value of the underlying securities covered by OTC call
options currently outstanding which were sold by the Portfolio and margin
deposits on the Portfolio's existing OTC options on futures contracts exceed 15%
of the total assets of the Portfolio, taken at market value, together with all
other assets of the Portfolio which are illiquid or are otherwise not readily
marketable. However, if the OTC option is sold by the Portfolio to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of New
York and the Portfolio has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, the Portfolio will
treat as illiquid such amount of the underlying securities equal to the
repurchase price less the amount by which the option is "in-the-money" (i.e.,
current market value of the underlying security minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money." This policy as to
OTC options is not a fundamental policy of the Portfolio and may be amended by
the Trustees of the Portfolio without the approval of the Portfolio's
Shareholders. However, the Portfolio will not change or modify this policy prior
to the change or modification by the Commission staff of its position.
Securities held by the Portfolio generally may not be purchased from,
sold or loaned to the Investment Manager or its affiliates or any of their
directors, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
MANAGEMENT OF THE PORTFOLIO
The following information supplements and should be read with the
section in the Prospectus entitled "Management of the Portfolio."
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees deemed to be
"interested persons" of the Trust for purposes of the Investment Company Act are
indicated by an asterisk.
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<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Portfolio During Past Five Years
---------------- --- -------------- ----------------------
<S> <C> <C> <C>
Peter M. Bren 63 Trustee President of The Bren Co. since 1969,
126 East 56th Street President of Koll, Bren Realty
New York, NY 10022 Advisors and Senior Partner for
Lincoln Properties prior thereto.
Peter B. Fox* 45 President and Trustee Managing Director - Emeritus -
Three First National Plaza February 1997, Bear Stearns, Senior
Chicago, IL 60602 Managing Director, Public Finance
since September 1987.
M.B. Oglesby, Jr. 55 Trustee Vice Chairman of Cassidy Associates
700 13th Street, N.W. since February 1996, Senior Vice
Suite 400 President of RJR Nabisco, Inc. from
Washington, D.C. 20005 April 1989 to February 1996, Former Deputy
Chief of Staff-White House from 1988
to January 1989.
John R. McKernan, Jr. 49 Trustee Chairman and Chief Executive Officer
P.O. Box 15213 of McKernan Enterprises Inc. since
Portland, ME 04112 January 1995; Governor of Maine prior
thereto.
Robert S. Reitzes* 53 Chairman and Trustee Director of Mutual Funds - Bear
245 Park Avenue Stearns Asset Management, Senior
New York, NY 10167 Managing Director, Bear Stearns, since
March 1994, Co- Director of
Research, C.J. Lawrence/Deutsche
Bank Securities from January 1991 to
March 1994, Chief Investment Officer,
Mabon & Nugent & Co. from
December 1984 to January 1991.
Stephen A. Bornstein 54 Vice President Managing Director, Legal Department,
245 Park Avenue Bear Stearns since September 1990.
New York, NY 10167
Frank J. Maresca 39 Vice President and Managing Director of Bear Stearns
245 Park Avenue Treasurer since September 1994, Associate
New York, NY 10167 Director of Bear Stearns September
1993 to September 1994, Executive
Vice President of BSFM since March 1992,
Vice President of Bear Stearns from March
1992 to September 1993, First Vice
President of Mitchell Hutchins Asset
Management Inc. from June 1988 to March 1992.
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<PAGE>
Position(s) Principal Occupation(s)
Name and Address Age with Portfolio During Past Five Years
---------------- --- -------------- ----------------------
<S> <C> <C> <C>
Ellen T. Arthur 44 Secretary Associate Director, Legal Department
245 Park Avenue of Bear Stearns since January 1996,
New York, NY 10167 Senior Counsel - Corporate Vice
President Paine Webber Incorporated
from April 1989 through September
1995.
Vincent L. Pereira 32 Assistant Treasurer Associate Director of Bear Stearns
245 Park Avenue since September 1995, Vice President
New York, NY 10167 of BSFM since May 1993, Vice
President of Bear Stearns from May
1993 to September 1995, Assistant
Vice President of Mitchell Hutchins
Asset Management from October 1992
to May 1993.
Eileen M. Coyle 32 Assistant Secretary Vice President of Bear Stearns since
245 Park Avenue September 1995, Manager of BSFM
New York, NY 10167 since 1995, Senior Fund Administrator
and Supervisor for BSFM from January
1994 to 1995, Accounting Supervisor
and Senior Accountant for Bear Stearns
since 1990.
</TABLE>
Certain of the Trustees and officers of the Trust hold comparable
positions with certain other investment companies of which Bear Stearns, BSFM or
an affiliate thereof is the investment adviser, administrator or distributor. As
of March 31, 1997, the Trustees and officers as a group owned less than 1/2 of
1% of the outstanding shares of beneficial interest of the Portfolio.
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Compensation Table
The following table shows the compensation paid by the Trust to the
Trustees during the fiscal year ended March 31, 1997:
<TABLE>
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Compensation
Compensation Benefits Accrued Annual from Portfolio and
from the as part of Benefits upon Fund Complex Paid
Name of Trustee Portfolio* Portfolio Expenses Retirement to Trustees
- --------------- ---------- ------------------ ---------- -----------
<S> <C> <C> <C> <C>
Peter M. Bren $5,000 None None $12,000
Peter B. Fox None None None None
John R. McKernan, Jr. $5,000 None None $12,000
M.B. Oglesby, Jr. $5,000 None None $12,000
Robert S. Reitzes None None None None
</TABLE>
* Amount does not include reimbursable expenses for attending board
meetings.
The Trust pays $5,000 in fees per annum to each Trustee who is not a
director, officer, employee or affiliate of BEA or Bear Stearns, together with
such Trustees' out-of-pocket expenses related to attendance at meetings of the
Board of Trustees. Executive officers of the Trust receive no compensation from
the Trust for their services as such. The Trust does not have a pension or
retirement plan applicable to Trustees or officers of the Trust.
Investment Manager and Administrator. As stated in the Portfolio's
Prospectus, BSFM, with principal business offices at 245 Park Avenue, New York,
New York 10167, serves as Investment Manager of the Portfolio. See "Management
of the Portfolio" in the Portfolio's Prospectus for a description of the duties
of BSFM as Investment Manager of the Portfolio.
The Portfolio's investment manager is BSFM, a wholly-owned subsidiary
of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New
York, New York 10167. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSFM is a registered investment adviser
and offers advisory and administrative services to open-end and closed-end
investment funds and other managed pooled investments vehicles generally with
net assets at March 31, 1997 totaling approximately $2.8 billion.
The Investment Manager provides administrative services which include,
subject to the general supervision of the Trustees of the Trust, (a) providing
supervision of all aspects of the Portfolio's non-investment operations (other
than certain operations performed by others pursuant to agreements with the
Portfolio), (b) providing the Portfolio, to the extent not provided pursuant to
such agreements, the agreement with the Trust's custodian, transfer and dividend
disbursing agent or agreements with other institutions, with personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of the Portfolio, (c) arranging,
to the extent not provided pursuant to such agreements, for the preparation, at
the Portfolio's expense, of reports to Shareholders, periodic updating of the
Prospectus and this Statement of Additional Information, and reports filed with
the Commission, (d) arranging for and overseeing the calculation of the net
asset value of the Portfolio's shares, (e) providing the Portfolio, to the
extent not provided pursuant to such agreements, with adequate
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<PAGE>
office space and certain related office equipment and services, and (f)
arranging for and overseeing the maintenance of all of the Portfolio's records
other than those maintained pursuant to such agreements.
The Investment Manager also furnishes the Portfolio with office
facilities and provides it with corporate management and performs or arranges
for the performance of the following services for the Portfolio: arranging for
and overseeing the maintenance of the books and records of the Portfolio
required under the Investment Company Act; preparation of financial information
for the Portfolio's proxy statements and semiannual and annual reports to
Shareholders; periodic updating of the Prospectus and the Statement of
Additional Information and reports filed with the Commission; responding to
inquiries from Portfolio Shareholders; arranging for and overseeing the
calculation of the net asset value of the Portfolio's shares; oversight of the
performance of administrative and professional services rendered to the
Portfolio by others, including its custodian, registrar, transfer agent, as well
as accounting, auditing and other services; providing the Portfolio with
administrative office space and preparation of the Portfolio's reports to the
Commission.
The Investment Manager has sole investment discretion for the Portfolio
and will make all decisions affecting assets in the Portfolio under the
supervision of the Board of Trustees and in accordance with the Portfolio's
stated policies. The Investment Manager will select investments for the
Portfolio and will place purchase and sale orders on behalf of the Portfolio.
Purchase and sale orders for the Portfolio's portfolio transactions in
securities may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Bear Stearns or its affiliates. Although the
Investment Manager's activities are subject to general oversight by the Trustees
and officers of the Portfolio, neither the Trustees nor officers of the
Portfolio evaluate the investment merits of the Investment Manager's selections
of individual securities.
The Portfolio bears all of its own expenses not specifically assumed by
the Investment Manager. Expenses borne by the Portfolio include, but are not
limited to, the following: (a) the cost (including brokerage commissions) of
securities purchased or sold by the Portfolio and any losses incurred in
connection therewith; (b) fees payable to and expenses incurred on behalf of the
Portfolio by the Investment Manager; (c) expenses of organizing the Portfolio
that are not attributable to a class of the Portfolio; (d) certain of the filing
fees and expenses relating to the registration and qualification of the
Portfolio under Federal and/or state securities laws and maintaining such
registrations and qualifications; (e) fees and salaries payable to the
Portfolio's trustees and officers; (f) taxes (including any income or franchise
taxes) and governmental fees; (g) costs of any liability and other insurance or
fidelity bonds; (h) any costs, expenses or losses arising out of a liability of
or claim for damages or other relief asserted against the Portfolio for
violation of any law; (i) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent trustees; (j) charges of
custodians and other agents; (k) expenses of setting in type and printing
prospectuses, statements of additional information and supplements thereto for
existing Shareholders, reports, statements, and confirmations to Shareholders
and proxy material that are not attributable to a class; (l) any extraordinary
expenses; (m) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (n) costs of
mailing and tabulating proxies and costs of Shareholders' and trustees'
meetings; and (o) the cost of investment company literature and other
publications provided by the Portfolio to its trustees and officers. Transfer
agency expenses, expenses of preparation, printing and mailing prospectuses,
statements of additional information, proxy statements and reports to
Shareholders, organizational expenses and registration fees and other costs
identified as belonging to a particular class of the Portfolio are allocated to
such class.
Under the Investment Management Agreement, BSFM will not be liable for
and will be indemnified by the Portfolio relative to, any error of judgment or
mistake of law or for any loss suffered by the Portfolio in connection with the
performance of the Investment Management Agreement, except a loss resulting from
willful misfeasance, reckless disregard, bad faith or gross negligence on the
part of BSFM. The Investment Management Agreement also provides that the
Portfolio will indemnify BSFM against certain liabilities, including liabilities
under the Federal securities laws, or, in lieu thereof, that contribute to
resulting losses.
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<PAGE>
The Investment Management Agreement between BSFM and the Trust on
behalf of the Portfolio was approved by the Trustees of the Trust, including all
of the disinterested Trustees of the Trust, on March 24, 1995 and by
Shareholders of the Portfolio at a Special Meeting of Shareholders held on May
4, 1995. The Portfolio's Investment Management Agreement renewal was approved
January 28, 1997 and then continues in effect from year to year provided each
continuance is specifically approved at least annually (a) by the vote of a
majority of the outstanding voting securities of the Portfolio or by a majority
of the Trustees of the Trust, and (b) by the vote of a majority of the Trustees
of the Trust who are not parties to such Agreement or "interested persons" (as
such term is defined in the Investment Company Act) of any party thereto cast in
person at a meeting called for the purpose of voting on such approval.
Pursuant to its Investment Management Agreement, for its investment
management and certain administrative services, BSFM receives a fee computed
daily and payable monthly 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 daily net assets above $100 million. BSFM has agreed to
waive its fees to the extent necessary to maintain total operating costs of the
Portfolio at 2.00% per annum of the average daily net assets of the Portfolio.
The current Investment Management Agreement became effective upon the approval
of the shareholders of the Portfolio at a Special Meeting of Shareholders held
on May 4, 1995. Prior thereto, BEA Associates ("BEA") served as investment
adviser to the Portfolio under the Investment Advisory Agreement and BSFM served
as manager to the Portfolio under the Management Agreement. BEA tendered its
resignation on March 24, 1995. For the period May 3, 1993 (commencement of
investment operations) through March 31, 1994, BSFM and BEA earned $141,588 and
$251,459 (after fee waivers), respectively, which was 0.33% and 0.59%,
respectively, of the Portfolio's average total net assets on an annual basis.
For the fiscal year ended March 31, 1995, BSFM and BEA earned $101,993 and
$181,319 (after fee waivers), which was 0.26% and 0.46%, respectively, of the
Portfolio's average total net assets on an annual basis. For the fiscal year
ended March 31, 1996, BSFM and BEA earned $17,788 and $7,222 (after fee
waivers), respectively, which was 0.06% and 0.02%, respectively, of the
Portfolio's average total net assets on an annual basis. For the fiscal year
ended March 31, 1997, BSFM earned $118,207 (after fee waivers), which was .36%
of the Portfolio's average total net assets on an annual basis.
The Investment Management Agreement will terminate automatically if
assigned (as defined in the Investment Company Act) and such agreement is
terminable at any time without penalty by the Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Portfolio on 60 days'
written notice.
As stated in the Prospectus, the Portfolio is responsible for the
payment of its expenses other than those assumed by its Investment Manager.
However, BSFM has agreed that if, in any fiscal year, the sum of the Portfolio's
expenses (including the fees payable to the Investment Manager, but excluding
taxes, interest, brokerage expenses and, where permitted, extraordinary expenses
such as for litigation) exceeds the expense limitations applicable to the
Portfolio imposed by state securities administrators, as such limitations may be
lowered or raised from time to time, BSFM will reimburse the Portfolio or make
other arrangements to limit Portfolio expenses to the extent required by such
expense limitations. The most restrictive expense limitation imposed by state
securities administrators provides that annual expenses (as defined) may not
exceed 2.50% of the first $30 million of the average value of the Portfolio's
net assets, plus 2.00% of the next $70 million, plus 1.50% of such assets in
excess of $100 million. Whether expense limitations apply to the Portfolio and
in what amounts depends upon the particular regulations of such states. For the
period May 3, 1993 (commencement of investment operations) through March 31,
1994, the fiscal year ended March 31, 1995 and the fiscal year ended March 31,
1996, BEA subsidized expenses of the Portfolio in the amounts of $89,460,
$131,939 and $28,291, respectively, and for the period May 3, 1993 (commencement
of investment operations) through March 31, 1994, the fiscal year ended March
31, 1995 and the fiscal year ended March 31, 1996, BSFM subsidized expenses of
the Portfolio in the amounts of $50,350, $74,215 and $249,429, respectively,
pursuant to a voluntary undertaking and not as a result of any expense
limitations imposed by state securities administrators.
