T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds and
Bear Stearns Investment Trust
CLASS A, B AND C SHARES
The Bear Stearns Funds and Bear Stearns Investment Trust are separate open-end
management investment companies, known as mutual funds (together the "Funds").
By this Prospectus, the Funds offer Class A, B and C shares of one non-
diversified portfolio, the Emerging Markets Debt Portfolio (the "Debt
Portfolio"), and two diversified portfolios, the Income Portfolio (formerly, the
Total Return Bond Portfolio) and the High Yield Total Return Portfolio (the
"High Yield Portfolio") (each a "Portfolio" and together the "Portfolios"). Each
Portfolio also offers another class of shares (Class Y Shares) which has
different expenses that would affect performance. Investors desiring to obtain
information about this other class should call 1-800-766-4111.
INCOME PORTFOLIO
Seeks high current income consistent with preservation of capital.
HIGH YIELD TOTAL RETURN PORTFOLIO
Seeks total return through high current income and capital appreciation.
EMERGING MARKETS DEBT PORTFOLIO
Seeks high current income by primarily investing in
debt obligations of issuers located in emerging countries, and seeks to
provide capital appreciation.
BEAR STEARNS ASSET MANAGEMENT INC. ("BSAM" or the "Adviser"), a wholly owned
subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's
investment adviser. Bear Stearns Funds Management Inc. ("BSFM"), a wholly owned
subsidiary of The Bear Stearns Companies Inc., is the Administrator of each
Portfolio. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSAM,
serves as each Portfolio's distributor. Bear Stearns is also referred to herein
as the "Distributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT EACH PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Part B (also known as the Statement of Additional Information), dated October
16, 1998, which may be revised from time to time, provides a further discussion
of certain areas in this Prospectus and other matters which may be of interest
to some investors. It has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. For a free copy, write to the address
or call one of the telephone numbers listed under "General Information" in this
prospectus. Additional information, including this Prospectus and the Statement
of Additional Information, may be obtained by accessing the Internet Web site
maintained by the Securities and Exchange Commission (http://www.sec.gov).
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank; are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency; and are subject to
investment risks, including possible loss of the principal amount invested.
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.
October 16, 1998
<PAGE>
Table of Contents
PAGE
Fee Table.................................................................. 3
Financial Highlights....................................................... 6
Alternative Purchase Methods............................................... 9
Description of the Portfolios.............................................. 9
Investment Objectives and Policies......................................... 10
Investment Techniques...................................................... 14
Risk Factors............................................................... 23
Management of the Portfolios............................................... 33
How to Buy Shares.......................................................... 38
Net Asset Value............................................................ 40
Shareholder Services....................................................... 43
How to Redeem Shares....................................................... 44
Dividends and Distributions................................................ 47
Taxes...................................................................... 48
Performance Information.................................................... 50
General Information........................................................ 51
Appendix................................................................... A-1
2
<PAGE>
Fee Table
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
INCOME HIGH YIELD TOTAL RETURN
PORTFOLIO PORTFOLIO
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed on Purchases
(as a percentage of
maximum offering
price)................. 4.50%(1) -- -- 4.50%(1) -- --
Maximum Deferred Sales
Charge Imposed on
Redemptions (as a
percentage of the
amount subject to
charge)................ -- (2) 5.00% 1.00% -- (2) 5.00% 1.00%
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
Advisory Fees (after
fee waiver)............ 0.00%(3) 0.00%(3) 0.00%(3) 0.00%(4) 0.00%(4) 0.00%(4)
12b-1 Fees............. 0.35%(5) 0.75% 0.75% 0.10% 0.75% 0.75%
Other Expenses (after
expense reimbursement). 0.45%(3) 0.70%(3) 0.70%(3) 0.90%(4) 0.90%(4) 0.90%(4)
---- ---- ---- ---- ---- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement). 0.80%(3) 1.45%(3) 1.45%(3) 1.00%(4) 1.65%(4) 1.65%(4)
==== ==== ==== ==== ==== ====
</TABLE>
- ------
See Notes on Page 5.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming a 5% annual return.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class A Shares............... $ 53 $53 $ 69 $ 69
Class B Shares............... 66 15 79 46
Class C Shares............... 25 15 46 46
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class A Shares............... 55 -- 75 --
Class B Shares............... 68 17 85 52
Class C Shares............... 27 17 52 52
- ------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class A Shares............... $ 87 $87 $140 $140
Class B Shares............... 103 79 156 156
Class C Shares............... 79 79 174 174
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class A Shares............... 98 -- 162 --
Class B Shares............... 113 90 178 178
Class C Shares............... 90 90 195 195
</TABLE>
- ------
* Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight in the case of Class B shares.
3
<PAGE>
Fee Table (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT
PORTFOLIO
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of maximum offering price)............... 4.50%(1) -- --
Maximum Deferred Sales Charge Imposed on Redemptions
(as a percentage of the amount subject to charge)... -- (2) 5.00% 1.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)(6)................. 0.28% 0.01% 0.28%
12b-1 Fees.......................................... 0.35%(5) 0.75% 0.75%
Other Expenses (after expense reimbursement)(7)..... 1.12% 1.64% 1.37%
---- ---- ----
Total Portfolio Operating Expenses (after fee waiver
and expense reimbursement)(6)....................... 1.75% 2.40% 2.40%
==== ==== ====
</TABLE>
- ------
See Notes on Page 5.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming a 5% annual return.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO
Class A Shares.......... $ 62 $ -- $ 98 $ --
Class B Shares.......... 75 24 107 75
Class C Shares.......... 34 24 75 75
- -------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO
Class A Shares.......... $136 $ -- $242 $ --
Class B Shares.......... 150 128 257 257
Class C Shares.......... 128 128 274 274
</TABLE>
- ------
* Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight in the case of Class B shares.
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the
Portfolios, 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 you in understanding the costs
and expenses borne by the Portfolios and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For
a description of the expense reimbursement or waiver arrangements in effect, see
"Management of the Portfolios."
4
<PAGE>
- ------
(1) The sales load may also be reduced or eliminated under certain
circumstances. See "How to Buy Shares."
(2) 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 of purchase. See "How to Buy Shares-
Class A Shares."
(3) With respect to Class B and C shares of the Income Portfolio, Other
Expenses include a shareholder servicing fee of 0.25%. With respect to
Class A, B and C shares, BSAM has undertaken to waive its investment
advisory fee and assume certain expenses of the Income Portfolio other than
brokerage commissions, extraordinary items, interest and taxes to the
extent Total Portfolio Operating Expenses exceed 0.80%, 1.45% and 1.45% for
Class A, B and C shares, respectively. Without such fee waiver and expense
reimbursement, Advisory Fees would have been 0.45% for the Income
Portfolio. Other Expenses would have been 1.86% for A shares, 0.73% for B
shares and 1.88% for C shares, and Total Portfolio Operating Expenses would
have been 2.66% for A Shares, 1.93% for B Shares and 3.08% for C Shares.
(4) With respect to Class A, B and C shares of the High Yield Portfolio, Other
Expenses include a shareholder servicing fee of 0.25%. BSAM has undertaken
to waive its investment advisory fee and assume certain expenses of the
High Yield Portfolio other than brokerage commissions, extraordinary items,
interest and taxes. Without such fee waiver and expense reimbursement,
Advisory Fees would have been 0.60% for the High Yield Portfolio. Other
Expenses would have been 1.97% for Class A shares, 1.98% for Class B shares
and 1.97% for Class C shares. Total Portfolio Operating Expenses would have
been 2.67% for Class A shares, 3.33% for Class B shares and 3.32% for Class
C shares.
(5) With respect to Class A shares of the Income and Debt Portfolios, 12b-1
fees include a shareholder servicing fee of 0.25% and a distribution fee of
0.10%. Bear Stearns will waive the distribution fee to the extent that the
Portfolio would otherwise exceed the National Association of Securities
Dealers, Inc. ("NASD") limitations on asset-based sales charges. Pursuant
to NASD rules, the aggregate deferred sales loads and annual distribution
fees may not exceed 6.25% of total gross sales, subject to certain
exclusions. The 6.25% limitation is imposed on the Portfolio rather than on
a per shareholder basis. Therefore, a long-term shareholder of the
Portfolio may pay more in distribution fees than the economic equivalent of
6.25% of such shareholder's investment in such shares. The maximum sales
charge rule is applied separately to each class.