Bear Stearns has agreed to permit the Trust to use the name "Bear
Stearns" or derivatives thereof as part of the Trust name for as long as the
Investment Management Agreement is in effect.
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<PAGE>
The Investment Manager seeks to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or sell securities
by the Portfolio and another advisory account. In some cases, this procedure
could have an adverse effect on the price or the amount of securities available
to the Portfolio. Pursuant to procedures adopted by the Investment Manager, if a
particular security is deemed suitable for the Portfolio and other advisory
accounts, allocations between accounts will be pro rata based: (i) 50 percent
upon the relative sizes of such accounts and (ii) 50 percent upon the relative
dollar amounts of commissions paid by such accounts during the preceding twelve
month period to the member of the underwriting syndicate from whom the shares
would be purchased. Notwithstanding the foregoing, an account shall be accorded
priority in allocation to the extent receipt of securities is directly
attributable to a representation that such account will hold the security for
investment.
Administrator. The Portfolio has engaged PFPC Inc. (the
"Administrator") to provide certain administrative services pursuant to the
Administrative Services Agreement. The Portfolio pays out of its own assets the
fee paid to the Administrator computed at the rate of 0.10% per annum of the
first $200 million of the Portfolio's average daily net assets, 0.07% per annum
of the next $200 million of the Portfolio's average daily net assets, 0.05% per
annum of the next $200 million of the Portfolio's average daily net assets and
0.03% per annum of any amounts over $600 million with a minimum annual fee of
$108,000. PFPC has agreed to provide the services under the Administrative
Services Agreement for a minimum annual fee of $75,000 for the period March 1,
1997 to September 30, 1997. PFPC charges an additional fee of $1,500 per month
for services provided with respect to Class C shares.
The Portfolio is responsible to the Investment Manager and the
Administrator for out-of-pocket expenses incurred on behalf of the Portfolio,
including, but not limited to, postage and mailing, telephone, telex, overnight
and delivery service, outside independent pricing services, daily report
transmissions, if any, and record retention/storage incurred by the Investment
Manager or Administrator in connection with their services.
Certain Emerging Market countries require a local entity to provide
administrative services for direct investments by foreigners. Where required by
local law, the Portfolio intends to retain a local entity to provide such
administrative services. In such event, the local administrator will be paid a
fee by the Portfolio for its services.
Distributor
Bear Stearns serves as the distributor of shares of the Portfolio
pursuant to a Distribution Agreement with the Trust dated March 1, 1993. The
Distribution Agreement provides that Bear Stearns may render similar services to
others so long as its services under such Agreement are not impaired thereby and
that the Trust will indemnify Bear Stearns against certain liabilities. The
continuation of the Distribution Agreement was approved by the Trustees,
including a majority of the disinterested Trustees, at the meeting of the Board
of Trustees convened on January 28, 1997.
Pursuant to the Distribution Agreement, after the Prospectus and
periodic reports have been prepared, set in type and mailed to Shareholders,
Bear Stearns will pay for the printing and distribution of copies thereof used
in connection with offering the shares to prospective investors. Bear Stearns
will also pay for other supplementary sales literature and advertising costs.
Expenses
Except as set forth in the Portfolio's Prospectus under "Management of
the Portfolio," the Trust, on behalf of the Portfolio, is responsible for the
payment of the Portfolio's expenses. The expenses to be borne by the Portfolio
will include: organizational costs, taxes, interest, loan commitment fees,
interest and distributions paid on securities sold short, brokerage fees and
commissions, if any, fees of board members who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of BSFM,
or its affiliates, Commission fees, state Blue Sky qualification fees, advisory,
administrative and fund accounting fees, charges of custodians, transfer and
dividend disbursing agents' fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of maintaining the
Portfolio's existence, costs of independent pricing services, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses),
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<PAGE>
costs of shareholders' reports and meetings, costs of preparing and printing
certain prospectuses and statements of additional information, and any
extraordinary expenses.
Transfer Agent
Under a Transfer Agency Agreement with the Trust on behalf of the
Portfolio, PFPC Inc., Bellevue Corporate Center, 103 Bellevue Parkway,
Wilmington, Delaware 19809 serves as transfer and dividend disbursing agent for
the Portfolio (the "Transfer Agent"). The Transfer Agent has undertaken with the
Trust with respect to the Portfolio to (i) record the issuance, transfer and
redemption of shares, (ii) provide confirmations of purchases and redemptions,
and monthly statements, as well as certain other statements, (iii) provide
certain information to the Trust's custodian in connection with redemptions,
(iv) provide dividend crediting and certain disbursing agent services, (v)
maintain Shareholder accounts, (vi) provide certain state Blue Sky and other
information, (vii) provide Shareholders and certain regulatory authorities with
tax related information, (viii) respond to Shareholder inquiries, and (ix)
render certain other miscellaneous services.
Custodian
Brown Brothers Harriman & Co. (the "Custodian"), 40 Water Street,
Boston, Massachusetts 02109, is the custodian of the Portfolio's securities and
cash and also maintains the Portfolio's accounting records. The Custodian has
appointed sub-custodians from time to time to hold certain securities purchased
by the Portfolio in foreign countries and to hold cash and currencies for the
Portfolio.
Independent Auditors
The Board of Trustees have selected Deloitte & Touche LLP as
independent auditors of the Trust for the fiscal year ending March 31, 1998. In
addition to audit services, Deloitte & Touche LLP reviews the Portfolio's
Federal and state tax returns and provides consultation and assistance on
accounting, internal control and related matters.
DISTRIBUTION PLAN
As described in its Prospectus, the Portfolio has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act. See "Distribution Plan" in the Prospectus.
The Plan has been approved by a vote of the Board of Trustees with
respect to Class A and Class C Shares, including a majority of the Trustees who
are not interested persons of the Trust and have no direct or indirect financial
interest in the operation of the Plan, cast in person at a meeting called for
the purpose of voting on the Plan. The annual compensation payable under the
Plan is 0.35% and 0.75% per annum of the average daily net asset value of Class
A shares and Class C shares, respectively, of the Portfolio.
As set forth above, the Portfolio pays 0.35% and 0.75% per annum of the
average daily net asset value of Class A shares and Class C shares,
respectively, of the Portfolio to Bear Stearns for distribution activities on
behalf of the Portfolio in connection with the sale of its shares. Presently,
Bear Stearns pays the entire amount of the distribution fee to Authorized
Dealers, if any, as a service fee for providing services in connection with the
sale of the Portfolio's shares. Service fees are payments to broker-dealers who
are members of the NASD for services rendered to investors, similar to account
maintenance fees. The NASD limit on Rule 12b-1 fees paid by investors of a fund
that charges a service fee is 6.25% of new sales, plus interest. To the extent
such fee is not paid to such dealers, Bear Stearns may retain such fee as
compensation for its services and expenses of distributing the Portfolio's
shares. If such fee exceeds its expenses, Bear Stearns may realize a profit from
these arrangements.
The Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Bear Stearns. If the Plan were terminated by the Board of Trustees
and no successor plan were adopted, the Trustees would cease to make
distribution payments to Bear
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<PAGE>
Stearns and Bear Stearns would be unable to recover the amount of any of its
unreimbursed distribution expenditures. However, Bear Stearns does not intend to
make distribution expenditures at a rate that materially exceeds the rate of
compensation received under the Plan.
The types of expenses for which Bear Stearns and Authorized Dealers may
be compensated under the Plan include compensation paid to and expenses incurred
by their respective officers, employees and sales representatives, allocable
overhead, telephone and travel expenses, the printing of prospectuses and
reports for other than existing Shareholders, preparation and distribution of
sales literature, advertising of any type and all other expenses incurred in
connection with activities primarily intended to result in the sale of shares of
the Portfolio.
Under the Plan, Bear Stearns, as distributor of the Portfolio's shares,
will provide to the Board of Trustees for its review, and the Board will review
at least quarterly, a written report of the services provided and amounts
expended by Bear Stearns under the Plan and the purposes for which such services
were performed and expenditures were made.
The Plan in its amended and restated form was approved by the Board of
Trustees, including the "non-interested" Trustees, on January 28, 1997. Under
its terms, the Plan remains in effect from year to year, provided such
continuance is approved annually by a vote of the Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan (the
"non-interested Trustees"). The Plan may not be amended to increase materially
the amount to be spent for the services described therein as to the Portfolio
without approval of a majority of the outstanding voting securities of the
Portfolio. All material amendments of the Plan must also be approved by the
Board of Trustees of the Trust in the manner described above. The Plan may be
terminated at any time without payment of any penalty by a vote of a majority of
the "non-interested" Trustees or by vote of a majority of the outstanding voting
securities of the shares of the Portfolio. So long as the Plan is in effect, the
selection and nomination of "non-interested" Trustees shall be committed to the
discretion of the "non-interested" Trustees. The Board of Trustees has
determined that in their judgment there is a reasonable likelihood that the Plan
will benefit the Portfolio and the holders of its Class A and Class C Shares.
For the period from May 3, 1993 (commencement of investment operations) through
March 31, 1994 and the fiscal year ended March 31, 1995, Bear Stearns earned
$107,662 and $97,893, respectively, under the prior 12b-1 plan, pursuant to
which the compensation payable thereunder was at a rate of 0.25% per annum of
the average daily net assets of the Class A Shares of the Portfolio. For the
fiscal years ended March 31, 1996, and March 31, 1997, Bear Stearns earned
$99,038 and $110,830, respectively, pursuant to which the compensation payable
thereunder was at a rate of 0.35% per annum of the average daily net assets of
the Class A Shares of the Portfolio. For the period July 26, 1995 (commencement
of initial public offering) through March 31, 1996 and for the fiscal year ended
March 31, 1997, Bear Stearns earned $452 and $9,356, respectively, pursuant to
which the compensation payable thereunder was at a rate of 0.75% per annum of
the average daily net assets of the Class C Shares of the Portfolio.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees, the
Investment Manager is responsible for the execution of the Portfolio's
transactions and the allocation of brokerage transactions for the Portfolio. In
executing portfolio transactions, the Investment Manager seeks to obtain the
best net results for the Portfolio, taking into account such factors as the
price (including the applicable brokerage commission or dealer spread), size of
the order, difficulty of execution and operational facilities of the firm
involved. While the Investment Manager generally seeks reasonably competitive
commission rates, payment of the lowest commission or spread is not necessarily
consistent with obtaining the best results in particular transactions. The
Portfolio paid no brokerage commissions for the fiscal year ended March 31,
1997.
Commission rates for brokerage transactions on foreign stock exchanges
are generally fixed. The reasonableness of any negotiated commission paid by the
Portfolio will be evaluated on the basis of the difficulty involved in
execution, the time taken to conclude the transaction, the extent of the
broker's commitment, if any,
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<PAGE>
of its own capital and the amount involved in the transaction. It should be
noted that commission rates in U.S. markets are negotiated.
In the case of over-the-counter issues, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup,
and the Portfolio will normally deal with the principal market makers unless it
can obtain better terms elsewhere.
The Portfolio does not have any obligation to deal with any broker or
group of brokers in the execution of portfolio transactions. The Investment
Manager may, consistent with the interests of the Portfolio and subject to the
approval of the Board of Trustees, select brokers on the basis of the research,
statistical and pricing services they provide to the Portfolio and other clients
of the Investment Manager. Information and research received from such brokers
will be in addition to, and not in lieu of, the services required to be
performed by the Investment Manager. A commission paid to such brokers may be
higher than that which another qualified broker would have charged for effecting
the same transaction, provided that the Investment Manager, as applicable,
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall responsibility of the Investment Manager to the
Portfolio and its other clients and that the total commissions paid by the
Portfolio will be reasonable in relation to the benefits to the Portfolio over
the long-term.
Most of the Debt Obligations to be purchased by the Portfolio generally
trade on the over-the-counter market on a "net" basis without a stated
commission, through dealers acting for their own account and not as brokers. The
Portfolio will primarily engage in transactions with these dealers or deal
directly with the issuer unless a better price or execution could be obtained by
using a broker. Prices paid to a dealer in debt securities will generally
include a "spread," which is the difference between the prices at which the
dealer is willing to purchase and sell the specific security at the time, and
includes the dealer's normal profit.
Investment decisions for the Portfolio and for other investment
accounts managed by the Investment Manager are made independently of each other
in the light of differing conditions. However, the same investment decision may
occasionally be made for two or more of such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated as to amount according to a formula deemed equitable
to each such account. While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Portfolio is
concerned, in other cases it is believed to be beneficial to the Portfolio. The
Portfolio will not purchase securities during the existence of any underwriting
or selling group relating to such security of which Bear Stearns, the Investment
Manager or any affiliated person (as defined in the Investment Company Act)
thereof is a member except pursuant to procedures adopted by the Portfolio's
Board of Trustees pursuant to Rule 10f-3 under the Investment Company Act. Among
other things, these procedures, which will be reviewed by the Trustees annually,
require that the Commission paid in connection with such a purchase be
reasonable and fair, that the purchase be at not more than the public offering
price prior to the end of the first business day after the date of the public
offering and that Bear Stearns, the Investment Manager or any affiliate thereof
not participate in or benefit from the sale to the Portfolio. In no instance
will portfolio securities be purchased from or sold to the Distributor or the
Investment Manager or any affiliated person of the foregoing entities except as
permitted by the exemptive order or by applicable law.
A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses and other transaction costs, which must be borne
directly by the Portfolio. Federal income tax laws may restrict the extent to
which the Portfolio may engage in short term trading of securities. See
"Taxation." The Portfolio anticipates that its annual portfolio turnover rate
will vary from year to year. The portfolio turnover rate is calculated by
dividing the lesser of the Portfolio's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the Portfolio during the year.