(6) The expense figures have been restated from actual expenses paid during the
fiscal year ended March 31, 1998 to reflect current expense levels. BSAM
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
1.75%, and 2.40% and 2.40% per annum of the average daily net assets of the
Class A shares, Class B shares and Class C shares, respectively. The waiver
of compensation will automatically expire at such time as the Debt
Portfolio has average net assets of $50 million or total operating expenses
of the Debt Portfolio are less than 1.75% per annum of the average daily
net assets, unless BSAM 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 average net assets for Class
A shares, Class B shares and Class C shares. Without such waiver by BSAM,
total operating expenses are estimated to be equal to an annual basis to
2.76%, 4.65% and 3.45% of average net assets for Class A shares, Class B
shares and Class C shares, respectively. See "Management of the
Portfolios".
(7) With respect to the Class B and Class C shares of the Debt Portfolio, Other
Expenses include a distribution fee of 0.10% and a shareholder servicing
fee of 0.25% for personal service and maintenance of accounts. A service
fee is reallocated to NASD member firms for continuous personal service by
such members to investors in the Debt 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 Debt Portfolio
may not exceed 6.25% of total gross sales, subject to certain exclusions.
5
<PAGE>
Financial Highlights
The information in the table below covering each Portfolio's investment results
for the periods indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in each Portfolio's Annual Report for
the fiscal year ended March 31, 1998, which is incorporated by reference into
each Portfolio's Statement of Additional Information, which is available upon
request.
Contained below are per-share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class A, B
and C shares of each Portfolio for the periods indicated. This information has
been derived from information provided in each Portfolio's financial statements.
Further information about performance is contained in the Annual Report, which
may be obtained without charge by writing to the address or calling one of the
telephone numbers listed under "General Information."
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
DISTRI-
NET NET BUTIONS NET
ASSET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, NET UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INVESTMENT GAIN/(LOSS) ON INVESTMENT CAPITAL END OF
OF PERIOD INCOME*(4) INVESTMENTS*(5) INCOME GAINS PERIOD
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO(1)
CLASS Y
For the fiscal year
ended March 31, 1998... $11.14 $0.91 $ 1.17 $(0.92) $(0.30) $12.00
For the fiscal year
ended March 31, 1997... 9.02 0.85 2.10 (0.83) -- 11.14
For the fiscal year
ended March 31, 1996... 6.90 0.91 2.13 (0.92) -- 9.02
For the fiscal year
ended March 31, 1995... 8.98 0.79 (1.85) (0.77) (0.25) 6.90
For the period May 3,
1993 through March 31,
1994................... 9.55 0.66 (0.55) (0.65) (0.03) 8.98
CLASS B
For the period January
12, 1998 through March
31, 1998............... 11.33 0.21 0.61 (0.20) -- 11.95
CLASS C
For the fiscal year
ended March 31, 1998... 11.14 0.97 1.04 (0.90) (0.30) 11.95
For the fiscal year
ended March 31, 1997... 9.04 0.84 2.07 (0.81) -- 11.14
For the period July 26,
1995 through March 31,
1996................... 7.81 0.59 1.32 (0.68) -- 9.04
INCOME PORTFOLIO(2)
CLASS A
For the fiscal year
ended March 31, 1998... 12.03 0.76 0.36 (0.76) (0.02) 12.37
For the fiscal year
ended March 31, 1997... 12.26 0.73 (0.20) (0.73) (0.03) 12.03
For the period April 5,
1995 through March 31,
1996................... 12.00 0.71 0.30 (0.71) (0.04) 12.26
CLASS B
For the period February
2, 1998 through March
31, 1998............... 12.47 0.10 (0.10) (0.10) -- 12.37
CLASS C
For the fiscal year
ended March 31, 1998... 12.03 0.70 0.36 (0.70) (0.02) 12.37
For the fiscal year
ended March 31, 1997... 12.26 0.68 (0.20) (0.68) (0.03) 12.03
For the period April 5,
1995 through March 31,
1996................... 12.00 0.67 0.30 (0.67) (0.04) 12.26
6
<PAGE>
HIGH YIELD TOTAL RETURN
PORTFOLIO(3)
CLASS A
For the period January
2, 1998 through
March 31, 1998......... 12.00 0.26 0.73 (0.26) -- 12.73
CLASS B
For the period January
2, 1998 through March
31, 1998............... 12.00 0.24 0.73 (0.24) -- 12.73
CLASS C
For the period January
2, 1998 through
March 31, 1998......... 12.00 0.24 0.73 (0.24) -- 12.73
</TABLE>
- -----
* Calculated based on 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) Commenced investment operations on May 3, 1993: Class B and C shares
commenced its initial public offering on January 12, 1998 and July 26,
1995, respectively.
(2) Commenced investment operations on April 5, 1995: Class B and C shares
commenced its initial public offering on February 2, 1998 and April 5,
1995, respectively.
(3) Commenced investment operations on January 2, 1998.
(4) Reflects waivers and related reimbursements.
7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
INCREASE/(DECREASE)
NET RATIO OF NET REFLECTED IN
ASSETS, RATIO OF INVESTMENT EXPENSE RATIOS AND NET
TOTAL END OF EXPENSES TO INCOME INVESTMENT INCOME
INVESTMENT PERIOD AVERAGE TO AVERAGE DUE TO WAIVERS AND PORTFOLIO
RETURN(6) (000'S OMITTED) NET ASSETS(4) NET ASSETS(4) RELATED REIMBURSEMENTS TURNOVER RATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
19.31% $33,448 1.75% 7.70% 1.01% 128.91%
33.48 33,185 2.00 7.95 0.80 223.41
46.13 28,860 2.00 10.64 1.18 266.46
(13.07) 28,049 2.00 8.86 0.53 35.01
0.36 45,691 2.00(8) 7.24(8) 0.33(8) 100.85
7.29(7) 566 2.40(8) 7.13(7)(8) 2.25(7)(8) 128.91
18.66 4,317 2.40 7.31 1.05 128.91
32.97 2,583 2.40 7.59 0.64 223.41
25.45(7) 202 2.40(7)(8) 8.72(7)(8) 3.42(7)(8) 266.46
9.43 2,926 0.80 6.13 1.86 244.78
4.40 3,367 0.80 5.99 1.73 262.95
8.54 4,467 0.85(8) 5.76(8) 2.87(8) 107.35
(0.04)(7) 18 1.45(8) 5.22(7)(8) 0.48(7)(8) 244.78
8.92 1,403 1.28 5.60 1.80 244.78
3.99 1,018 1.20 5.57 1.74 262.95
8.13 1,775 1.25(8) 5.38(8) 2.95(8) 107.35
8.30 18,301 1.00(8) 9.14(8) 1.67(8) 139.61
8.13 6,013 1.65(8) 8.46(8) 1.68(8) 139.61
8.13 11,298 1.65(8) 8.46(8) 1.67(8) 139.61
</TABLE>
- -----
(5) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
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. For the Debt Portfolio net realized
and unrealized gain/(loss) on investments include forward foreign currency
exchange contracts and translation of foreign currency related
transactions.
(6) Total investment return does not consider the effects of sales charges 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.
(7) Total investment return and ratios for a class of shares are not
necessarily comparable to those of any other outstanding class of shares,
due to timing differences in the commencement of the initial public
offerings.
(8) Annualized.
8
<PAGE>
Alternative Purchase Methods
By this Prospectus, each Portfolio offers investors three 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 each Portfolio's investment
portfolio.
CLASS A SHARES
Class A shares of each Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 4.50% 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 Debt Portfolio and the Income Portfolio are subject to an annual
distribution and shareholder servicing fee at the rate of 0.35 of 1% of the
value of the average daily net assets of Class A shares. Class A shares of High
Yield Portfolio are subject to an annual distribution fee at the rate of 0.10 of
1% of the average daily net assets of Class A shares. The Class A shares of the
High Yield Portfolio are subject to an annual shareholder servicing fee at the
rate of 0.25 of 1% of the value of the average daily net assets of Class A
shares for fees incurred in connection with the personal service and maintenance
of accounts holding Portfolio shares.
CLASS B SHARES
Class B shares of each Portfolio are sold without an initial sales charge, but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares--Class B Shares." Class B shares of each Portfolio are subject to an
annual distribution fee at the rate of 0.75 of 1% of the average daily net
assets of Class B shares. Class B shares of each Portfolio are subject to an
annual shareholder servicing fee at the rate of 0.25 of 1% of the value of the
average daily net assets of Class B shares for fees incurred in connection with
the personal service and maintenance of accounts holding Portfolio shares. Class
B shares of each Portfolio will convert to Class A shares, based on their
relative net asset values, eight years after the initial purchase. The
distribution and shareholder servicing fees will cause Class B shares to have a
higher expense ratio and to pay lower dividends than Class A shares.
CLASS C SHARES
Class C shares of each Portfolio are subject to a 1% CDSC which is assessed only
if Class C shares are redeemed within one year of purchase. See "How to Redeem
Shares--Class C Shares." Class C shares of each Portfolio are subject to an
annual distribution fee at the rate of 0.75 of 1% of the average daily net
assets of Class C. Class C shares of each Portfolio also are subject to an
annual shareholder servicing fee at the rate of 0.25 of 1% of the value of the
average daily net assets of Class C shares for fees incurred in connection with
the personal service and maintenance of accounts holding Portfolio shares. The
distribution and shareholder servicing fees will cause Class C shares to have a
higher expense ratio and to pay lower dividends than Class A shares.
The decision as to which class of shares is more beneficial to each investor
depends on the amount and the intended length of time of the investor's
investment. Each investor should consider whether, during the anticipated life
of the investor's investment in a Portfolio, the accumulated distribution and
shareholder servicing fees and CDSC, if any, on Class B or 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 net return
of Class A. See "How to Buy Shares--Choosing a Class of Shares."
Description of the Portfolios
GENERAL
Each of the Bear Stearns Funds and Bear Stearns Investment Trust is known as a
"series fund," which is a mutual fund divided into separate portfolios. Each
portfolio is treated as a separate entity for certain purposes under the
Investment Company Act of 1940, as amended (the "1940 Act"), and for other
purposes. A shareholder of one portfolio is not deemed to be a shareholder of
any other portfolio. As described below, for certain matters the Funds'
shareholders vote together as a group; as to others they vote separately by
Portfolio. By this Prospectus, shares of the Debt Portfolio, the Income
Portfolio and the High Yield Portfolio are being offered. From time to time,
other portfolios may be established and sold pursuant to other offering
documents. See "General Information."
9
<PAGE>
NON-DIVERSIFIED STATUS
The Debt Portfolio is a non-diversified portfolio of Bear Stearns Investment
Trust. The Portfolio's classification as a "non-diversified" investment company
means that the proportion of its assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. However, the Portfolio
intends to conduct its operations so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"), which generally requires that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Portfolio's total
assets be invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Portfolio's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets be invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies). Since a relatively high percentage of the Portfolio's assets may be
invested in the securities of a limited number of issuers, some of which may be
within the same industry or economic sector, the Portfolio's portfolio
securities may be more susceptible to any single economic, political or
regulatory occurrence than the portfolio securities of a diversified investment
company.
Investment Objectives and Policies
The investment objectives and principal investment policies of each Portfolio
are described below. Each Portfolio's investment objective cannot be changed
without approval by the holders of a majority (as defined in the 1940 Act) of
such Portfolio's outstanding voting shares. There can be no assurance that a
Portfolio's investment objective will be achieved.
INCOME PORTFOLIO
The Income Portfolio's investment objective is to seek high current income
consistent with preservation of capital.
The Income Portfolio invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds (which it
defines as bonds, debentures and other fixed-income securities). The Portfolio
is permitted to invest in a broad range of investment grade, U.S. dollar
denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of domestic
and foreign issuers. These debt securities include bonds, debentures, notes,
money market instruments (including foreign bank obligations, such as time
deposits, certificates of deposit and bankers' acceptances, commercial paper and
other short-term corporate debt obligations, and repurchase agreements),
mortgage-related securities (including interest-only and principal-only stripped
mortgage-backed securities), asset-backed securities, municipal obligations and
convertible debt obligations. The issuers may include domestic and foreign
corporations, partnerships or trusts, and governments or their political
subdivisions, agencies or instrumentalities. Under normal market conditions, the
Portfolio seeks to provide performance results that equal or exceed the Salomon
Brothers BIG Bond Index, which is a market-capitalization weighted index that
includes U.S. Treasury, Government- sponsored, mortgage and investment grade
fixed-rate corporate fixed-income securities with a maturity of one year or
longer and a minimum of $50 million amount outstanding at the time of inclusion
in the Salomon Brothers BIG Bond Index. As of March 31, 1998, the weighted
average maturity of securities comprising the Salomon Brothers BIG Bond Index
was approximately eight and 1/2 years and their average duration was
approximately four and 1/2 years. Under normal market conditions, the Portfolio
invests in a portfolio of securities with a dollar-weighted average maturity of
approximately seven years.
As a measure of a fixed-income security's cash flow, duration is an alternative
to the concept of "term to maturity" in assessing the price volatility
associated with changes in interest rates. Generally, the longer the duration,
the more volatility an investor should expect. For example, the market price of
a bond with a duration of five years would be expected to decline 5% if interest
rates rose 1%. Conversely, the market price of the same bond would be expected
to increase 5% if interest rates fell 1%. The market price of a bond with a
duration of 10 years would be expected to increase or decline twice as much as
the market price of a bond with a five year duration. Duration measures a
security's maturity in terms of the average time required to receive the present
value of all interest
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and principal payments as opposed to its term to maturity. The maturity of a
security measures only the time until final payment is due; it does not take
account of the pattern of a security's cash flows over time, which would include
how cash flow is affected by prepayments and by changes in interest rates.
Incorporating a security's yield, coupon interest payments, final maturity and
option features into one measure, duration is computed by determining the
weighted average maturity of a bond's cash flows, where the present values of
the cash flows serve as weights. In computing the duration of the Portfolio,
BSAM will estimate the duration of obligations that are subject to prepayment or
redemption by the issuer, taking into account the influence of interest rates on
prepayments, coupon flows and other factors which may affect the maturity of the
security. This method of computing duration is known as effective duration.
BSAM anticipates actively managing the Portfolio's assets in response to changes
in the business cycle. BSAM seeks to identify and respond to phases in the
business cycle--simplistically, the expansion, topping out, recession and trough
phases--and to invest the Portfolio's assets by shifting among market sectors,
maturities and relative credit quality in a way which it believes will achieve
the Portfolio's objective in a relatively conservative manner taking into
account the volatility and risk associated with investing in a portfolio of
relatively longer-term fixed-income securities. While the Portfolio seeks, as
part of its investment objective, to preserve capital, investors should
recognize that the net asset value per share of the Portfolio should be expected
to be more volatile than the net asset value per share of a fund that invested
in portfolio securities with a shorter duration.
At least 65% of the value of the Portfolio's total assets must consist of
securities which, in the case of bonds and other debt instruments, are rated no
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB or higher by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P") or the equivalent by other rating agencies or, if unrated, deemed to be
of comparable quality by BSAM. Up to 25% of the value of the Portfolio's total
assets may consist of securities which, in the case of bonds and other debt
instruments, are rated no lower than Ba or B by Moody's or, BB or B by S&P, or
the equivalent by other rating agencies or, if unrated, deemed to be of
comparable quality by BSAM. The Portfolio may invest in short-term fixed-income
obligations which are rated in the two highest rating categories by Moody's,
S&P, Fitch or Duff. See "Risk Factors--Fixed-Income Securities and High Yield
Securities" below, and "Appendix" in the Statement of Additional Information.
HIGH YIELD TOTAL RETURN PORTFOLIO ("HIGH YIELD PORTFOLIO")
The High Yield Portfolio's investment objective is total return through high
current income and capital appreciation.
The High Yield Portfolio will invest, under normal circumstances, at least 80%
of its total assets in high yield fixed-income securities (as defined below),
including domestic and foreign debt securities, convertible securities and
preferred stocks. The balance of the Portfolio's assets may be invested in any
other securities which BSAM believes are consistent with the Portfolio's
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. The Portfolio is designed for investors seeking to
diversify an all-equity portfolio with securities that offer greater income with
capital appreciation potential. The Portfolio is not a market-timing vehicle.
Securities offering the high current yield and capital appreciation potential
characteristics that the Portfolio seeks are generally found in rapidly growing
companies requiring debt to fund plant expansion plans or pay for acquisitions
and large, well-known companies with a high degree of leverage. These securities
are also generally rated in the medium to lower categories by recognized rating
services. The Portfolio expects to seek high current income by investing at
least 80% of its total assets in "high yield fixed-income securities," which for
this purpose constitute fixed income securities rated Ba or lower by Moody's
Investors Service (Moody's), or BB or lower by Standard & Poor's Ratings Group
(Standard & Poor's) or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO), or unrated securities determined by the
Adviser to be of comparable quality. Corporate bonds rated Ba or lower by
Moody's and BB or lower by Standard & Poor's are considered speculative. The
Portfolio may invest up to 10%, and will normally hold no more than 25% (as a
result of market movements or downgrades), of its assets in bonds rated below
Caa by Moody's or CCC by Standard & Poor's, including bonds in the lowest
ratings categories (C for Moody's and D for Standard and Poor's) and unrated
bonds of comparable quality. Such securities are highly speculative and may be
in default of principal and/or interest payments. A description of corporate
bond ratings is contained in the Appendix to this Prospectus.