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PURCHASE AND REDEMPTION INFORMATION
Payment and Terms of Offering. Shares of the Portfolio are sold at an
offering price equal to the net asset value per share. Class A shares are
subject to a sale load based on the amount of purchase (for purchases less than
$1,000,000, which sales charge may be reduced under the Right of Accumulation.
Purchases of Class A shares in the amount of $1,000,000 or more are subject to a
CDSC of 0.50% on redemptions made within the first year of purchase. Class C
shares are subject to a CDSC of 1.00% on redemptions made within the first year
of purchase. Payment for shares purchased should accompany the purchase order as
described in the Prospectus. Payment must be made by check or money order drawn
on a U.S. bank. Checks or money orders must be payable in U.S. dollars.
As a condition of this offering, if an order to purchase the shares is
cancelled due to nonpayment (for example, on account of a check returned for
"not sufficient funds"), the person who made the order will be responsible for
any loss incurred by the Portfolio by reason of such cancellation, and if such
purchaser is a shareholder, the Portfolio shall have the authority as agent of
the shareholder to redeem shares in his or her account at their then-current net
asset value per share to reimburse the Portfolio for the loss incurred.
Investors whose purchase orders have been cancelled due to nonpayment may be
prohibited from placing future orders.
An order to purchase shares is not binding on the Portfolio until it
has been confirmed in writing by the Transfer Agent (or other arrangements made
with the Portfolio, in the case of orders utilizing wire transfer of funds, as
described above) and payment has been received. To protect existing
shareholders, the Portfolio reserves the right to reject any offer for a
purchase of shares by any individual.
Upon the purchase of shares of the Portfolio, a shareholder investment
account is opened for the investor on the books of the Portfolio and maintained
by the Transfer Agent. This is an open account in which shares owned by the
investor are credited by the Transfer Agent in lieu of issuance of a share
certificate.
Class A shares of the Portfolio may be purchased at net asset value
with the proceeds from the redemption of shares of an investment company sold
with a sales charge or commission and not distributed by Bear Stearns. See "How
to Buy Shares - Class A Shares" in the Prospectus. Bear Stearns may make or
allow additional payments or offer promotional incentives to dealers that sell
Class A shares. Frequently, in connection with promotional incentives to
Authorized Dealers, Bear Stearns will offer to pay Authorized Dealers an amount
up to 1% of the net asset value of shares purchased by the dealer's clients or
customers with such proceeds. The current promotional incentive offered to
Authorized Dealers from April 15, 1996 through June 28, 1996 is indefinitely
extended.
Under certain circumstances set forth in the Prospectus under "How to
Buy Shares - Class A Shares" the purchaser's front-end sales charges can be
waived. In these instances where the front-end sales charges are waived, Bear
Stearns requires documentation, certification or information from the Authorized
Dealer. Any such waiver will be subject to confirmation of the purchaser's
holdings through a check of these records to verify that such purchaser is
eligible for the applicable exemption from the front-end sales charges.
Transfer of Shares. In the event a Shareholder requests a transfer of
any shares to a new registration, such shares will be transferred without sales
charge at the time of transfer.
Redemption. The Portfolio reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption of the
Portfolio's shares by making payment in whole or in part in securities chosen by
the Portfolio and valued in the same way as they would be valued for purposes of
computing the Portfolio's net asset value. If payment is made in securities, a
Shareholder may incur transaction costs in converting these securities into
cash. The Portfolio has selected, however, to be governed by Rule 18f-1 under
the Investment Company Act so that the Portfolio is obligated to redeem its
shares solely in cash up to the lesser of $250,000 or 1% of its net asset value
during any 90-day period for any one Shareholder of the Portfolio.
Under the Investment Company Act, the Portfolio may suspend the right
to redemption or postpone the date of payment upon redemption for any period
during which the New York Stock Exchange (the "NYSE") is
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closed (other than customary weekend and holiday closings), or during which
trading on said Exchange is restricted, or during which (as determined by the
Commission by rule or regulation) an emergency exists as a result of which
disposal or valuation of the Portfolio's securities is not reasonably
practicable, or for such other periods as the Commission may permit. The
Portfolio may also suspend or postpone the recordation of the transfer of its
shares upon the occurrence of any of the foregoing conditions.
A Shareholder of the Portfolio may request redemptions of shares of the
Portfolio by telephone if the optional telephone transaction privilege is
elected on the Account Information Form accompanying the Portfolio's Prospectus.
It may be difficult to implement redemptions by telephone in times of drastic
economic or market changes. In an effort to prevent unauthorized or fraudulent
redemption requests by telephone, the Portfolio employs reasonable procedures
specified by the Trust to confirm that such instructions are genuine. Telephone
transaction procedures include the following measures: requiring the appropriate
telephone transaction election be made on the Portfolios' Account Information
Form requiring the caller to provide the names of the account owners, the
account owner's social security number and name of fund, all of which must match
the Portfolio's records; requiring that the Transfer Agent's service
representative complete a telephone transaction form listing all of the above
caller identification information; requiring that redemption proceeds be sent
only by check to the account owners of record at the address of record, or by
wire only to the owners of record at the bank account of record; sending a
written confirmation for each telephone transaction to the owners of record at
the address of record within five (5) business days of the call; and maintaining
tapes of telephone transactions for six months, if the Portfolio elects to
record shareholder telephone transactions.
For accounts held of record by a broker-dealer, trustee, custodian or
an attorney-in-fact (under a power of attorney), additional documentation or
information regarding the scope of a caller's authority is required. Finally,
for telephone transactions in accounts held jointly, additional information
regarding other account holders is required. The Trust may implement other
procedures from time to time. If reasonable procedures are not implemented, the
Trust may be liable for any loss due to unauthorized or fraudulent transactions.
In all other cases, neither the Portfolio, the Trust nor Bear Stearns will be
responsible for the authenticity of redemption or exchange instructions received
by telephone.
Written redemption instructions which are given directly to the
Transfer Agent require signature guarantees, and duly endorsed stock
certificates, if previously issued, must be received by the Transfer Agent in
proper form and signed exactly as the shares are registered. The Transfer Agent
has adopted standards and procedures pursuant to which signature-guarantees in
proper form generally will be accepted from domestic banks, brokers, dealers,
credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations, as well as from
participants in the New York Stock Exchange Medallion Signature Program, the
Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion
Program ("STAMP"). Such guarantees must be signed by an authorized signatory
thereof with "Signature Guaranteed" appearing with the shareholder's signature.
If the signature is guaranteed by a broker or dealer, such broker or dealer must
be a member of a clearing corporation and maintain net capital of at least
$100,000. Signature-guarantees may not be provided by notaries public.
Redemption requests by corporate and fiduciary shareholders must be accompanied
by appropriate documentation establishing the authority of the person seeking to
act on behalf of the account. Investors may obtain from the Fund or the Transfer
Agent forms of resolutions and other documentation which have been prepared in
advance to assist compliance with the Portfolio's procedures. Any questions with
respect to signature-guarantees should be directed to the Transfer Agent by
calling 1-800-477-1139.
The Portfolio may suspend redemption privileges or postpone the date of
payment for more than seven days after a redemption order is received during any
period (i) when the NYSE is closed other than customary weekend and holiday
closings, or trading on the NYSE is restricted as determined by the Commission,
(ii) when an emergency exists, as defined by the Commission, which makes it not
reasonably practicable for the Portfolio to dispose of securities owned by it or
fairly to determine the value of its assets, or (iii) as the Commission may
otherwise permit.
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SHARES OF THE PORTFOLIO
The Trust's Agreement and Declaration of Trust dated October 15, 1992
(the "Trust Agreement") permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more separate
series, provided each share has a par value of $0.001 per share, represents an
equal proportionate interest in that series with each other share and is
entitled to such dividends out of the income belonging to such series as are
declared by the Trustees.
The Trustees have authority under the Trust Agreement to create and
classify shares of beneficial interest in separate series of the Trust without
further action by Shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized unlimited shares of the Portfolio. The
Trust Agreement further authorizes the Board of Trustees to classify or
reclassify any series or portfolio of unlimited shares into one or more classes.
Pursuant thereto, the Board of Trustees has authorized the issuance of one
series with three classes of shares of the Portfolio: Class A shares, Class C
and Class Y shares.
Shareholders of the Trust have certain rights with respect to calling
special meetings of Shareholders, provided that certain terms of the Trust's
By-Laws are met. Pursuant to the By-Laws, the record holders of at least 20% of
the shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of Shareholders for any purpose except that
the record holders of at least 10% of the shares outstanding may call a special
meeting for the purpose of voting upon the question of removal of any Trustee or
Trustees and Shareholders may, under certain circumstances as permitted by the
Investment Company Act, communicate with other Shareholders in connection with
requiring a special meeting of Shareholders. In addition, the Portfolio is
required to assist Shareholder communication in connection with the calling of
Shareholder meetings to consider removal of a Trustee.
Each share of the Portfolio represents an equal proportionate interest
in the assets belonging to the Portfolio. All Portfolio expenses are based on a
percentage of the Portfolio's aggregate average net assets, except that the
respective distribution and account administration fees relating to a particular
class will be borne exclusively by that class.
Certain aspects of the shares may be altered, after advance notice to
Shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, Shareholders are entitled to share pro rata in the net assets of
the Portfolio available for distribution to such Shareholders. All shares
entitle their holders to one vote per share, are freely transferable and have no
preemptive, subscription or conversion rights.
BSFM provided the initial capital for the Portfolio by purchasing
10,472 shares of the Portfolio for $100,007.60 on January 5, 1993.
Under Massachusetts law, there is a remote possibility that
Shareholders of a business trust could, under certain circumstances, be held
personally liable as partners for the obligations of such trust. The Trust
Agreement contains an express disclaimer of Shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The Trust Agreement provides for indemnification out of Trust
property of any Shareholder charged or held personally liable for obligations or
liabilities of the Trust solely by reason of being or having been a Shareholder
of the Trust and not because of such Shareholder's acts or omissions or for some
other reason. The Trust Agreement also provides that the Trust shall, upon
proper and timely request, assume the defense of any charge made against any
Shareholder as such for any obligation or liability of the Trust and satisfy any
judgment thereon. Thus, the risk of a Shareholder incurring financial loss on
account of Shareholder liability is limited to circumstances in which the Trust
itself would be unable to meet its obligations.
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NET ASSET VALUE
The net asset value per share of each Class of the Portfolio is
calculated by the Portfolio's Administrator as of the close of regular trading
of the NYSE (normally 4:00 p.m., New York time) on each Business Day. "Business
Day" means each weekday when the NYSE is open for business. Net asset value per
share of each Class is calculated by dividing the value of the Portfolio's net
assets represented by such Class (i.e., the value of its assets less its
liabilities) by the total number of shares of such Class outstanding. Currently,
the NYSE is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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 or its delegates as the primary market.
Securities traded in the over-the-counter market and listed on the National
Association of Securities Dealers Automatic Quotation System ("NASDAQ") are
valued at the last trade price listed on the NASDAQ at 4:00 pm; securities
listed on NASDAQ for which there were no sales on that day and other
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 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.
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. The Portfolio's obligation to pay any local taxes on remittances from
Emerging Countries will become a liability on the record date for a dividend
payment and will have the effect of reducing the Portfolio's net asset value.
Because of the differences in operating expenses incurred by each Class, the per
share net asset value of each Class will differ.
Foreign currency exchange rates are generally determined prior to the
close of the NYSE. Occasionally, events affecting the value of foreign
securities and such exchange rates occur between the time at which they are
determined and the close of the NYSE, which events will not be reflected in a
computation of the Portfolio's net asset value. If events materially affecting
the value of such securities or assets or currency exchange rates occurred
during such time period, the securities or assets would be valued at their fair
value as determined in good faith by or under the direction of the Board of
Trustees. The foreign currency exchange transactions of the Portfolio conducted
on a spot basis will be valued at the spot rate for purchasing or selling
currency prevailing on the foreign exchange market. Under normal market
conditions this rate differs from the prevailing exchange rate by an amount
generally less than one-tenth of one percent due to the costs of converting from
one currency to another. In determining the approximate market value of
portfolio investments, the Portfolio may employ outside organizations, which may
use a matrix or formula method that takes into consideration market indices,
matrices, yield curves and other specific adjustments. This may result in the
securities being valued at a price different from the price that would have been
determined had the matrix or formula method not been used. All cash, receivables
and current payables are carried on the Portfolio's books at their face value.
Other assets, if any, are valued at fair value as determined in good faith by
the Board of Trustees.
PERFORMANCE AND YIELD INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Total Return. For purposes of quoting and comparing the performance of
the Portfolio to that of other mutual funds and to stock or other relevant
indices in advertisements or in reports to Shareholders, performance
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may be stated in terms of total return. Under the rules of the Commission, funds
advertising performance must include total return quotes calculated according to
the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the
end of the 1, 5 or 10 year periods
(or fractional portion thereof) of
a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10
year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertisement for publication, and
will cover one, five and ten year periods or a shorter period dating from the
effectiveness of the Portfolio's registration statement. In calculating the
ending redeemable value, the maximum sales load is deducted from the initial
$1,000 payment and all dividends and distributions by the Portfolio are assumed
to have been reinvested at net asset value, as described in the Prospectus, on
the reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return over
the 1, 5 and 10 year periods (or fractional portion thereof) that would equate
the initial amount invested to the ending redeemable value. Any sales loads that
might in the future be made applicable at the time to reinvestments would be
included as would any recurring account charges that might be imposed by the
Portfolio. The Portfolio may also from time to time include in such advertising,
an aggregate total return figure or a total return figure that is not calculated
according to the formula set forth above in order to compare more accurately the
Portfolio's performance with other measures of investment return. For example,
in comparing the Portfolio's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of the Standard & Poor's 500
Stock Index or the Dow Jones Industrial Average, as appropriate, the Portfolio
may calculate its aggregate and/or average annual total return for the specified
periods of time by assuming the investment of $1,000 in Portfolio shares and
assuming the reinvestment of each dividend or other distribution at net asset
value on the reinvestment date. The Portfolio does not, for these purposes,
deduct from the initial value invested any amount representing sales charges
with respect to Class A shares and any amount representing any applicable CDSC
with respect to Class C shares. The Portfolio will, however, disclose the
maximum sales charge and will also disclose that the performance data do not
reflect sales charges and that inclusion of sales charges would reduce the
performance quoted. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under the
Commission rules, and all advertisements containing performance data will
include a legend disclosing that such performance data represent past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The total return calculated using the above method for the fiscal year
ended March 31, 1997 was 28.49% total return for the Class A shares and 32.97%
for the Class C shares respectively.
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Yield. The Portfolio may also advertise their yield. Under the rules of
the Commission, the Portfolio advertising yield must calculate yield using the
following formula:
YIELD = 2[(a-b)/cd + 1)^6 - 1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
Under the foregoing formula, yield is computed by compounding
semi-annually, the net investment income per share earned during a 30 day period
divided by the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by the Portfolio, the formula generally
calls for amortization of the discount or premium; the amortization schedule
will be adjusted monthly to reflect changes in the market values of the debt
obligations.
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yields will fluctuate, they cannot be compared with
yields on savings accounts or other investment alternatives that provide an
agreed to or a guaranteed fixed yield for a stated period of time. However,
yield information may be useful to an investor considering temporary investments
in money market instruments. In comparing the yield of one money market fund to
another, consideration should be given to each fund's investment policies,
including the types of investments made, lengths of maturities of the Portfolio
securities (the method used by the fund to compute the yield methods may differ)
and whether there are any special account charges which may reduce the effective
yield.
The yields on certain obligations are dependent on a variety of
factors, including general money market conditions, conditions in the particular
market for the obligation, the financial condition of the issuer, the size of
the offering, the maturity of the obligation and the ratings of the issue. The
ratings of Moody's and S&P represent their respective opinions as to the quality
of the absolute standards of quality. Consequently, obligations with the same
rating, maturity and interest rate may have different market prices. In
addition, subsequent to its purchase by the Portfolio, an issue may cease to be
rated or may have its rating reduced below the minimum required for purchase. In
such an event, the Portfolio's Investment Manager will consider whether the
Portfolio should continue to hold the obligation.
CODE OF ETHICS
The Trust, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Trust must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Trust and employees of the
Trust and BSFM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security being purchased or sold, or being
considered for purchase or sale, by the Portfolio, without prior approval by the
Trust or without the applicability of certain exemptions; (2) the recommendation
of a securities transaction without disclosing his or her interest in the
security or issuer of the security; (3) the commission of fraud in connection
with the purchase or sale of a security held by or to be acquired by the
Portfolio; (4) the purchase of any securities in an initial public offering or
private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Trust; and (5) the acceptance of gifts of more
than a de minimus value from those doing business with or on behalf of the
Portfolio. Certain transactions are exempt from item (1) of the previous
sentence, including: (1) purchases or sales on the account of an access person
that are not under the control of or that are non-volitional with respect to
that person; (2) purchases or sales of securities not eligible for purchase or
sale by the Portfolio; (3) purchases or sales relating to rights issued by an
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issuer pro rata to all holders of a class of its securities; and (4) any
securities transaction, or series of related transactions, involving 500 or
fewer shares of an issuer having a market capitalization greater than $1
billion.
The Code of Ethics specifies that access persons shall place the interests of
the shareholders of the Portfolio first, shall avoid potential or actual
conflicts of interest with the Portfolio, and shall not take unfair advantage of
their relationship with the Portfolio. Under certain circumstances, the
Investment Manager to the Portfolio may aggregate or bunch trades with other
clients provided that no client is materially disadvantaged. Access persons are
required by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Trust who is not an "interested person" (as defined in the Investment Company
Act) of the Trust is not required to report a transaction if such person did not
know or, in the ordinary course of his duties as a trustee of the Trust, should
have known, at the time of the transaction, that, within a 15 day period before
or after such transaction, the security that such person purchased or sold was
either purchased or sold, or was being considered for purchase or sale, by the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
TAXATION
GENERAL TAX CONSEQUENCES TO THE PORTFOLIO AND ITS SHAREHOLDERS
The following is only a summary of certain additional tax
considerations generally affecting the Portfolio and its Shareholders that are
not described in the Portfolio's Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Portfolio or its Shareholders,
and the discussion in this Statement of Additional Information and in the
Portfolio's Prospectus is not intended as a substitute for careful tax planning.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
The Portfolio has elected to be taxed as a regulated investment company
under Part I of Subchapter M of the Code. As a regulated investment company, the
Portfolio is exempt from Federal income tax on its net investment income and
realized capital gains which it distributes to Shareholders, provided that it
distributes an amount equal to at least 90% of its investment company taxable
income (the sum of the net taxable investment income and the excess of net
short-term capital gain over net long-term capital loss), if any, for the year
(the "Distribution Requirement") and satisfies certain other requirements of the
Code that are described below. Distributions of investment company taxable
income made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year will satisfy the Distribution
Requirement. The Distribution Requirement for any year may be waived if a
regulated investment company establishes to the satisfaction of the Internal
Revenue Service that it is unable to satisfy the Distribution Requirement by
reason of distributions previously made for the purpose of avoiding liability
for Federal excise tax (discussed below). In addition to satisfaction of the
Distribution Requirement the Portfolio must derive at least 90% of its gross
income from dividends, interest, certain payments with respect to securities
loans and gains from the sale or other disposition of stock or securities or
foreign currencies, or from other income derived with respect to its business of
investing in such stock, securities, or currencies (the "Income Requirement")
and derive less than 30% of its gross income from the sale or other disposition
of any of the following investments, if such investments were held for less than
three months: (a) stock or securities (as defined in Section 2(a) (36) of the
Investment Company Act); (b) options, futures, or forward contracts (other than
options, futures or forward contracts on foreign currencies); and (c) foreign
currencies (or options, futures or forward contracts on foreign currencies) but
only if such currencies (or options, futures or forward contracts) are not
directly related to the regulated investment company's principal business of
investing in stock or securities (or in options and futures with respect to
stocks or securities) (the "Short-Short Gain Test"). Interest (including accrued
original issue discount and, in the case of debt securities bearing taxable
interest income, "accrued market discount") received by the Portfolio at
maturity or on disposition of a security held for less than three months will
not be treated as gross income derived from the sale or other disposition of
such security for purposes of the Short- Short Gain Test. However, any other
income which is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
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Income derived by a regulated investment company from a partnership or
trust (including a foreign entity that is classified as a partnership or trust
for U.S. federal income tax purposes) will satisfy the Income Requirement only
to the extent such income is attributable to items of income of the partnership
or trust that would satisfy the Income Requirement if they were realized by a
regulated investment company in the same manner as realized by the partnership
or trust.
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of the Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses (the
"Asset Diversification Requirement"). The Internal Revenue Service has taken the
position, in informal rulings issued to other taxpayers, that the issuer of a
repurchase agreement is the bank or dealer from which securities are purchased.
The Portfolio will not enter into repurchase agreements with any one bank or
dealer if entering into such agreements would, under the informal position
expressed by the Internal Revenue Service, cause it to fail to satisfy the Asset
Diversification Requirement.
Distributions of investment company taxable income will be taxable to
Shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any
distribution from the Portfolio in the form of additional shares will be treated
as receiving a taxable distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date.
The Portfolio intends to distribute to Shareholders its excess of net
long-term capital gain over net short-term capital loss ("net capital gain"), if
any, for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to Shareholders as long-term capital gain, regardless of the
length of time the Shareholder has held his shares, whether such gain was
recognized by the Portfolio prior to the date on which a Shareholder acquired
shares of the Portfolio and whether the distribution was paid in cash or
reinvested in shares. The aggregate amount of distributions designated by the
Portfolio as capital gain dividends may not exceed the net capital gain of the
Portfolio for any taxable year, determined by excluding any net long-term
capital loss attributable to transactions occurring after October 31 of such
year and by treating any such loss as if it arose on the first day of the
following taxable year. Such distributions will be designated as capital gain
dividends in a written notice mailed by the Portfolio to Shareholders not later
than 60 days after the close of the Portfolio's respective taxable year. The
Portfolio would incur a federal income tax liability under the Code with respect
to retained net capital gains. Investors should be aware that any loss realized
upon the sale, exchange or redemption of shares held for six months or less will
be treated as a long-term capital loss to the extent any capital gain dividends
have been paid with respect to such shares.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to Shareholders, and all
distributions will be taxable as ordinary dividends to the extent of the
Portfolio's current and accumulated earning and profits. Such distributions will
be eligible for the dividends received deduction in the case of corporate
Shareholders regardless of the source of the Portfolio's income, subject to the
limitations which apply to the dividends received deduction, including the
requirement that the dividends be received on shares held for more than 45 days.
Investors should be aware that any loss realized on a sale of shares of the
Portfolio will be disallowed to the extent an investor repurchases shares of the
Portfolio within a period of 61 days (beginning 30 days before and ending 30
days after the day of disposition of the shares). Dividends reinvested by the
Portfolio in shares within the 61-day period would be treated as a purchase for
this purpose.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that do not distribute with respect to each calendar year an amount
equal to 98% of their ordinary income for the calendar year plus 98% of their
capital gain net income for the 1-year period ending on October 31 of such
calendar year. The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a company is treated
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as having distributed any amount on which it is subject to income tax for any
taxable year ending in such calendar year. Because the Portfolio intends to
distribute all of its taxable income currently, the Portfolio does not
anticipate incurring any liability for this excise tax. However, investors
should note that the Portfolio may in certain circumstances be required to
liquidate investments in order to make sufficient distributions to avoid excise
tax liability.
The Portfolio is expected to invest in both short-term and long-term
emerging markets Debt Obligations with original issue discount and/or market
discount. Original issue discount generally is the excess (if any) of the stated
redemption price of an obligation over its original issue price. Market discount
generally is the excess (if any) of the stated redemption price of an obligation
(or in the case of an obligation issued with original issue discount, its
original issue price plus accreted original issue discount) over the price at
which it is purchased subsequent to original issuance. Original issue discount
is generally required to be included in income on a periodic basis by a holder
as ordinary income. Income attributable to market discount generally is ordinary
income (as opposed to capital gain). A taxpayer may elect to include market
discount in income on a periodic basis as opposed to including market discount
in income upon payment or sale of the obligation. In some cases, the amount of
original issue discount and/or market discount on obligations purchased by the
Portfolio may be significant. The Portfolio has elected to include market
discount in income currently, for both book and tax purposes. Accordingly,
accretion of market discount together with original issue discount, will cause
the Portfolio to realize income prior to the receipt of cash payments with
respect to these securities. In order to distribute this income and maintain its
qualification as a regulated investment company and avoid becoming subject to
federal income or excise tax, the Portfolio may be required to liquidate
portfolio securities that it might otherwise have continued to hold, use its
cash assets or borrow funds on a temporary basis necessary to declare and pay a
distribution to Shareholders. The Portfolio may realize capital gains or losses
from those sales, which would increase or decrease the Portfolio's investment
company taxable income or net capital gain. In addition, any such gains may be
realized on the disposition of securities held for less than three months.
Because of the Short-Short Gain Test, any such gains would reduce the
Portfolio's ability to sell other securities, or certain options, futures or
forward contracts, held for less than three months that it might wish to sell in
the ordinary course of its portfolio management.
Because distributions made in respect of accreted market discount will
be taxable to Shareholders currently as ordinary income, Shareholders may
realize income attributable to market discount on an obligation held by the
Portfolio earlier than if the Shareholder had directly owned such obligation. In
the case of such direct ownership, absent an election by the holder to currently
include market discount in income, market discount income generally would not be
realized by the holder until payment or other disposition of the obligation.
Original issue discount on an obligation held directly by a Shareholder, on the
other hand, generally would have to be included in income on a periodic basis.
In general, distributions by the Portfolio of amounts in respect of accreted
discount should reduce the net asset value of the Portfolio by a corresponding
amount. Therefore, distributions in respect of accreted discount would result in
current income to Shareholders, but in general may also reduce taxable gain (or
increase loss) to a holder by a similar amount in case of a subsequent
disposition by a holder of his or her interest in the Portfolio. In the event
the Portfolio has to liquidate portfolio securities earlier than it otherwise
would have in order to make distributions of accreted discount and the Portfolio
realizes net capital gains from such transactions, the Shareholders may receive
a larger capital gain distribution than they would have in the absence of such
transactions.
The Portfolio will be required in certain cases to withhold and remit
to the United States Treasury 31% of dividends paid to any Shareholder (1) who
has provided either an incorrect tax identification number or no number at all,
(2) who is subject to backup withholding for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Portfolio that he is not subject to backup withholding or that he is an "exempt
recipient." The backup withholding tax is not an additional tax and may be
credited against a Shareholders' regular federal income tax liability.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
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Although the Portfolio expects to continue to qualify as a "regulated
investment company" and to be relieved of all or substantially all Federal
income taxes, depending upon the extent of its activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Portfolio may be subject to the tax laws of such states
or localities.
Certain states exempt from state income taxation, dividends paid by a
regulated investment company that are derived from interest on U.S. government
obligations. The Portfolio will accordingly inform its Shareholders annually of
the percentage, if any, of its ordinary dividends that is derived from interest
on U.S. government obligations. Shareholders should consult with their tax
advisers as to the availability and extent of any applicable state income tax
exemption.
Income received by the Portfolio from sources outside the United States
may be subject to withholding and other taxes imposed by countries other than
the United States. If the Portfolio qualifies as a regulated investment company,
if certain distribution requirements are satisfied and if more than 50% of the
value of the Portfolio's assets at the close of the taxable year consists of
stocks or securities of foreign corporations, the Portfolio will be eligible to
elect for federal income tax purposes and if eligible, intends to file an
election with the Internal Revenue Service to treat any foreign income taxes
paid by the Portfolio that can be treated as income taxes under United States
income tax principles as paid by its Shareholders. However, there is no
guarantee that the Portfolio will be able to do so. For any year that the
Portfolio makes such an election, an amount equal to the foreign income taxes
paid by the Portfolio that can be treated as income taxes under United States
income tax principles will be included in the income of its Shareholders and
each Shareholder will be entitled (subject to certain limitations) to credit the
amount included in his income against such Shareholder's United States tax
liabilities, if any, or to deduct such amount from such Shareholder's United
States taxable income, if any.
Generally, a credit for foreign taxes may not exceed the United States
Shareholder's United States tax attributable to its total foreign source taxable
income. If a regulated investment company makes the election described in the
previous paragraph, the source of the Portfolio's income flows through to its
Shareholders. Thus, dividends and interest received by the Portfolio in respect
of foreign securities will give rise to foreign source income to the
Shareholders. However, certain items of the Portfolio's income, including income
and gains from securities transactions as well as certain foreign currency
gains, may be treated as United States source income to Shareholders.