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In selecting a security for investment by the Portfolio, BSAM will perform its
own investment analysis and will not rely principally on the ratings assigned by
the rating services, although such ratings will be considered by BSAM. BSAM will
consider, among other things, the financial history and condition, the prospects
and the management of an issuer in selecting securities for the Portfolio. BSAM
will be free to invest in high yield, high risk debt securities of any maturity
and duration, and the interest rates on such securities may be fixed or
floating.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than higher rated securities. Some of such
investments may be non-performing when purchased. See "Risk Factors."
In addition to providing the potential for high current income, high yield
securities may provide the potential for capital appreciation. The Portfolio
will seek capital appreciation by investing in securities which may be expected
by BSAM to appreciate in value as a result of declines in long-term interest
rates or favorable developments affecting the business or prospects of the
issuer, which may improve the issuer's financial condition and credit rating, or
a combination of both.
As stated above, normally at least 80% of the Portfolio's total assets will be
invested in high yield fixed-income securities, including medium- to lower-
rated high yield fixed-income securities and unrated securities of comparable
quality. The balance of the Portfolio's assets may be invested in any other
securities believed by BSAM to be consistent with the Portfolio's investment
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. When prevailing economic conditions cause a narrowing
of the spreads between the yields derived from medium to lower-rated or
comparable unrated securities and those derived from higher rated issues, the
Portfolio may invest in higher-rated fixed-income securities that provide
similar yields but have less risk. Generally, the Portfolio's average weighted
maturity will range from three to twelve years.
EMERGING MARKETS DEBT PORTFOLIO ("DEBT PORTFOLIO")
The Debt Portfolio's investment objective is 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.
The Debt Portfolio considers "Debt Obligations" to include fixed or floating
rate bonds, notes, debentures, commercial paper, loans, 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. 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
Debt Portfolio's investment objective will be achieved.
The Portfolio may invest at least 80% of its total assets in Debt Obligations 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
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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."
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
Debt 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." When BSAM 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.
BSAM 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 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
BSAM'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 its shares 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
Debt 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 BSAM is expected to acquire or utilize on behalf of the Debt Portfolio are
described below.
The Debt 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,
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and other factors. Because the Portfolio can purchase floating rate securities
and securities with short to intermediate term maturities, BSAM 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 BSAM to adjust the Portfolio's
investments as interest rates change to take advantage of the most attractive
segments of the yield curve.
Investment Techniques
Each Portfolio may engage in various investment techniques as described below.
FIXED-INCOME SECURITIES (ALL PORTFOLIOS)
Each Portfolio invests primarily in fixed-income securities. Investors should be
aware that even though interest-bearing securities are investments which promise
a stable stream of income, the prices of such securities typically are inversely
affected by changes in interest rates and, therefore, are subject to the risk of
market price fluctuations. Thus, if interest rates have increased from the time
a security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its cost. In either instance, if the security was purchased at face value
and held to maturity, no gain or loss would be realized. Certain securities
purchased by a Portfolio, such as those with interest rates that fluctuate
directly or indirectly based on multiples of a stated index, are designed to be
highly sensitive to changes in interest rates and can subject the holders
thereof to extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, a Portfolio will
consider all circumstances deemed relevant in determining whether to continue to
hold the security. Holding such securities that have been downgraded below
investment grade can subject a Portfolio to additional risk. Certain securities
purchased by a Portfolio, such as those rated Baa by Moody's or BBB by S&P,
Fitch or Duff, may be subject to such risk with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. Debt securities which are rated Baa by Moody's are
considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily 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 debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
FOREIGN SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in securities of foreign issuers. When a Portfolio
invests in foreign securities, they may be denominated in foreign currencies.
Thus, a Portfolio's net asset value will be affected by changes in exchange
rates. (See "Risk Factors".) Under normal conditions, the High Yield Portfolio
will not invest more than 25% of its total assets in foreign securities.
CONVERTIBLE SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks or other securities 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. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique investment characteristics such as
(1) higher yields than common stocks, but lower yields than comparable
nonconvertible securities, (2) a lesser degree of fluctuation in value than the
underlying stock since they have fixed income characteristics, and (3) the
potential for capital appreciation if the market price of the underlying common
stock increases. Convertible debt securities have characteristics of both fixed
income and equity instruments.
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No Portfolio has the current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment upon
conversion, although it may do so for temporary purposes. A convertible security
might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by a Portfolio is called for redemption, the Portfolio may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party. Under normal conditions,
the High Yield Portfolio and the Debt Portfolio will not invest more than 10% of
their total assets, respectively, in convertible securities.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS (ALL
PORTFOLIOS)
Each Portfolio may invest in zero coupon securities and pay-in-kind bonds. These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. Each Portfolio also may purchase
pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of their interest in
the form of debt or equity securities. The Portfolios will only purchase
pay-in-kind bonds that pay all or a portion of their interest in the form of
debt securities. Zero coupon securities and pay- in-kind bonds may be issued by
a wide variety of corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Portfolios are required to accrue as income each year the
value of securities received in respect of pay-in-kind bonds and a portion of
the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Portfolios will elect similar treatment for any market discount with respect to
debt securities acquired at a discount. Accordingly, the Portfolios may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate current cash to satisfy certain distribution requirements. Under normal
conditions, the High Yield Portfolio will not invest more than 25% of its total
assets in zero coupon securities, pay-in-kind bonds or discount obligations.
NON-DOLLAR DENOMINATED SECURITIES (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and Debt Portfolios may invest in non-dollar denominated
securities. 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. A
Portfolio will invest in short term or floating rate non-dollar denominated
securities when BSAM 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 a Portfolio's non-dollar
denominated securities. Currently, because of high inflation and other factors,
the currencies of the countries in which the Debt 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. BSAM
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
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political data, but will not generally be involved in active currency
forecasting. The Portfolios may or may not hedge or cross hedge its foreign
currency exposure. The High Yield Portfolio may invest up to 25% of its total
assets in non-dollar denominated securities. The Debt Portfolio may invest up to
30% of its total assets in non-dollar denominated securities provided that no
more than 20% of its assets are expected to be invested in Debt Obligations
denominated in the currency of any one country.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (ALL PORTFOLIOS)
Each Portfolio may purchase securities on a when-issued basis. When-issued
transactions arise when securities are purchased by a 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. Each 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. Each Portfolio may enter into offsetting contracts for the
forward sale of other securities that it owns. Although a 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
BSAM deems it appropriate to do so.
The issuance of some of the securities in which the Debt 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 Debt 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.
The High Yield Portfolio may not invest more than 33 1/3% of its total assets in
when-issued securities and forward commitments. There is no overall limit on the
percentage of the Debt Portfolio's assets which may be committed to the purchase
of securities on a when-issued basis; however, the Debt 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 Debt Portfolio's assets committed to such
purchase of securities on a when-issued basis may increase the volatility of its
net asset value.
Each 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 1940 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.
BORROWING AND LEVERAGE (ALL PORTFOLIOS)
The Debt Portfolio may, solely for temporary or emergency purposes, borrow in an
amount up to 15% of its total assets (including the amount borrowed), less all
liabilities and indebtedness other than the borrowing. The Income Portfolio and
the High Yield Portfolio may borrow money to the extent permitted under the 1940
Act. However, the Income Portfolio currently intends to borrow money only in
temporary or emergency (not leveraging) purposes, in an amount up to 15% of the
value of its total assets. A Portfolio may not purchase securities when
borrowings exceed 5% of its total assets. If market fluctuations in the value of
the Debt 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 Debt 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 Debt Portfolio or to pay dividends and
distributions to Shareholders of the Portfolio, in instances where the Debt
Portfolio does not desire to liquidate its portfolio holdings. The Debt
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 a 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,
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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 (ALL PORTFOLIOS)
Each 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. Each 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 BSAM 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 BSAM 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 BSAM and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, the
respective 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, BSAM 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.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
The Portfolios may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies currently include futures contracts and related
options (including interest rate futures contracts and options thereon), options
on securities, financial indices and currencies, and forward currency exchange
contracts. The Portfolios' ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Portfolio Securities"
in the Statement of Additional Information for The Bear Stearns Funds and
"Investment Practices" in the Statement of Additional Information for the Bear
Stearns Investment Trust. New financial products and risk management techniques
continue to be developed and the Portfolios may use these new investments and
techniques to the extent consistent with their investment objective and
policies.