Accordingly, if the Portfolio recognizes capital gain income which is subject to
foreign income or withholding tax, as described more fully below, United States
Shareholders may not be deemed to receive foreign source income against which
the foreign tax credit could be applied. The overall limitation on a foreign tax
credit is also applied separately to specific categories of foreign source
income. Furthermore, the foreign tax credit is allowed to offset only 90% of any
alternative minimum tax to which a United States Shareholder may be subject. As
a result of these rules, certain United States Shareholders may be unable to
claim a credit for the full amount of their proportionate share of the foreign
taxes paid by the Portfolio. If a United States Shareholder is not able to
credit the foreign tax paid because of the application of the foreign tax credit
limitation described herein, double taxation of such gain could only be
mitigated by deducting the tax paid, which may be subject to the limitations
described above.
Taxation of a Shareholder who, as to the United States, is a foreign
investor (such as a nonresident alien individual, a foreign trust or estate, a
foreign corporation or foreign partnership) depends, in part, on whether the
Shareholder's income from the Portfolio is "effectively connected" with a United
States trade or business carried on by the Shareholder. If the foreign investor
is not a resident alien and the income from the Portfolio is not effectively
connected with a United States trade or business carried on by the foreign
investor, distributions of net investment income and net realized short-term
capital gains will be subject to a 30% (or lower treaty rate) United States
withholding tax. Furthermore, foreign investors may be subject to an increased
United States tax on their income resulting from the Portfolio's election
(described above) to "pass through" amounts of foreign taxes paid by the
Portfolio, but may not be able to claim a credit or deduction with respect to
the foreign taxes treated as having been paid by them. Distributions of net
realized long-term capital gains, amounts retained by the Portfolio which are
designated as undistributed capital gains and gains realized upon the sale of
shares of the Portfolio will not be subject to United States tax unless a
foreign investor who is an individual is physically present in the United
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States for more than 182 days during the taxable year, and, in the case of gain
realized upon the sale of shares of the Portfolio, (i) such gain is attributable
to an office or fixed place of business in the United States, or (ii) such
nonresident alien individual has a tax home in the United States and such gain
is not attributable to an office or place of business located outside the United
States. The Portfolio intends to distribute to Shareholders its net capital
gain, if any, for each taxable year. However, a determination by the Portfolio
not to distribute long-term capital gains may reduce a foreign investor's
overall return from an investment in the Portfolio, since the Portfolio will
incur a United States federal tax liability with respect to retained long-term
capital gains, thereby reducing the amount of cash held by the Portfolio that is
available for distribution, and the foreign investor may not be able to claim a
credit or deduction with respect to such taxes.
In general, if a foreign investor is a resident alien or if dividends
or distributions from the Portfolio are effectively connected with a United
States trade or business carried on by the foreign investor, then dividends of
net investment income, distributions of net short-term and long-term capital
gains, amounts retained by the Portfolio that are designated as undistributed
capital gains and any gains realized upon the sale of shares of the Portfolio
will be subject to United States income tax at the rates applicable to United
States citizens or domestic corporations. If the income from the Portfolio is
effectively connected with a United States trade or business carried on by a
foreign investor that is a corporation, then such foreign investor may also be
subject to the 30% (or lower treaty rate) branch profits tax.
The tax consequences to a foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Under regulations proposed to be effective for dividends paid
after 1997, foreign shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their own tax advisers with respect to
(a) whether their income from the Portfolio is or is not effectively connected
with a United States trade or business carried on by them, (b) whether they may
claim the benefits of an applicable tax treaty and (c) any other tax
consequences to them of an investment in the Portfolio.
Shareholders will be notified annually by the Portfolio as to the
United States federal income tax status of the dividends, distributions and
deemed distributions made by the Portfolio to its Shareholders. Furthermore,
Shareholders will also receive, if appropriate, various written notices after
the close of the Portfolio's taxable year regarding the United States federal
income tax status of certain dividends, distributions and deemed distributions
that were paid (or that are treated as having been paid) by the Portfolio to its
Shareholders during the preceding taxable year.
Distributions also may be subject to additional state, local and
foreign taxes depending on each Shareholder's particular situation.
SPECIAL TAX CONSIDERATIONS
The following discussion relates to the particular Federal income tax
consequences of the investment policies of the Portfolio. The ability of the
Portfolio to engage in options, short sale and futures activities will be
somewhat limited by the requirements for their continued qualification as
regulated investment companies under the Code, in particular the Distribution
Requirement, the Short-Short Gain Test and the Asset Diversification
Requirement.
Straddles
The options transactions that the Portfolio enters into may result in
"straddles" for Federal income tax purposes. The straddle rules of the Code may
affect the character of gains and losses realized by the Portfolio. In addition,
losses realized by the Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the investment company taxable income and net capital gain of the
Portfolio for the taxable year in which such losses are realized. Losses
realized prior to October 31 of any year may be similarly deferred under the
straddle rules in determining the "required distribution" that the
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Portfolio must make in order to avoid Federal excise tax. Furthermore, in
determining its investment company taxable income and ordinary income, the
Portfolio may be required to capitalize, rather than deduct currently, any
interest expense on indebtedness incurred or continued to purchase or carry any
positions that are part of a straddle. The tax consequences to the Portfolio of
holding straddle positions may be further affected by various elections provided
under the Code and Treasury regulations, but at the present time the Portfolio
is uncertain which (if any) of these elections it will make.
Because only a few regulations implementing the straddle rules have
been promulgated by the U.S. Treasury, the tax consequences to the Portfolio of
engaging in options transactions are not entirely clear. Nevertheless, it is
evident that application of the straddle rules may substantially increase or
decrease the amount which must be distributed to Shareholders in satisfaction of
the Distribution Requirement (or to avoid Federal excise tax liability) for any
taxable year in comparison to a fund that did not engage in options
transactions. For purposes of the Short-Short Gain Test, current Treasury
regulations provide that (except to the extent that the short sale rules
discussed below would otherwise apply) the straddle rules will have no effect on
the holding period of any straddle position. However, the U.S. Treasury has
announced that it is continuing to study the application of the straddle rules
for this purpose.
Options and Section 1256 Contracts
The writer of a covered put or call option generally does not recognize
income upon receipt of the option premium. If the option expires unexercised or
is closed on an exchange, the writer generally recognizes short-term capital
gain. If the option is exercised, the premium is included in the consideration
received by the writer in determining the capital gain or loss recognized in the
resultant sale. However, options transactions that the Portfolio enters into, as
well as futures transactions and transactions in forward foreign currency
contracts that are traded in the interbank market entered into by the Portfolio,
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year (i.e., marked-to-market), regardless
of whether a taxpayer's obligations (or rights) under such contracts have
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end marking-to-market of Section 1256 contracts is combined (after
application of the straddle rules that are described above) with any other gain
or loss that was previously recognized upon the termination of Section 1256
contracts during that taxable year. The net amount of such gain or loss for the
entire taxable year is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss, except in the case of marked-to-market forward
foreign currency contracts for which such gain or loss may be treated as
ordinary income or loss. See "Foreign Currency Transactions" below. Such
short-term capital gain (and, in the case of marked-to-market forward foreign
currency contracts, such ordinary income) would be included in determining the
investment company taxable income of the Portfolio for purposes of the
Distribution Requirement, even if it were wholly attributable to the year-end
marking-to-market of Section 1256 contracts that the Portfolio continued to
hold. Investors should also note that Section 1256 contracts will be treated as
having been sold on October 31 in calculating the "required distribution" that
the Portfolio must make to avoid Federal excise tax liability.
The Portfolio may elect not to have the year-end marking-to-market rule
apply to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Portfolio that are not Section 1256 contracts (the "Mixed
Straddle Election"). It is unclear under present law how certain gain that the
Portfolio may derive from trading in Section 1256 contracts for which a Mixed
Straddle Election is not made will be treated for purposes of the "Short-Short
Gain Test."
Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Portfolio qualifies as
a regulated investment company. It is currently unclear, however, who will be
treated as the issuer of a foreign currency instrument or how foreign
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currency options, futures or forward foreign currency contracts will be valued
for purposes of the Asset Diversification Requirement.
Under Code Section 988 special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss. In certain
circumstances where the transaction is not undertaken as part of a straddle, the
Portfolio may elect capital gain or loss treatment for such transactions.
Alternatively, the Portfolio may elect ordinary income or loss treatment for
transactions in futures contracts and options on foreign currency that would
otherwise produce capital gain or loss. In general, gains or losses from a
foreign currency transaction subject to Code Section 988 will increase or
decrease the amount of the Portfolio's investment company taxable income
available to be distributed to Shareholders as ordinary income, rather than
increasing or decreasing the amount of the Portfolio's net capital gain.
Additionally, if losses from a foreign currency transaction subject to Code
Section 988 exceed other investment company taxable income during a taxable
year, the Portfolio will not be able to make any ordinary dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be accreted as a return of capital to Shareholders,
thereby reducing each Shareholder's basis in his shares.
Conversion Transactions
All or a portion of the capital gain from the disposition or other
termination of any position that was part of a "conversion transaction" will
generally be accreted as ordinary income. A conversion transaction is a
transaction, generally consisting of two or more positions taken with regard to
the same or similar property, where substantially all of the taxpayer's return
is attributable to the time value of the taxpayer's net investment in the
transaction. A transaction, however, is not a conversion transaction unless it
also satisfies one of the following four criteria: (1) the transaction consists
of the acquisition of property by the taxpayer and a substantially
contemporaneous agreement to sell the same or substantially identical property
in the future; (2) the transaction is a straddle, within the meaning of Section
1092 (treating stock as personal property); (3) the transaction is one that was
marketed or sold to the taxpayer on the basis that it would have the economic
characteristics of a loan but the interest-like return would be taxed as capital
gain; or (4) the transaction is described as a conversion transaction in
regulations to be promulgated on a prospective basis by the Secretary of the
Treasury.
Subject to regulations to be promulgated by the Secretary of the
Treasury, the amount of gain accreted as ordinary income generally shall not
exceed the amount of interest that would have accrued on the Portfolio's net
investment in the conversion transaction for the relevant period at a yield
equal to 120% of the applicable federal rate as defined in Section 1274(d).
Thus, to the extent that the Portfolio recognizes income from conversion
transactions, Shareholders will be taxed on all or a part of this income at
ordinary rates.
Passive Foreign Investment Companies
If the Portfolio acquires shares in certain foreign investment
entities, called "passive foreign investment companies" (a "PFIC"), the
Portfolio may be subject to United States federal income tax on a portion of any
"excess distribution" received with respect to such shares or on a portion of
any gain recognized upon a disposition of such shares, notwithstanding the
distribution of such income to the Shareholders of the Portfolio. Additional
charges in the nature of interest may also be imposed on the Portfolio in
respect of such federal income taxes. However, in lieu of sustaining the
foregoing tax consequences, the Portfolio may elect to have its investment in
any PFIC taxed as an investment in a "qualified electing fund" (a "QEF"). By
making a QEF election, the Portfolio would be required to include in its income
each year a ratable portion, whether or not distributed, of the ordinary
earnings and net capital gain of the QEF. Any such QEF inclusions would have to
be taken into account by the Portfolio for purposes of satisfying the
Distribution Requirement and the excise tax distribution requirement.
The Internal Revenue Service has issued proposed regulations that would
permit the Portfolio to elect (in lieu of paying deferred tax or making a QEF
election) to mark-to-market annually any PFIC shares that it owned and to
include any gains (but not losses) that it was deemed to realize as ordinary
income. The Portfolio generally
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would not be subject to deferred Federal income tax on any gains that it was
deemed to realize as a consequence of making a mark-to-market election, but such
gains would be taken into account by the Portfolio for purposes of satisfying
the Distribution Requirement and the excise tax distribution requirement. The
proposed regulations indicate that they would apply only prospectively, to
taxable years ending after their promulgation as final regulations.
Short-Short Gain Test
Because of the Short-Short Gain Test, the Portfolio may have to limit
the sale of appreciated (but not depreciated) securities that it has held for
less than three months. The short sale of (including for this purpose the
acquisition of a put option on) (1) securities held on the date of the short
sale or acquired after the short sale and on or before the date of closing
thereof or (2) securities which are "substantially identical" to securities held
on the date of the short sale or acquired after the short sale and on or before
the date of the closing thereof may reduce the holding period of such securities
for purposes of the Short-Short Gain Test.
Any increase in value of a position that is part of a "designated
hedge" will be offset by any decrease in value (whether realized or not) of the
offsetting hedging position during the period of such hedge for purposes of the
Short-Short Gain Test. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of the Short-Short Gain
Test. The Portfolio anticipates engaging in hedging transactions that qualify as
designated hedges. However, because of the failure of the U.S. Treasury to
promulgate regulations as authorized by the Code, it is not clear at the present
time whether this treatment will be available to all of the Portfolio's hedging
transactions. To the extent the Portfolio's transactions do not qualify as
designated hedges, the Portfolio's investments in short sales, options or other
transactions may be limited.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING THE PORTFOLIO AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES
TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
MISCELLANEOUS
Counsel. Mayer, Brown & Platt, 1675 Broadway, New York, New York 10019,
serves as counsel to the Portfolio, the Investment Manager and the Distributor.
Independent Auditors. Deloitte & Touche LLP, Two World Financial
Center, New York, New York 10281, serves as the Portfolio's independent
auditors.
The Prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement and the
exhibits relating thereto, which the Portfolio has filed with the Securities and
Exchange Commission, Washington, D.C., under the Securities Act and the
Investment Company Act to which reference is hereby made.
FINANCIAL STATEMENTS
The Portfolio's Annual Report to Shareholders for the fiscal year ended
March 31, 1997, including the financial statements, accompanying notes and
report of independent auditors appearing therein, is a separate document
supplied with this Statement of Additional Information and is available upon
request by calling 1-800-447- 1139.
BSF-S-004-02
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APPENDIX A
INVESTMENT PRACTICES
A detailed discussion of various hedging and fixed income strategies
that may be pursued by the Investment Manager on behalf of the Portfolio follows
below. The Portfolio will not be obligated to pursue any of these investment
strategies and makes no representation as to the availability of these
techniques at this time or at any time in the future. The Investment Manager may
utilize these investment practices to the extent that they are consistent with
the Portfolio's investment objective and permitted by the Portfolio's investment
limitations and applicable regulatory authorities.
The Portfolio may engage in certain forward, futures, options, forward
foreign exchange contracts, interest rate swaps and other strategies to attempt
to reduce the overall risk of its investments (hedge), adjust investment
exposure, enhance income, or to replicate a fixed income return in markets which
present an attractive interest rate environment but which restrict foreign
investment in fixed income securities; however, the instruments necessary to
engage in such investment practices may not generally be available or may not
provide a perfect hedge and also entail certain risks.
The Portfolio may engage in certain options strategies involving debt
securities and may enter into forward currency contracts in order to attempt to
enhance income or to hedge the Portfolio's investments. The Portfolio also may
use bond index futures contracts, interest rate futures contracts, foreign
currency futures contracts (collectively, "futures contracts" or "futures") and
forward currency contracts, and use options and futures contracts for hedging
purposes or in other circumstances permitted by the CFTC. The foregoing
instruments are sometimes referred to collectively as "Hedging Instruments" and
certain special characteristics of and risks associated with using Hedging
Instruments are discussed below. In addition to the investment guidelines
(described below) adopted by the Board of Trustees to govern investment in
Hedging Instruments, use of these instruments may be subject to the applicable
regulations of the Securities and Exchange Commission (the "Commission"), the
several options and futures exchanges upon which options and futures contracts
are traded, and other regulatory authorities. In addition to the products,
strategies and risks described below, the Investment Manager may become aware of
additional opportunities in connection with options, futures contracts, forward
currency contracts and other hedging techniques. These new opportunities may
become available as the Investment Manager develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
options, futures contracts, forward currency contracts or other techniques are
developed. The Investment Manager may utilize these opportunities to the extent
that they are consistent with the Portfolio's investment objectives and
permitted by the Portfolio's investment limitations and applicable regulatory
authorities.
The following discussion summarizes the principal currency management
strategies involving forward contracts that may be used by the Portfolio. The
Portfolio may engage in hedging strategies, including among others, settlement
hedging, transaction hedging, position hedging, proxy hedging and cross-hedging.
A "settlement hedge" or "transaction hedge" is designed to protect the Portfolio
against an adverse change in foreign currency values between the date a security
is purchased or sold and the date on which payment is made or received. Entering
into a forward contract for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction for a fixed amount of
U.S. dollars "locks in" the U.S. dollar price of the security. Forward contracts
to purchase or sell a foreign currency may also be used by the Portfolio in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by BSFM.
The Portfolio may also use forward contracts to hedge against a decline
in the value of existing investments denominated in a foreign currency. For
example, if the Portfolio owns securities denominated in a particular currency,
it could enter into a forward contract to sell that particular currency in
return for U.S. dollars to hedge against possible declines in the particular
currency's value. Such a hedge, sometimes referred to as a "position hedge,"
would tend to offset both positive and negative currency fluctuations, but would
not offset changes in security values caused by other factors. The Portfolio
could also hedge the position by selling another currency (or
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basket of currencies) expected to perform similarly to a particular currency.
This type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would not hedge
currency exposure as effectively as a direct hedge into U.S. dollars. Proxy
hedges may result in losses if the currency used to hedge does not perform
similarly to the currency in which the hedged securities are denominated. With
regard to the Portfolio's use of proxy hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relating to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying the Portfolio's proxy hedges and the movements in the exchange rates
of the foreign currencies in which the Portfolio assets that are the subject of
such proxy-hedges are denominated.
The Portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting exposure from
U.S. dollars to a foreign currency. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that is
sold, and increase exposure to the currency that is purchased, much as if the
Portfolio had sold a security denominated in one currency and purchased an
equivalent security denominated in another. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the Portfolio to
assume the risk of fluctuations in the value of the currency it purchases.
Successful use of currency management strategies will depend on BSFM's
skill in analyzing currency values. Currency management strategies may
substantially change the Portfolio's investment exposure to changes in currency
exchange rates and could result in losses to the Portfolio if currencies do not
perform as BSFM anticipates. For example, if a currency's value rose at a time
when BSFM had hedged the Portfolio by selling that currency in exchange for
dollars, the Portfolio would not participate in the currency's appreciation. If
BSFM hedges currency exposure through proxy hedges, the Portfolio could realize
currency losses from both the hedge and the security position if the two
currencies do not move in tandem. Similarly, if BSFM increases the Portfolio's
exposure to a foreign currency and that currency's value declines, the Portfolio
will realize a loss. There is no assurance that BSFM's use of currency
management strategies will be advantageous to the Portfolio or that it will
hedge at appropriate times.
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are generally charged
at any stage for trades.
At the maturity of a forward contract, the Portfolio may either accept
or make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
The Portfolio may enter into forward currency contracts to purchase or
sell foreign currencies for a fixed amount of U.S. dollars or another foreign
currency for any lawful purpose. For example, the Portfolio may purchase a
forward currency contract to lock in the U.S. dollar price of a security
denominated in a foreign currency that the Portfolio intends to acquire. In
addition, the Portfolio may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
The cost to the Portfolio of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or commissions
are involved. When the Portfolio enters into a forward currency contract, it
relies on the counterparty to make or take delivery of the underlying currency
at the maturity of the contract. Failure by the counterparty to do so would
result in the loss of any expected benefit of the transaction.
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Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, the Portfolio might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
The Portfolio may also create non-speculative "synthetic" positions. A
synthetic position is deemed not to be speculative if the position is covered by
segregation of short-term liquid assets. A "synthetic position" is the
duplication of a cash market transaction when deemed advantageous by the
Investment Manager for cost liquidity or transactional efficiency reasons. A
cash market transaction is the purchase or sale of a security or other asset for
cash. For example, from time to time, the Portfolio experiences large cash
inflows which may be redeemed from the Portfolio in a relatively short period.
In this case, the Portfolio currently can leave the amounts uninvested in
anticipation of the redemption or the Portfolio can invest in securities for a
relatively short period, incurring transaction costs on the purchase and
subsequent sale. Alternatively, the Portfolio may create a synthetic position by
investing in a futures contract on a security, such as a deutschemark bond or on
a securities index gaining investment exposure to the relevant market while
incurring lower overall transaction costs. Since the financial markets in
emerging countries are not as developed as in the United States, these financial
investments may not be available to the Portfolio and the Portfolio may be
unable to hedge certain risks or enter into certain transactions. The Portfolio
would enter into such transactions if the markets for these instruments were
sufficiently liquid and there was an acceptable degree of correlation to the
cash market. By segregating cash, the Portfolio's features contract position
would generally be no more leveraged or riskier than if it had invested in the
cash market i.e., purchased securities.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Portfolio will in fact be able to close out a forward currency contract
at a favorable price prior to maturity. In addition, in the event of insolvency
of the counterparty, the Portfolio might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Portfolio
would continue to be subject to market risk with respect to the position, and
would continue to be required to maintain a position in securities denominated
in the foreign currency or to maintain cash or securities in a segregated
account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Portfolio might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Unless the Portfolio engages in currency hedging transactions, it will
be subject to the risk of changes in relation to the U.S. dollar of the value of
the Emerging Country currencies in which its assets are denominated. The
Portfolio may from time to time seek to protect, during the period prior to the
remittance, the value of the amount of interest, dividends and net realized
capital gains received or to be received in a local currency that it intends to
remit out of an Emerging Country by investing in high-quality short-term U.S.
dollar-denominated debt securities of such country and/or participating in the
forward currency market for the purchase of U.S. dollars in the country. There
can be no guarantee that suitable U.S. dollar-denominated investments will be
available at the time the Investment Manager wishes to use them to hedge amounts
to be remitted. Moreover, investors should be aware that dollar-denominated
securities may not be available in some or all Emerging Countries, 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.
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A separate account of the Portfolio consisting of cash or liquid assets
equal to the amount of the Portfolio's assets that could be required to
consummate forward contracts, when required under applicable laws, will be
established with the Portfolio's custodian. For the purpose of determining the
adequacy of the assets in the account, the deposited assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional cash or assets will be placed in the account daily so that the value
of the account will equal the amount of such commitments by the Portfolio. The
segregated account will be marked-to-market on a daily basis. Although the
contracts are not presently regulated by the CFTC, the CFTC may in the future
assert authority to regulate these contracts. In such event, the Portfolio's
ability to utilize forward foreign currency exchange contracts may be
restricted.
The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the Portfolio security if
its market value exceeds the amount of foreign currency the Portfolio is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Portfolio to sustain losses on these contracts and transaction costs. The
Portfolio may enter into a forward contract and maintain a net exposure on such
contract only if (1) the consummation of the contract would not obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of the
Portfolio's fund securities or other assets denominated in that currency or (2)
the Portfolio maintains cash or liquid assets in a segregated account in an
amount not less than the value of the Portfolio's total assets committed to the
consummation of the contract which value must be marked to market daily. The
Portfolio will comply with guidelines established by the Commission with respect
to coverage of forward contracts entered into by the Portfolio and, if such
guidelines so require, will set aside liquid assets in a segregated account with
its custodian in the amount prescribed. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, the Investment Manager believes that it is important to
have the flexibility to enter into such forward contracts when it determines
that the best interests of the Portfolio will be served.
At or before the maturity date of a forward contract requiring the
Portfolio to sell a currency, the Portfolio may either sell the portfolio
security and use the sale proceeds to make delivery of the currency or retain
the security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Portfolio will obtain, on the
same maturity date, the same amount of the currency that it is obligated to
deliver. Similarly, the Portfolio may close out a forward contract requiring it
to purchase a specified currency by entering into a second contract entitling it
to sell the same amount of the same currency on the maturity date of the first
contract. The Portfolio would realize a gain or loss as a result of entering
into such an offsetting forward currency contract under either circumstance to
the extent the exchange rate or rates between the currencies involved moved
between the execution dates of the first contract and the offsetting contract.
The cost to the Portfolio of engaging in forward currency contracts
will vary with factors such as the currencies involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees or
commissions are involved. The use of forward currency contracts will not
eliminate fluctuations in the prices of the underlying securities the Portfolio
owns or intends to acquire, but it will fix a rate of exchange in advance. In
addition, although forward currency contracts limit the risk of loss due to a
decline in the value of the hedged currencies, at the same time they limit any
potential gain that might result should the value of the currencies increase.
Although the Portfolio will value its assets daily in terms of U.S.
dollars, the Portfolio does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. The Portfolio may convert foreign
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currency from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency to
the dealer.
The Portfolio generally will not enter into a forward contract with a
term of greater than one year.
Cover for Options and Futures Strategies. The Portfolio generally will
not use leverage in its options and futures strategies. In the case of a
transaction entered into as a hedge, the Portfolio will hold securities,
currencies or other options or futures positions whose values are expected to
offset ("cover") its obligations under the transaction. The Portfolio will not
enter into an option or a futures strategy that exposes the Portfolio to an
obligation to another party unless it owns (1) an offsetting ("covered")
position in securities, currencies or other options or futures contracts or (2)
cash or liquid assets with a value sufficient at all times to cover its
potential obligations. The Portfolio will comply with guidelines established by
the Commission with respect to coverage of option and futures strategies by
mutual funds and, if such guidelines so require, will set aside liquid assets in
a segregated account with its custodian in the amount prescribed. Securities,
currencies or other options or futures positions used for cover and securities
held in a segregated account cannot be sold or closed out while the option or
futures strategy is outstanding, unless they are replaced with similar assets.
As a result, there is a possibility that the use of cover or segregation
involving a large percentage of the Portfolio's assets could impede fund
management or the Portfolio's ability to meet current obligations.
Option Income and Hedging Strategies. The Portfolio may purchase and
write (sell) both OTC and exchange-traded options. Exchange-traded options
generally are issued by a clearing organization affiliated with the exchange on
which the option is listed, which, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between the Portfolio and its counter-party with no clearing organization
guarantee. Thus, when the Portfolio purchases an OTC option, it will rely on the
dealer from which it has purchased the OTC option to make or take delivery of
the securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by the Portfolio, as well as the loss of
the expected benefit of the transaction. Currently, options on debt securities
and most foreign currencies are primarily traded on the OTC market.
The Portfolio may purchase call options on securities that the
Investment Manager intends to include in the Portfolio's portfolio in order to
fix the cost of a future purchase. Call options also may be purchased as a means
of enhancing returns by, for example, participating in an anticipated price
increase of a security on a more limited risk basis than would be possible if
the security itself were purchased. In the event of a decline in the price of
the underlying security, use of this strategy would serve to limit the
Portfolio's potential loss to the option premium paid; conversely, if the market
price of the underlying security increases above the exercise price and the
Portfolio either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid.
The Portfolio may purchase put options on securities in order to
attempt to hedge against a decline in the market value of securities held in its
portfolio or to enhance return. A put option would enable the Portfolio to sell
the underlying security at a predetermined exercise price; thus the potential
for loss to the Portfolio below the exercise price would be limited to the
option premium paid. If the market price of the underlying security were higher
than the exercise price of the put option, any profit the Portfolio realizes on
the sale of the security would be reduced by the premium paid for the put option
less any amount for which the put option may be sold.
The Portfolio may write covered call options on securities in which it
may invest for hedging purposes or to increase income in the form of premiums
received from the purchasers of the options. Because it can be expected that a
call option will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, the Portfolio will
generally write covered call options on securities when the Investment Manager
believes that the premium received by the Portfolio, plus anticipated
appreciation in the market price of the underlying security up to the exercise
price of the option, will be greater than the total appreciation in the price of
the security. The strategy may also be used to provide limited protection
against a decrease in the market price of
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the security in an amount equal to the premium received for writing the call
option less any transaction costs. Thus, in the event that the market price of
the underlying security held by the Portfolio declines, the amount of such
decline will be offset wholly or in part by the amount of the premium received
by the Portfolio. If, however, there is an increase in the market price of the
underlying security and the option is exercised, the Portfolio would be
obligated to sell the security at less than its market value. The Portfolio
would give up the ability to sell the portfolio securities used to cover the
call option while the call option is outstanding. In the case of OTC options
written by the Portfolio, such securities would also be considered illiquid.