No Portfolio will purchase or sell futures contracts or related options, or
options on stock indices, if immediately thereafter the sum of the amounts of
initial margin deposits on the Portfolio's existing futures and premiums paid
for options exceeds 5% of the Portfolio's total assets. This restriction does
not apply to the purchase and sale of futures contracts and related options made
for "bona fide hedging purposes."
OPTIONS ON SECURITIES, INDICES AND FOREIGN CURRENCIES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered put and call
options on securities, indices and foreign currencies. Each Portfolio may
purchase call options to gain market exposure in a particular sector while
limiting downside risk. Each Portfolio may purchase put options in order to
hedge against an anticipated loss in value of Portfolio securities. The
principal reason for writing covered call options (which are call options with
respect to which a Portfolio owns the underlying security or securities) is to
realize, through the receipt of premiums, a greater return than would be
realized on each Portfolio's securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. A Portfolio may not invest more than 5% of its assets, represented by
the premium paid, in the purchase of call and put options. A Portfolio may not
write covered call or put option contracts in an amount exceeding 20% of its net
assets at the time such option contracts are written. (See "Risk Factors" and
the Statements of Additional Information for additional risk factors).
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FUTURES AND OPTIONS ON FUTURES (ALL PORTFOLIOS)
Each Portfolio may buy and sell futures contracts and related options on
securities indices and related interest rates for a number of purposes. It may
do so to try to manage its exposure to the possibility that the prices of its
portfolio securities and instruments may decline or to establish a position in
the futures or options market as a temporary substitute for purchasing
individual securities or instruments. It may do so in an attempt to enhance its
income or return by purchasing and selling call and put options on futures
contracts on financial indices or securities. It also may use interest rate
futures to try to manage its exposure to changing interest rates. Investments in
futures and options on futures involve certain risks. (See "Risk Factors" and
the Statement of Additional Information.)
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
Each Portfolio may, in seeking to increase its income, lend securities in its
portfolio to securities firms and financial institutions deemed creditworthy by
BSAM. 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 a
Portfolio's investment program and by regulatory agencies and approved by the
Board of Trustees. While the securities loan is outstanding, a 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. Each 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 a Portfolio lends its
portfolio securities will be monitored on an ongoing basis by BSAM pursuant to
procedures adopted and reviewed on an ongoing basis by the Board of Trustees.
The Income Portfolio and the Debt Portfolio may each lend up to 33 1/3% of its
total assets. The High Yield Portfolio may lend up to 30% of its total assets.
The Income and High Yield Portfolios have appointed Custodial Trust Company
(CTC), an affiliate of BSAM, as securities lending agent. CTC receives a fee for
these services.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Each 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 Portfolios to be illiquid.
SHORT SALES (ALL PORTFOLIOS)
Each Portfolio may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales). To complete the transaction,
a Portfolio will borrow the security to make delivery to the buyer. A Portfolio
is then obligated to replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio. Until the
security is replaced, a Portfolio is required to pay to the lender any dividends
or interest which accrue during the period of the loan. To borrow the security,
a Portfolio may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the broker
to the extent necessary to meet margin requirements until the short position is
closed out. Until a Portfolio replaces the borrowed security, it will (a)
maintain in a segregated account cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, at such
a level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current value of the security sold short
and will not be less than the market value of the security at the time it was
sold short or (b) otherwise cover its short position through a short sale
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"against-the-box," which is a short sale in which the Portfolio owns an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short. There are
certain tax implications associated with this strategy. See "Dividends,
Distributions and Taxes."
A Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Portfolio replaces the borrowed security. A Portfolio will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale. Under
normal conditions, a Portfolio will not engage in short sales to the extent that
the Portfolio would be required to segregate with its Custodian, or deposit as
collateral to replace borrowed securities, more than 25% of its net assets. The
Debt Portfolio may not make short sales of securities, except short sales
against the box.
BRADY BONDS (DEBT PORTFOLIO)
"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
1940 Act rules and regulations, Brady bonds are not considered U.S. Government
securities.
The Debt 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
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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--Sovereign Debt."
INDEXED SECURITIES (DEBT PORTFOLIO)
The Debt 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.
INVESTMENT IN OTHER FUNDS (INCOME AND DEBT PORTFOLIOS)
In accordance with the 1940 Act, the Income and Debt Portfolios may each invest
a maximum of up to 10% of the value of its total assets in securities of other
investment companies, and each Portfolio may own up to 3% of the total
outstanding voting stock of any one investment company. In addition, up to 5% of
each Portfolio's total assets may be invested in the securities of any one
investment company. The Debt Portfolio may invest in both investment companies
that are registered under the 1940 Act as well as those that are not required to
be so registered. Investment in other investment companies or vehicles may be
the sole or most practical means by which the Debt 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 1940 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 Debt Portfolio's operations. In addition, special tax considerations may
apply. The Debt Portfolios do not intend to invest in such vehicles or funds
unless, in the judgment of BSAM, the potential benefits of such investment
justify the payment of any applicable premium or sales charge. As an investor in
an investment company, each Portfolio would bear its ratable share of that
investment company's expenses, including its administrative and advisory fees.
At the same time, each Portfolio would continue to pay its own investment
management fees and other expenses; however, BSAM has agreed to waive its fees
to the extent necessary to comply with state securities laws. In addition, BSAM
has agreed to waive its fees to the extent necessary to retain its current
expense cap.
LOANS (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and the Debt Portfolios may each invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a foreign
entity and one or more financial institutions ("Lenders"). The majority of a
Portfolio's investments in Loans in emerging markets is expected to be in the
form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in a Portfolio having a contractual relationship only with
the Lender, not with the borrower government. A Portfolio will have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In connection with purchasing
Participations, a 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 set-off against the borrower, and the Portfolio
may not directly benefit
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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, a Portfolio may be treated
as a general creditor of the Lender and may not benefit from any set- off
between the Lender and the borrower. A Portfolio will acquire Participations
only if the Lender positioned between the Portfolio and the borrower is
determined by BSAM to be creditworthy. Creditworthiness will be judged based on
the same credit analysis performed by BSAM when purchasing marketable
securities. When a Portfolio purchases Assignments from Lenders, the Portfolio
will acquire direct rights against a borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by a
Portfolio as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.
A Portfolio may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Portfolios anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on a Portfolio's ability to dispose of particular
Assignments or Participations 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 borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for a Portfolio
to assign a value to those securities for purposes of valuing the Portfolio and
calculating its net asset value. Under normal conditions, the High Yield
Portfolio will not invest more than 15% of its total assets in Loans and the
Debt Portfolio will not invest more than 20% of its total assets in Loans.
MORTGAGE-RELATED SECURITIES (HIGH YIELD AND INCOME PORTFOLIOS)
The High Yield and Income Portfolios may each invest in mortgage-related
securities, consistent with their investment objectives, that provide funds for
mortgage loans made to residential homeowners. These include securities which
represent interests in pools of mortgage loans made by lenders such as savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled for sale to investors by various governmental,
government-related and private organizations. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Prepayments are caused by repayments of principal resulting from the sale of the
underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect government
guarantees of payments in such pools. However, timely payment of interest and/or
principal of these pools is supported by various forms of insurance or
guarantees, including individual loan, title, pool or hazard insurance. There
can be no assurance that the private insurers can meet their obligations under
the policies. The Portfolios may buy mortgage-related securities without
insurance or guarantees if, through an examination of the loan experience and
practices of the poolers, BSAM determines that the securities meet the
Portfolios investment criteria. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. Under normal conditions, the High Yield Portfolio
will not invest more than 20% of its total assets in mortgage-related
securities.
EQUITY SECURITIES (HIGH YIELD PORTFOLIO)
In seeking to meet its objective, the High Yield Portfolio may invest in
"equity" securities, including distressed securities, as described below. These
securities include foreign and domestic common stocks or preferred stocks,
rights and warrants and debt securities or preferred stock which are convertible
or exchangeable for common stock or preferred stock. To the extent the Portfolio
invests in equity securities, there may be a diminution in the Portfolio's
overall yield. See "Distressed Securities" below. Under normal conditions, the
High Yield Portfolio will not invest more than 20% of its total assets in equity
securities.