Similarly, assets used to "cover" OTC options written by the Portfolio will be
treated as illiquid unless the OTC options are sold to qualified dealers who
agree that the Portfolio may repurchase any OTC options it writes for a maximum
price to be calculated by a formula set forth in the option agreement. The
"cover" for an OTC option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option. In addition, the Portfolio could lose
the ability to participate in an increase in the value of such securities above
the exercise price of the call option because such an increase would likely be
offset by an increase in the cost of closing out the call option (or could be
negated if the buyer chose to exercise the call option at an exercise price
below the securities' current market value).
The Portfolio may write put options. A put option gives the purchaser
of the option the right to sell, and the writer (seller) the obligation to buy,
the underlying security at the exercise price during the option period. So long
as the obligation of the writer continues, the writer may be assigned an
exercise notice by the purchaser of options requiring the writer to make payment
of the exercise price against delivery of the underlying security or take
delivery. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
If the put option is not exercised, the Portfolio will realize income in the
amount of the premium received. This technique could be used to enhance current
return during periods when the Investment Manager expects that the price of the
security will not fluctuate greatly. The risk in such a transaction would be
that the market price of the underlying security would decline below the
exercise price less the premium received, in which case the Portfolio would
expect to suffer a loss.
The Portfolio may purchase put and call options and write put and
covered call options on bond indices in much the same manner as the more
traditional securities options discussed above, except that bond index options
may serve as a hedge against overall fluctuations in the debt securities markets
(or a market sector) rather than anticipated increases or decreases in the value
of a particular security. A bond index assigns a value to the securities
included in the index and fluctuates with changes in such values. Settlement of
bond index options are effected with cash payments and do not involve the
delivery of securities. Thus, upon settlement of a bond index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the bond index.
The effectiveness of hedging techniques using bond index options will depend on
the extent to which price movements in the bond index selected correlate with
price movements of the securities in which the Portfolio invests.
The Portfolio may purchase and write covered straddles on securities or
bond indices. A long straddle is a combination of a call and a put option
purchased on the same security where the exercise price of the put is less than
or equal to the exercise price of the call. The Portfolio would enter into a
long straddle when the Investment Manager believes that it is likely that the
price of the underlying security will be more volatile during the term of the
options than the option pricing implies. A short straddle is a combination of a
call and a put written on the same security where the exercise price of the put
is less than or equal to the exercise price of the call and where the same issue
of security or currency is considered cover for both the put and the call. The
Portfolio would enter into a short straddle when the Investment Manager believes
that it is unlikely the price of the underlying security will be as volatile
during the term of the options as the option pricing implies.
Special Characteristics and Risks of Options Trading. The Portfolio may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If the Portfolio wishes to terminate its obligation to
purchase or sell securities under a put or call option it has written, the
Portfolio may purchase a put or call option of the same series (i.e., an option
identical in its terms to the option previously written); this is known as a
closing purchase transaction. Conversely, in order to terminate its right to
purchase or sell specified securities or currencies under a call or put option
it has purchased, the Portfolio may write an option of the same series as
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the option held; this is known as a closing sale transaction. Closing
transactions essentially permit the Portfolio to realize profits or limit losses
on its options positions prior to the exercise or expiration of the option.
Whether a profit or loss is realized from a closing transaction depends on the
price movement of the underlying security or currency and the market value of
the option.
In considering the use of options to enhance income or to hedge the
Portfolio's investments, particular note should be taken of the following:
(1) The value of an option position will reflect, among other things,
the current market price of the underlying security, or bond index, the time
remaining until expiration, the relationship of the exercise price to the market
price, the historical price volatility of the underlying security, or bond index
and general market conditions. For this reason, the successful use of options as
a hedging strategy depends upon the Investment Manager's ability to forecast the
direction of price fluctuations in the underlying securities or, in the case of
bond index options, fluctuations in the market sector represented by the
selected index.
(2) Options normally have expiration dates of up to 90 days. The
exercise price of the options may be below, equal to or above the current market
value of the underlying securities, bond index or currencies. Purchased options
that expire unexercised have no value. Unless an option purchased by the
Portfolio is exercised or unless a closing transaction is effected with respect
to that position, the Portfolio will realize a loss in the amount of the premium
paid and any transaction costs.
(3) A position in an exchange-listed option may be closed out only on
an exchange that provides a secondary market for identical options. Although the
Portfolio intends to purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any specific time.
Closing transactions may be effected with respect to options traded in the OTC
markets (currently the primary markets for options on debt securities) only by
negotiating directly with the other party to the option contract, or in a
secondary market for the option if such a market exists. Although the Portfolio
will enter into OTC options only with dealers that are expected to be capable of
entering into closing transactions with the Portfolio, there can be no assurance
that the Portfolio will be able to liquidate an OTC option at a favorable price
at any time prior to expiration. In the event of insolvency of the
counter-party, the Portfolio may be unable to liquidate an OTC option.
Accordingly, it may not be possible to effect closing transactions with respect
to certain options, with the result that the Portfolio would have to exercise
those options which it has purchased in order to realize any profit. With
respect to options written by the Portfolio, the inability to enter into a
closing transaction may result in material losses to the Portfolio. For example,
because the Portfolio must maintain a covered position with respect to any call
option it writes on a security, bond index or currency, the Portfolio may not
sell the underlying security or currency (or invest any cash, government
securities or short-term debt securities used to cover a bond index option)
during the period it is obligated under the option. This requirement may impair
the Portfolio's ability to sell the Portfolio security or make an investment at
a time when such a sale or investment might be advantageous.
(4) Bond index options are settled exclusively in cash. If the
Portfolio writes a call option on an index, the Portfolio will not know in
advance the difference, if any, between the closing value of the index on the
exercise date and the exercise price of the call option itself and thus will not
know the amount of cash payable upon settlement. In addition, a holder of a bond
index option who exercises it before the closing index value for that day is
available runs the risk that the level of the underlying index may subsequently
change.
(5) The Portfolio's activities in the options markets may result in
higher fund turnover rates and additional brokerage costs; however, the
Portfolio may also save on commissions by using options as a hedge rather than
buying or selling individual securities in anticipation or as a result of market
movements.
Futures Strategies. The Portfolio may engage in futures strategies to
attempt to reduce the overall investment risk that would normally be expected to
be associated with ownership of the securities in which it invests. This may
involve, among other things, using futures strategies to manage the average
duration of the Portfolio's debt securities. If the Investment Manager wishes to
shorten the average duration of the Portfolio's securities, the
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Portfolio may sell a futures contract. If the Investment Manager wishes to
lengthen the average duration of the Portfolio's securities, the Portfolio may
buy a futures contract.
The Portfolio may use interest rate futures contracts to hedge its fund
against changes in the general level of interest rates and in other
circumstances permitted by the CFTC. The Portfolio may purchase an interest rate
futures contract when it intends to purchase debt securities but has not yet
done so. This strategy may minimize the effect of all or part of an increase in
the market price of the debt securities that the Portfolio intends to purchase
in the future. A rise in the price of the debt securities prior to their
purchase may be either offset by an increase in the value of the futures
contract purchased by the Portfolio or avoided by taking delivery of the debt
securities under the futures contract. Conversely, a fall in the market price of
the underlying debt securities may result in a corresponding decrease in the
value of the futures position. The Portfolio may sell an interest rate futures
contract in order to continue to receive the income from a debt security, while
endeavoring to avoid part or all of the decline in market value of that security
that would accompany an increase in interest rates.
The Portfolio may sell bond index futures contracts in anticipation of
a general market or market sector decline that could adversely affect the market
value of the Portfolio's securities. To the extent that a portion of the
Portfolio's portfolio correlates with a given index, the sale of futures
contracts on that index could reduce the risks associated with a market decline
and thus provide an alternative to the liquidation of securities positions. For
example, if the Portfolio correctly anticipates a general market decline and
sells bond index futures to hedge against this risk, the gain in the futures
position should offset some or all of the decline in the value of the Portfolio.
The Portfolio may purchase bond index futures contracts if a significant market
or market sector advance is anticipated. Such a purchase of a futures contract
would serve as a temporary substitute for the purchase of individual debt
securities, which debt securities may then be purchased in an orderly fashion.
This strategy may minimize the effect of all or part of an increase in the
market price of securities that the Portfolio intends to purchase. A rise in the
price of the securities should be partly or wholly offset by gains in the
futures position.
The Portfolio may also purchase and write covered straddles on interest
rate, foreign currency or bond index futures contracts. A long straddle is a
combination of a call and a put purchased on the same futures contract where the
exercise price of the put option is less than the exercise price of the call
option. The Portfolio would enter into a long straddle when it believes that it
is likely that interest rates or foreign currency exchange rates will be more
volatile during the term of the options than the option pricing implies. A short
straddle is a combination of a call and put written on the same futures contract
where the exercise price of the put option is less than the exercise price of
the call option and where the same security or futures contract is considered
for both the put and the call. The Portfolio would enter into a short straddle
when it believes that it is unlikely that interest rates or foreign currency
exchange rates will be as volatile during the term of the options as the option
pricing implies.
The settlement price of a futures contract is generally a function of
the spot market price of the underlying security and a cost of financing,
adjusted for any interest, dividends or other income received on the underlying
instrument over the life of the contract. It is therefore possible to earn a
return approximating that of debt securities of a similar tenor to that of a
forward contract by security or basket of securities and selling a futures
contract for such security or basket. The Portfolio may enter into such future
strategies, using securities other than Debt Obligations, in cases where (a)
government regulations restrict foreign investment in fixed income securities
but not in other securities, such as common stocks, or commodities; and (b) in
the Investment Manager's opinion both the cash and futures markets are
sufficiently liquid.
Special Characteristics and Risks of Futures Trading. No price is paid
upon entering into a futures contract. Instead, upon entering into a futures
contract, the Portfolio will be required to deposit with its custodian in a
segregated account in the name of the futures broker through whom the
transaction will be effected an amount of liquid assets generally equal to 10%
or less of the contract value. This amount is known as "initial margin." Unlike
margin in securities transactions, margin on futures contracts the Portfolio has
written does not involve borrowing to finance the futures transactions. Rather,
initial margin on futures contracts or on such options is in the nature of a
performance bond or good-faith deposit on the contract that will be returned to
the Portfolio upon termination of the transaction, assuming all contractual
obligations have been satisfied. Under certain circumstances, such as periods of
high volatility, the Portfolio may be required by an exchange to increase the
level of its initial
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margin payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. Subsequent payments, called
"variation margin," to and from the broker, are made on a daily basis as the
value of the futures varies, a process known as "marking to the market." For
example, if the Portfolio purchases a contract and the value of the contract
rises, the Portfolio will receive from the broker a variation margin payment
equal to that increase in value. Conversely, if the value of the futures or
written option position declines, the Portfolio would be required to make a
variation margin payment to the broker equal to the decline in value. Variation
margin does not involve borrowing to finance the futures, but rather represents
a daily settlement of the Portfolio's obligations to or from a clearing
organization.
Holders and writers of futures positions can enter into offsetting
closing transactions, similar to closing transactions on options on securities,
by selling or purchasing, respectively, a futures position with the same terms
as the position held or written. Positions in futures contracts may be closed
only on an exchange or board of trade providing a secondary market for such
futures. The Portfolio will incur brokerage fees and related transaction costs
when it purchases or sells futures contracts and premiums.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract may vary either up or
down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and, therefore, does not limit potential losses because
futures prices could move to the daily limit for several consecutive trading
days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for the Portfolio to close a
position and, in the event of adverse price movements, the Portfolio would have
to make daily cash payments of variation margin (except in the case of purchased
options). However, in the event futures contracts have been used to hedge fund
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
In considering the Portfolio's use of futures contracts, particular
note should be taken of the following:
(1) Successful use by the Portfolio of futures contracts will depend
upon the Investment Manager's ability to predict movements in the direction of
the overall securities, currency and interest rate markets, which requires
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
price level of the underlying instrument or currency but to the anticipated
levels at some point in the future. There is, in addition, the risk that the
movements in the price of the futures contract will not correlate with the
movements in prices of the securities or currencies being hedged. For example,
if the price of the futures contract moves less than the price of the securities
or currencies that are the subject of the hedge, the hedge will not be fully
effective; however, if the price of securities or currencies being hedged has
moved in an unfavorable direction, the Portfolio would be in a better position
than if it had not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, the advantage may be partially offset by
losses on the futures position. In addition, if the Portfolio has insufficient
cash, it may have to sell assets from its portfolio to meet daily variation
margin requirements. Any such sale of assets may or may not be made at prices
that reflect the rising market. Consequently, the Portfolio may need to sell
assets at a time when such sales are disadvantageous to the Portfolio. If the
price of the futures contract moves more than the price of the underlying
securities or currencies, the Portfolio will experience either a loss or a gain
on the futures contract that may or may not be completely offset by movements in
the price of the securities or currencies that are the subject of the hedge.
(2) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the
A-9
<PAGE>
futures markets may occur. Second, because the margin deposit requirements in
the futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of the
underlying securities or currencies instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures contracts over the short term. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage and other investment strategies may result in temporary price
distortions.
(3) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract at any particular time. In
such event, it may not be possible to close a futures position, and in the event
of adverse price movements, the Portfolio would continue to be required to make
variation margin payments.
(4) As is the case with options, the Portfolio's activities in the
futures markets may result in higher fund turnover rates and additional
transaction costs in the form of added brokerage commissions; however, the
Portfolio may save on commissions by using futures contracts or options thereon
as a hedge rather than buying or selling individual securities or currencies in
anticipation or as a result of market movements.
Guideline for Futures. The Portfolio will not purchase or sell futures
contracts if, immediately thereafter, the sum of the amount of initial margin
deposits on the Portfolio's existing futures positions and initial margin
deposits would exceed 5% of the market value of the Portfolio's total assets.
This guideline may be modified by the board without Shareholder vote. Adoption
of this guideline will not limit the percentage of the Portfolio's assets at
risk to 5%.
Interest Rate Swaps. The Portfolio may enter into interest rate swaps
for hedging purposes and non-hedging purposes. Inasmuch as swaps are entered
into for good faith hedging purposes or are offset by a segregated account as
described below, the Portfolio and the Investment Manager believe that swaps do
not constitute senior securities as defined in the Investment Company Act and,
accordingly, will not treat them as being subject to the Portfolio's borrowing
restrictions. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid high grade debt
securities (i.e., securities rated in one of the top three ratings categories by
Moody's or S&P, or, if unrated, deemed by the Investment Manager to be of
comparable credit quality) having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the
Portfolio's custodian. The Portfolio will not enter into any interest rate swap
unless the credit quality of the unsecured senior debt or the claims-paying
ability of the other party thereto is considered to be investment grade by the
Investment Manager. If there is a default by the other party to such a
transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
A-10
<PAGE>
PART C.