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DISTRESSED SECURITIES (HIGH YIELD PORTFOLIO)
The High Yield Portfolio may invest in debt or equity securities of financially
troubled or bankrupt companies (financially troubled issuers) and in debt or
equity securities of companies, that in the view of the Adviser are currently
undervalued, out of favor or price depressed relative to their long-term
potential for growth and income (operationally troubled issuers) (collectively,
"distressed securities"). Investment in distressed securities involves certain
risks. See "Risk Factors." Under normal conditions, the Portfolio will not
invest more than 20% of its total assets in distressed securities.
ASSET-BACKED SECURITIES (INCOME AND HIGH YIELD PORTFOLIOS)
The Income and High Yield Portfolios may invest in asset-backed securities,
which are a form of derivative securities. The securitization techniques used
for asset-backed securities are similar to those used for mortgage-related
securities. These securities include debt securities and securities with
debt-like characteristics. The collateral for these securities has included home
equity loans, automobile and credit card receivables, boat loans, computer
leases, airplane leases, mobile home loans, recreational vehicle loans and
hospital account receivables.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
generally are unsecured and the debtors are entitled to the protection of a
number of state and Federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. The High Yield Portfolio currently intends to invest no more than 5%
of its assets in asset-backed securities.
MUNICIPAL OBLIGATIONS (INCOME AND HIGH YIELD PORTFOLIOS)
Municipal obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivision, agencies and instrumentalities, multistate agencies or
authorities. While, in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain issues of municipal obligations, both taxable and
non-taxable, offer yields comparable, in and some cases, greater than the yields
available on other permissible investments. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Dividends received by shareholders which are attributable to
interest income received by a Portfolio from municipal obligations generally
will be subject to federal income tax. Municipal obligations bear fixed,
floating or variable rates of interest, which are determined in some instances
by formulas under which the municipal obligation's interest rate will change
directly or inversely to changes in interest rates or an index, or multiples
thereof, in many cases subject to a maximum and minimum. The Income Portfolio
currently intends to invest no more than 25% of its assets in municipal
obligations. However, this percentage may be varied from time to time without
shareholder approval. The High Yield Portfolio currently intends to invest no
more than 5% of its assets in municipal obligations.
TEMPORARY STRATEGIES (ALL PORTFOLIOS)
Each Portfolio retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with a Portfolio's investment
objectives, BSAM may employ a temporary defensive investment strategy if it
determines such a strategy is warranted. Under such a defensive strategy, a
Portfolio temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality fixed-income securities or money market instruments of U.S. or foreign
issuers, and most or all of the Portfolio's investments may be made in the
United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of a Portfolio shares
or to meet ordinary daily cash needs, a Portfolio temporarily may hold cash
(U.S. dollars, foreign currencies or multinational currency units) and may
invest any portion of its assets in high quality foreign or domestic money
market instruments (See Appendix B).
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SIMULTANEOUS INVESTMENTS (ALL PORTFOLIOS)
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by BSAM. However, if such other
investment companies or accounts are prepared to invest in, or desire to dispose
of, securities of the type in which a Portfolio invests at the same time as the
Portfolio, available investments or opportunities for sales will be allocated
equitably to each. In some cases, this procedure may adversely affect the size
of the position obtained for or disposed of by a Portfolio or the price paid or
received by the Portfolio.
MISCELLANEOUS TECHNIQUES (ALL PORTFOLIOS)
In addition to the techniques and investments described above, the High Yield
Portfolio may invest in trade claims, depository receipts and depository shares,
and may engage in forward foreign currency exchange contracts, currency swaps,
mortgage swaps, index swaps and interest rate swaps, caps, floors and collars
and reverse repurchase agreements. The Debt Portfolio may engage in forward
foreign currency exchange contracts, interest rate swaps, proxy hedging, cross
hedging, settlement hedging, transaction hedging, position hedging and other
strategies. The Income Portfolio may engage in forward currency contracts,
currency swaps and cross currency hedging.
PORTFOLIO TURNOVER
The Portfolios will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because high yield markets can be
especially volatile, securities of emerging market countries may at times be
held only briefly. Under normal conditions, the portfolio turnover rates for the
Income Portfolio, High Yield Portfolio and Debt Portfolio generally will not
exceed 250%, 150% and 150%, respectively, in any one year. However, the
portfolio turnover rates may exceed this rate when BSAM believes the anticipated
benefits of short-term investments outweigh any increase in transaction costs or
increase in short-term gains. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions or transaction costs.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income.
CERTAIN FUNDAMENTAL POLICIES
Each Portfolio may: (i) borrow money to the extent permitted under the 1940 Act;
and (ii) invest up to 25% of the value of its total assets in the securities of
issuers in a single industry, provided that there is no such limitation on
investments in securities issued or guaranteed by the U.S. Government, its
agencies or sponsored enterprises. Each of the Income Portfolio and the High
Yield Portfolio may also (iii) invest up to 5% of the value of its total assets
in the obligations of any issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested, and securities issued or guaranteed by
the U.S. Government, its agencies or sponsored enterprises may be purchased,
without regard to any such limitation. This paragraph describes certain
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares.
See "Investment Objectives and Management Policies--Investment Restrictions" in
the relevant Portfolio's Statement of Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its
assets, but only to secure permitted borrowings; and (ii) invest up to 15% of
the value of its net assets in repurchase agreements providing for settlement in
more than seven days after notice and in other illiquid securities. In addition,
the Debt Portfolio may purchase securities of any company having less than three
years' continuous operation (including operations of any predecessors) if such
purchase does not cause the value of the Debt Portfolio's investments in all
such companies to exceed 10%, of the value of its total assets. See "Investment
Objectives and Management Policies-- Investment Restrictions" in The Bear
Stearns Funds' Statements of Additional Information and "Investment Objective
and Policies" in the Bear Stearns Investment Trust's Statement of Additional
Information.
Risk Factors
No investment is free from risk. Investing in a Portfolio will subject investors
to certain risks which should be considered. The following risks apply to each
Portfolio to the extent that it engages in the investment practices set forth
below.
NET ASSET VALUE FLUCTUATIONS
No Portfolio's net asset value per share is fixed and should be expected to
fluctuate. Investors should purchase Portfolio shares only as a supplement to an
overall investment program and only if investors are willing to undertake the
risks involved.
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FIXED-INCOME SECURITIES
Investors should be aware that even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities that may be purchased by the
Portfolios, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, the Portfolio
will consider all circumstances deemed relevant in determining whether to
continue to hold the security. Holding such securities that have been downgraded
below investment grade can subject a Portfolio to additional risk. Certain
securities purchased by a Portfolio, such as those rated Baa by Moody's or BBB
by S&P, Fitch or Duff, may be subject to such risk with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated fixed-income securities. Debt securities which are rated Baa by Moody's
are considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily 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 debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Funds' Board of Trustees. In accordance with
such guidelines, BSAM will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information.
FOREIGN SECURITIES
Foreign securities involve certain risks, which should be considered carefully
by an investor in the Portfolios. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company or government than about a domestic company or the U.S. Government.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment. In many instances, foreign debt
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These investments, however, may be less
liquid than the securities of U.S. corporations. In the event of default of any
such foreign debt obligations, it may be more difficult for a Portfolio to
obtain or enforce a judgement against the issuers of such securities.
Investing in the securities markets of developing countries involves exposure to
economies that are generally less diverse and mature and to political systems
which can be expected to have less stability than those of developed countries.
Historical experience indicates that the markets of developing countries have
been more volatile than the markets of developed countries. The risks associated
with
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<PAGE>
investments in foreign securities may be greater with respect to investments in
developing countries and are certainly greater with respect to investments in
the securities of financially and operationally troubled issuers.
Additional costs could be incurred in connection with a Portfolio's
international investment activities. Foreign brokerage commissions are generally
higher than United States brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversion between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of a Portfolio's securities
denominated in that currency. Such changes also will affect the Portfolio's
income and distributions to shareholders. In addition, although the Portfolio
will receive income in such currencies, the Portfolio will be required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency declines after the Portfolio's income has been
accrued and translated into U.S. dollars, the Portfolio could be required to
liquidate portfolio securities to make such distributions, particularly in
instances in which the amount of income the Portfolio is required to distribute
is not immediately reduced by the decline in such currency. Similarly, if an
exchange rate declines between the time the Portfolio incurs expenses in U.S.
dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater than the equivalent amount in any such currency of such
expenses at the time they were incurred.
Each Portfolio may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking-in the
U.S. dollar price of the purchase or sale of securities denominated in a foreign
currency; locking-in the U.S. dollar equivalent of dividends to be paid on such
securities which are held by the Portfolio; and protecting the U.S. dollar value
of such securities which are held by the Portfolio.