OTHER INFORMATION
BEAR STEARNS INVESTMENT TRUST
ITEM 24. Financial Statements and Exhibits.
(a) Financial Statements:
The Financial Statements included in Part A of this
Registration Statement:
-Financial Highlights (Per Share Data and Ratios/Supplemental
Data)
The Financial Statements included in Part B of this
Registration Statement:
-Portfolio of Investments
-Statement of Assets and Liabilities
-Statement of Operations
-Statement of Changes in Net Assets
-Notes to the Financial Statements
(b) Exhibits:
Exhibit
Number Description
1. Agreement and Declaration of Trust of Registrant(a)
2. By-Laws of Registrant(a)
3. None
4. None
5. Form of Investment Management Agreement between Bear Stearns
Investment Trust (on behalf of Emerging Markets Debt Portfolio
(the "Portfolio")) and Bear Stearns Funds Management Inc.(d)
6. Form of Distribution Agreement between Registrant and Bear,
Stearns & Co. Inc.(a)
7. None
8.1.(a) Form of Custodian Agreement between the Portfolio and Brown
Brothers Harriman & Co.(b)
-1-
<PAGE>
8.1.(b) Form of Transfer Agency Services Agreement between Bear
Stearns Investment Trust and Provident Financial Processing
Corporation(b)
9.1. Form of Management Agreement between the Portfolio and Bear
Stearns Funds Management Inc.(a)
9.2. Form of Administrative Services Agreement by and between PFPC
Inc. and Bear Stearns Investment Trust (on behalf of the
Portfolio)(d)
10. Opinion and consent of Mayer, Brown & Platt
11. Consent of Deloitte & Touche LLP, independent auditors
12. None
13. Form of Investment Letter(a)
14. Forms of Individual Retirement Account Forms and Agreements
(c)
15. Form of First Amended and Restated Plan of Distribution
Pursuant to Rule 12b-1(d)
16. Schedule of Computation of Performance Data (e)
17. Financial Data Schedule
18. Rule 18f-3 Plan(f)
18.1 Amended Rule 18f-3 Plan(g)
(a) Incorporated by reference to the Registration Statement on Form N-1A,
filed previously on October 16, 1992.
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A, filed previously on December 28,
1992.
(c) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A, filed previously on September 13,
1993.
(d) Incorporated by reference to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A, filed previously on March 30,
1995.
(e) Incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A, filed previously on May 31, 1996.
(f) Incorporated by reference to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A, filed previously on April 12,
1996.
(g) Incorporated by reference to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A, filed previously on March 31,
1997.
ITEM 25. Persons Controlled by or Under Common Control with Registrant.
Prior to the effectiveness of this Registration Statement, the
Registrant sold 10,472 of its shares of beneficial interest to Bear Stearns
Funds Management Inc. ("BSFM"), a New York corporation. As of May 15, 1997, BSFM
owned 12,645 shares of beneficial interest, including 2,713 shares acquired
through dividends reinvested. BSFM is a wholly owned subsidiary of The Bear
Stearns Companies Inc. The Bear Stearns Companies Inc. is a holding company
which,
-2-
<PAGE>
through its subsidiaries including its principal subsidiary, Bear, Stearns & Co.
Inc., is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors.
ITEM 26. Number of Holders of Securities.
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest at May 15, 1997
----------------------------- ----------------
SERIES 1: The Emerging Markets Debt
Portfolio
Class A Shares.................................... 1,126
Class C Shares.................................... 226
Class Y Shares.................................... 0
ITEM 27. Indemnification.
Indemnification provisions for each of the Registrant's Trustees and
officers and persons who serve at the Trust's request as directors, officers or
trustees of other organizations in which the Trust has any interest as a
shareholder, creditor or otherwise (thereinafter referred to as "Covered
Person") are set forth in Article VI, Section 6.4 of the Registrant's Agreement
and Declaration of Trust. See Item 24(b)1 above. Under this Article, such
persons will not be indemnified for any acts for which indemnification would be
prohibited by the Investment Company Act of 1940 (the "Investment Company Act").
Pursuant to Article VI, Section 6.4 of the Registrant's Agreement and
Declaration of Trust and Section 11 of the Investment Management Agreement,
neither the Investment Manager nor Covered Persons shall be liable for any
action or failure to act except in the case of bad faith, willful misfeasance,
gross negligence or reckless disregard of duties to the Registrant. See Items
24(b)1 and 24(b)5.
"Director and Officer" liability policies purchased by the Trust insure
the Trust's Trustees and officers, subject to the policy's coverage limits and
exclusions and deductibles, against loss resulting from claims by reason of act,
error, omission, misstatement, misleading statement, neglect or breach of duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such trustee,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act, and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that it will apply the indemnification
provision of its Agreement and Declaration of Trust in a manner consistent with
Release 11330 of the Securities and
-3-
<PAGE>
Exchange Commission under the Investment Company Act, so long as the
interpretation of Sections 17(h) and 17(i) of such Act remains in effect.
ITEM 28. Business and Other Connections of Investment Manager.
See "Management of the Portfolio" in the Prospectus and Statement of
Additional Information regarding the business of the investment manager. For
information as to the business, profession, vocation or employment of a
substantial nature engaged in by Bear Stearns Funds Management Inc. or any of
its respective officers and directors during the past two years, reference is
made to Form ADV, filed with the Securities and Exchange Commission under the
Investment Advisers Act of 1940, as amended, by Bear Stearns Funds Management
Inc., herein incorporated by reference.
ITEM 29. Principal Underwriters.
(a) Bear, Stearns & Co. Inc. ("Bear Stearns") acts as principal
underwriter or depositor for the following investment companies:
o Municipal Securities Trust, High Income Series 1
(and Subsequent Series)
o The Bear Stearns Funds
o S&P STARS Funds
(b) Set forth below is a list of each executive officer and director of
Bear Stearns. The principal business address of each such person is 245 Park
Avenue, New York, New York 10167, except as set forth below.
Positions and Offices Positions and
Name with Bear Stearns Offices with Registrant
- ---- ----------------- -----------------------
Directors
Alan C. Greenberg Chairman
James E. Cayne
Warren J. Spector Acting Secretary
Mark E. Lehman
Michael L. Tarnopol
Alan D. Schwartz
John H. Slade Director Emeritus
John L. Knight
Executive Officers
Alan C. Greenberg Chairman of Board
James E. Cayne Chief Executive Officer/President
Michael L. Tarnopol Executive Vice President
Warren J. Spector Executive Vice President
Alan D. Schwartz Executive Vice President
William J. Montgoris Chief Operating Officer/
Chief Financial Officer/
Chief Operations Officer(designation)
-4-
<PAGE>
Positions and Offices Positions and
Name with Bear Stearns Offices with Registrant
- ---- ----------------- -----------------------
Directors
Kenneth L. Edlow Secretary
Michael Minikes Treasurer
Michael J. Abatemarco1/ Controller/Assistant
Secretary
Mark E. Lehman Executive Vice President/
General Counsel
Chief Legal Officer
(designation)
Samuel L. Molinaro, Jr. Senior Vice President
Finance
Frederick B. Casey Assistant Treasurer
ITEM 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act and Rules 31a-1 to 31a-3 promulgated
thereunder are maintained pursuant to the following arrangement:
Bear Stearns Funds Management Inc., the Portfolio's Investment Manager,
shall maintain such records pertaining to the Portfolio as are set forth in
Schedule C of the Investment Management Agreement. Such records shall be
maintained by Bear Stearns Funds Management Inc. at 245 Park Avenue, New York,
New York 10167. See Item 24(b)5.
Records relating to the holders of the shares issued by Registrant are
maintained by the Registrant's Transfer Agent, at 103 Bellevue Parkway,
Wilmington, Delaware 19809.
Brown Brothers Harriman & Co., the Portfolio's Custodian, shall
maintain such records as set forth in the Custodian Agreement. Such records
shall be maintained by Brown Brothers Harriman & Co. at 40 Water Street, Boston,
Massachusetts 02109.
ITEM 31. Management Services.
Registrant is not a party to any management related service contract
not discussed in Part A or Part B of this Form.
ITEM 32. Undertakings.
The undersigned Registrant hereby undertakes to include a discussion of
the Portfolio's performance in the Portfolio's annual report to Shareholders
which will be made available to Shareholders upon request and without charge.
- --------
1/ Michael J. Abatemarco's principal business address is 1 MetroTech Center
North, Brooklyn, New York 11201-3859.
-5-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
requirements for effectiveness of the Amendment to the Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933, as amended and has
duly caused this Post-Effective Amendment No. 8 to its Registration Statement to
be signed on its behalf by the undersigned, thereto duly authorized, in the City
of Chicago, and the State of Illinois, on this 30th day of May, 1997.
Bear Stearns Investment Trust
(Registrant)
By: /s/ Peter B. Fox
----------------------
Peter B. Fox
President and Trustee
Each person whose signature appears below hereby authorizes Frank J.
Maresca his true and lawful attorney-in-fact, with full power of such
attorney-in-fact to sign on his behalf, individually and in each capacity stated
below, any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on this 30th day of May, 1997.
Signatures Title
- ---------- -----
By: /s/ Peter B. Fox
-----------------------
Peter B. Fox President and Trustee
(Chief Executive Officer)
By: /s/ Robert S. Reitzes
-----------------------
Robert S. Reitzes Chairman and Trustee
*By: /s/ M.B. Oglesby, Jr.
-----------------------
M.B. Oglesby, Jr. Trustee
*By: /s/ Peter M. Bren
-----------------------
Peter M. Bren Trustee
-6-
<PAGE>
Signatures Title
- ---------- -----
By:
-----------------------
John R. McKernan, Jr. Trustee
By: /s/ Frank J. Maresca
-----------------------
Frank J. Maresca Vice President
and Treasurer
(Chief Financial Officer
and Chief Accounting Officer)
* Signed by Frank J. Maresca as attorney-in-fact pursuant to a power of
attorney contained in the Registration Statement dated October 16,
1992, Pre-Effective Amendment No. 1 thereto dated December 28, 1992,
Post-Effective Amendment No. 1 thereto dated September 13, 1993 and
Post- Effective Amendment No. 3 thereto dated March 30, 1995.
-7-
<PAGE>
BEAR STEARNS INVESTMENT TRUST
EXHIBIT INDEX
TO
POST-EFFECTIVE AMENDMENT NO. 8
TO
REGISTRATION STATEMENT
ON FORM N-1A
Page Number
In Sequential
Numbering
Exhibit No. Description of Document System
- ----------- ----------------------- -------------
10. Opinion and Consent of Mayer, Brown & Platt
11. Consent of Deloitte & Touche LLP, independent auditors
17. Financial Data Schedule
<PAGE>
[LETTERHEAD OF MAYER, BROWN & PLATT]
EXHIBIT 10
May 30, 1997
Bear Stearns Investment Trust
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
We are delivering this opinion in connection with the registration
pursuant to Rule 24e-2 under the Investment Company Act of 1940, as amended, by
the Bear Stearns Investment Trust, a Massachusetts business trust (the "Trust")
of 556,546 shares of beneficial interest (the "Shares") of the Trust in
Post-Effective Amendment No. 8 to the Trust's Registration Statement on Form
N-1A.
We have examined originals, or copies certified or otherwise identified
to our satisfaction, of such documents and corporate and public records as we
deem necessary as a basis for the opinion hereinafter expressed. With respect to
such examination, we have assumed the genuineness of all signatures appearing on
all documents presented to us as originals, and the conformity to the originals
of all documents presented to us as conformed or reproduced copies. Where
factual matters relevant to such opinion were not independently established, we
have relied upon certificates of appropriate state and local officials, and upon
certificates of executive officers and responsible employees and agents of the
Trust.
This opinion is limited to the Federal laws of the United States and
the laws of the State of Massachusetts. We are admitted to practice in the State
of New York; we are not admitted in the State of Massachusetts. Accordingly, for
purposes of rendering this opinion, we have assumed that the laws of the State
of Massachusetts are substantially similar to the laws of the State of New York.
Based upon the foregoing, it is our opinion that the Shares have been
duly and validly authorized and when sold, paid for and issued as contemplated
by the Registration Statement will be duly and validly issued and fully paid and
nonassessable.
<PAGE>
Bear Stearns Investment Trust
May 30, 1997
Page 2
We hereby consent to the use of this opinion as Exhibit 10 to the
Registration Statement, and to the use of our name as your counsel in connection
with the Registration Statement and in the Prospectus forming a part thereof. In
giving this consent, we do not hereby concede that we come within the categories
of persons whose consent is required by the Securities Act or the General Rules
and Regulations promulgated thereunder.
Very truly yours,
MAYER, BROWN & PLATT
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
Emerging Markets Debt Portfolio
(a Series of Bear Stearns Investment Trust):
We consent to the incorporation by reference in this Post- Effective Amendment
No. 8 to Registration Statement No. 33-53368 of Bear Stearns Investment Trust on
Form N-1A of our report dated May 9, 1997 appearing in the Annual Report for the
year ended March 31, 1997 and to the reference to us under the heading
"Financial Highlights" appearing in the Prospectus, which is a part of such
Registration Statement.
DELOITTE & TOUCHE LLP
New York, New York
May 29, 1997
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This schedule contains summary financial information from Bear Stearns
Investment Trust Registration Statement for the fiscal year March 31,
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</LEGEND>
<CIK> 0000893247
<NAME> BEAR STEARNS INVESTMENT TRUST
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<NUMBER> 011
<NAME> EMERGING MARKETS DEBT PORTFOLIO - CLASS A
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<PERIOD-TYPE> 6-MOS
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<RECEIVABLES> 3797250
<ASSETS-OTHER> 99267
<OTHER-ITEMS-ASSETS> 0
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<PER-SHARE-NAV-BEGIN> 9.02
<PER-SHARE-NII> .85
<PER-SHARE-GAIN-APPREC> 2.10
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<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.14
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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This schedule contains summary financial information from Bear Stearns
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</LEGEND>
<CIK> 0000893247
<NAME> BEAR STEARNS INVESTMENT TRUST
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<NUMBER> 012
<NAME> EMERGING MARKETS DEBT PORTFOLIO - CLASS C
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