RISK OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the
Portfolios would not be subject absent the use of these strategies. The
Portfolios, and thus the investors, may lose money through any unsuccessful use
of these strategies. If BSAM's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options,
foreign currency and futures contracts and options on futures contracts include
(1) dependence on BSAM's ability to predict correctly movements in the direction
of interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to pursue these strategies are different
from those needed to select portfolio securities; (4) the possible absence of a
liquid secondary market for any particular instrument at any time; (5) the
possible need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of a Portfolio to purchase or sell
a portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Portfolio to maintain "cover" or
to segregate securities in connection with hedging transactions. See "Dividends,
Distributions and Taxes" in The Bear Stearns Funds' Statement of Additional
Information and "Taxation" in the Bear Stearns Investment Trust's Statement of
Additional Information.
The Portfolios will generally purchase options and futures on an exchange only
if there appears to be a liquid secondary market for such options or futures;
the Portfolios will generally purchase OTC options only if BSAM believes that
the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or that the other party will continue to make a market. Thus, it may
not be possible to close an options or futures transaction. The inability to
close options and futures positions also could have an adverse impact on a
Portfolio's ability to effectively hedge its portfolio. There is also the risk
of loss by a Portfolio of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Portfolio has an open position in an
option, a futures contract or related option.
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<PAGE>
HIGH YIELD SECURITIES
GENERAL. The High Yield and Debt Portfolios may invest all or substantially all
of their assets in high yield, high risk debt securities, commonly referred to
as "junk bonds." The Income Portfolio may invest up to 25% of its assets in
securities rated below investment grade. Securities rated below investment grade
and comparable unrated securities offer yields that fluctuate over time, but
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks than
higher-rated securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Certain of the debt securities in which a
Portfolio may invest may have, or be considered comparable to securities having,
the lowest ratings for non-subordinated debt instruments assigned by Moody's,
S&P or D&P (i.e., rated C by Moody's or CCC or lower by S&P or D&P). Under
rating agency guidelines, these securities are considered to have extremely poor
prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default, 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. Such securities are considered speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. Unrated securities deemed
comparable to these lower- and lowest- rated securities will have similar
characteristics. Accordingly, it is possible that these types of factors could,
in certain instances, reduce the value of securities held by a Portfolio with a
commensurate effect on the value of its respective shares. Therefore, an
investment in a Portfolio should not be considered as a complete investment
program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers, and participants in the market
are mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on a
Portfolio's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Portfolio is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Funds' Board of Trustees to value the Portfolio's
securities and the Funds' Trustees may have to use a greater degree of judgment
in making such valuations. Furthermore, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on fundamental
analysis, may tend to decrease the market value and liquidity of such
lower-rated securities. Less liquid secondary markets may also affect a
Portfolio's ability to sell securities at their fair value. In addition, each
Portfolio may invest up to 15% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield, high risk debt
securities contract due to adverse economic conditions or for other reasons,
certain previously liquid securities in a Portfolio may become illiquid and the
proportion of the Portfolio's assets invested in illiquid securities may
increase.
The ratings of fixed-income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their Debt Obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default in payment of interest or principal by such issuers is
significantly greater than with investment grade
26
<PAGE>
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
Many fixed-income securities, including certain U.S. corporate fixed-income
securities in which the Portfolios may invest, contain call or buy-back features
which permit the issuer of the security to call or repurchase it. Such
securities may present risks based on payment expectations. If an issuer
exercises such a "call option" and redeems the security, a Portfolio may have to
replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Portfolio.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose a
Portfolio to the direct or indirect consequences of political, social or
economic changes in the developing and emerging countries that issue the
securities. The ability and willingness of sovereign obligors in developing and
emerging countries or the governmental authorities that control repayment of
their external debt to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which a Portfolio may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
As a result, a governmental obligor may default on its obligations. If such a
default occurs, a Portfolio may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign sovereign debt
securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
sovereign Debt Obligations in the event of default under their commercial bank
loan agreements.
DISTRESSED SECURITIES
Distressed securities involve a high degree of credit and market risk and may be
subject to greater price volatility than other securities in which the Portfolio
invests.
Although a Portfolio will invest in select companies which in the view of BSAM
have the potential over the long term for capital growth, there can be no
assurance that such financially or operationally troubled companies can be
successfully transformed into profitable operating companies. There is a
possibility that the Portfolio may incur substantial or total losses on its
investments. During an economic downturn or recession, securities of financially
troubled issuers are more likely to go into default than securities of other
issuers. In addition, it may be difficult to obtain information about
financially and operationally troubled issuers.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The market
prices of such securities are subject to erratic and abrupt market movements and
the spread between bid and asked prices may be greater than normally expected.
In addition, it is anticipated that many of such portfolio investments may not
be widely traded and that the Portfolio's position in such securities may be
substantially relative to the market for such securities. As a result, the
Portfolio may experience delays and incur losses and other costs in connection
with the sale of its portfolio securities.
Distressed securities which a Portfolio may purchase may also include securities
of companies involved in bankruptcy proceedings, reorganizations and financial
restructurings. To the extent the Portfolio invests in such securities, it may
have a more active participation in the affairs of issuers than is generally
assumed by an investor. This may subject the Portfolio to litigation risks or
prevent the Portfolio from disposing of securities. In a bankruptcy or other
proceeding, the Portfolio as a creditor may be unable to enforce its rights in
any collateral or may have its security interest in any collateral challenged,
disallowed or subordinated to the claims of the creditors. See "Investment
Objective and Management Policies--Portfolio Securities--Bankruptcy and Other
Proceedings--Litigation Risks" in The Bear Stearns Funds' Statement of
Additional Information and "Risk Factors and Special Considerations--Investing
in Securities Markets of Emerging Countries" in the Bear Stearns Investment
Trust's Statement of Additional Information.
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<PAGE>
Of the Debt Portfolio's total net assets as of March 31, 1998, 94.85% consisted
of portfolio investments and 5.15% 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, 1998 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BBB Baa 3.05%
BB B 16.31%
BB Ba 60.28%
B B 15.38%
NR NR 4.98%
</TABLE>
Based on the weighted average ratings of all investments held during the Debt
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1998),
the percentage of the Debt 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
Debt Portfolio's assets during the most recent period and is not necessarily
representative of the Debt Portfolio's assets as of the end of such period, the
current fiscal period or at any time in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB Baa 3.27%
BB B 29.50%
BB Ba 45.38%
B B 16.66%
NR NR 5.19%
</TABLE>
Of the High Yield Portfolio's total net assets as of March 31, 1998, 110.88%
consisted of portfolio investments and -10.88% consisted of liabilities in
excess of other assets. The percentage of the High Yield Portfolio's investments
invested in securities rated by S&P and Moody's as of March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 1.33%
BB Ba 0.64%
B Ba 0.64%
B B 67.55%
B Caa 11.25%
CCC B 3.63%
CCC Caa 2.55%
NR NR 12.41%
</TABLE>
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<PAGE>
Based on the weighted average ratings of all investments held during the High
Yield Portfolio's most recent fiscal period (the fiscal year ended March 31,
1998), the percentage of the High Yield 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 High Yield Portfolio's assets during the most recent period
and is not necessarily representative of the High Yield Portfolio's assets as of
the end of such period, the current fiscal period or at any time in the future.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 0.68%
BB Ba 0.97%
B Ba 1.31%
B B 63.27%
B Caa 12.45%
CCC B 3.67%
CCC Caa 4.31%
NR NR 13.34%
</TABLE>
- ------
* Equivalent Unrated-These categories represent the comparable quality of
unrated securities as determined by the Adviser. For foreign government
obligations not individually rated by an internationally recognized
statistical rating organization, the Debt Portfolio assigns a rating based
on the rating of the sovereign credit of the issuing government.
Debt Obligations in which the Portfolios 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. A
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 Portfolios expect 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 a 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 a Portfolio and thereby maintain its qualification as a "regulated
investment company" under the Code, a 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 a 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 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.
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<PAGE>
While BSAM intends to manage the Portfolios in a manner that will minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause a Portfolio to suffer a loss of interest or principal on any of
its holdings. The Portfolios will treat investments 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 a 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 Debt 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 a 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 BSAM intends to manage the
Portfolios in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse political changes will not cause a 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 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.
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<PAGE>
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 a Portfolio is uninvested and
no return is earned thereon. The inability of a 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 a 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. A 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 a 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 a 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 Funds
may suspend redemption of Portfolio shares for any period during which an
emergency exists, as determined by the Securities and Exchange Commission.
Accordingly, if a Portfolio believes that appropriate circumstances exist, it
will promptly apply to the Securities and Exchange Commission for a
determination that an emergency is present. During the period commencing from a
Portfolio's identification of such condition until the date of the Securities
and Exchange 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
The Debt Obligations of emerging markets countries will not be registered with
the Securities and Exchange Commission or subject to U.S. regulatory or
reporting requirements. Disclosure
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<PAGE>
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 Portfolios may engage have
risks associated with them, including possible default by the other party to the
transaction, illiquidity and, to the extent BSAM'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 a 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 entails certain risks. The cost to a
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 a
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 Portfolios, 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 a 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. A 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 a
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.
32
<PAGE>
YEAR 2000 RISK
Many of the world's computer systems currently record years in two-digit format.
Such computer systems will be unable to properly interpret dates beyond the year
1999, which could lead to business disruptions in the U.S. and internationally
(the "Year 2000 Issue").
To ensure that the Portfolios are not negatively impacted by the Year 2000
Issue, BSAM's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially arise in internally developed computer systems and to either obtain
representations from or make other inquiries of those parties who provide
computer applications or services that are computer system dependent that BSAM
has determined are critical to the Portfolios.
At the present time, BSAM has been informed by its corporate parent that it
expects that most of its significant Year 2000 corrections should be tested in
production by the end of 1998. Full integration testing of these systems and
testing of interfaces with third party providers will continue through 1999.
However, there can be no assurance that such schedule will be met or the systems
of other companies on which BSAM and the Portfolios are dependent also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Portfolios.
Management of the Portfolios
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. Each Portfolio's Statement of Additional Information contains
the name and general business experience of each Trustee.
PORTFOLIO MANAGEMENT
BSAM uses a team approach to manage each Portfolio. Each team consists of
portfolio managers, assistant portfolio managers and analysts performing as a
dynamic unit to manage the assets of each Portfolio.
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<PAGE>
INVESTMENT ADVISER AND MANAGER
The Portfolios' investment adviser and manager is BSAM, a wholly owned
subsidiary of The Bear Stearns Companies Inc., which is located at 575 Lexington
Avenue, New York, New York 10022. 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. BSAM is a registered investment adviser
and offers, either directly or through affiliates, investment advisory services
to open-end and closed-end investment funds and other managed pooled investment
vehicles with net assets at June 30, 1998, of $9.8 billion.
BSAM supervises and assists in the overall management of the Portfolios' affairs
under an Investment Advisory Agreement between BSAM and the Portfolios, subject
to the overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law.
BSAM uses a team approach to money management consisting of portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to manage
the assets of each Portfolio.
Under the terms of an Investment Advisory Agreement, BSAM is entitled to receive
from the Bond Portfolio and High Yield Portfolio a monthly fee equal to an
annual rate of 0.45% and 0.60%, respectively, of each Portfolio's average daily
net assets. For the fiscal year ended March 31, 1998, investment advisory fees
accrued by the Income Portfolio and High Yield Portfolio amounted to $91,715 and
$28,723, respectively, all of which was waived.
Under the terms of the Investment Management Agreement, the Debt Portfolio pays
BSAM a fee computed daily and payable monthly, at an annual rate equal to 1.15%
of the Debt Portfolio's average daily net assets up to $50 million, 1.00% of the
Debt Portfolio's average daily net assets of more than $50 million but not in
excess of $100 million, and 0.70% of the Debt Portfolio's average daily net
assets above $100 million. For the fiscal year ended March 31, 1998, investment
management fees earned by the Debt Portfolio amounted to $435,752, of which
$328,977 was waived.
BSAM has agreed that if, in any fiscal year, the sum of the Debt Portfolio's
expenses exceeds the expense limitations applicable to the Debt Portfolio
imposed by state securities administrators, BSAM will reimburse the Debt
Portfolio its fees under the Investment Management Agreement or make other
arrangements to limit Debt Portfolio expenses to the extent required by such
expense limitations. From time to time, BSAM may waive receipt of its fees
and/or voluntarily assume certain of the Debt Portfolio's expenses, which would
have the effect of lowering the Debt Portfolio's expense ratio and increasing
yield to investors at the time such amounts are waived or assumed, as the case
may be. The Debt Portfolio will not pay BSAM at a later time for any amounts it
may waive, nor will the Debt Portfolio reimburse BSAM for any amounts it may
assume until such time as the average net assets of the Debt Portfolio exceed
$50 million or the total operating expenses of the Debt Portfolio are less than
1.75%, 2.40% and 2.40% of the Class A shares, Class B and Class C shares,
respectively, of the Debt Portfolio. The investment management fees paid by the
Debt Portfolio are greater than those paid by most funds, but are believed by
BSAM to be appropriate for fees paid by funds with a global investment strategy.
ADMINISTRATOR
Each Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York
10167. BSFM offers administrative services to open-end and closed-end investment
funds and other managed pooled investment vehicles with assets at June 30, 1998
of over $3.0 billion.
For providing administrative services to each Portfolio, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of 0.15 (before fee waiver) of 1% of
each Portfolio's average daily net assets.
Under the terms of an Administrative Services Agreement with the Funds, PFPC
Inc. provides certain administrative services to each Portfolio. For providing
these services, PFPC Inc. is entitled to receive from each Portfolio a monthly
fee equal to an annual rate of 0.10 of 1% of the Portfolio's average daily net
assets up to $200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of
the next $200 million and 0.03 of 1% of net assets above $600 million, subject
to a minimum annual fee of $150,000 for each portfolio.
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<PAGE>
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
certain Portfolio expenses, which would have the effect of lowering a
Portfolio's expense ratio and increasing yield to investors at the time such
amounts are waived or assumed, as the case may be. No Portfolio will pay BSFM at
a later time for any amounts it may waive, nor will a Portfolio reimburse BSFM
for any amounts it may assume. From time to time PFPC Inc. may waive a portion
of its fee. PFPC Inc. reserves the right to revoke this voluntary fee waiver at
any time.
Brokerage commissions may be paid to Bear Stearns for executing transactions if
the use of Bear Stearns is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of each
Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional
Information.
Bear Stearns has agreed to permit the Funds to use the name "Bear Stearns" or
derivatives thereof as part of the Funds' name for as long as the Investment
Advisory and Management Agreements are in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
each Portfolio's principal underwriter and distributor of each Portfolio's
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 each Portfolio's Distribution and Shareholder Servicing Plans
described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, acts as the custodian for the Bond Portfolio and the
High Yield Portfolio.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian for the Debt Portfolio's assets.
PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware
19809, acts as each Portfolio's administrator, transfer agent, dividend-paying
agent and registrar.
Rules adopted under the 1940 Act permit the Portfolios to maintain their
securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those rules, the Portfolios' portfolio of securities
and cash invested in securities of foreign countries are held by their
subcustodians, who are approved by the Trustees of the Portfolios in accordance
with the rules of the Securities and Exchange Commission.
DISTRIBUTION AND SHAREHOLDER SERVICING
This section summarizes the distribution and shareholder servicing plans
relating to each class of shares of each Portfolio.
INCOME PORTFOLIO
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--CLASS A AND C SHARES
Under a plan adopted by the Board of Trustees of The Bear Stearns Funds pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"), the Income Portfolio pays Bear
Stearns for distributing Portfolio shares and for providing personal services
to, and/or maintaining accounts of, Portfolio shareholders.
The Income Portfolio will pay Bear Stearns an annual fee of 0.35% and 0.75% for
Class A and C shares, respectively, of the Portfolio's average daily net assets.
With respect to Class A shares of the Income Portfolio, Bear Stearns will waive
the distribution fee to the extent that the fee would otherwise exceed the NASD
limitations on asset-based sales charges. The 6.25% limitation is imposed on the
Income Portfolio rather than on a per-shareholder basis. Therefore, a long-term
shareholder of the Bond Portfolio may pay more in distribution fees than the
economic equivalent of 6.25% of such shareholder's investment in such shares.
Under the Plan, Bear Stearns may pay third parties in respect of these services
such amount as it may determine. The fees paid to Bear Stearns under the Plan
are payable without regard to actual expenses incurred. With respect to Class A
shares of the Income Portfolio, up to 0.25% of the average daily net assets of
the class will compensate institutions for personal service and maintenance of
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<PAGE>
accounts holding the Income Portfolio's shares. The Fund understands that these
third parties also may 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. Fees paid under the Plan may also include a service fee paid to
broker-dealers or others who provide services in connection with "no transaction
fee" or similar programs for the purchase of shares.
DISTRIBUTION PLAN--CLASS B SHARES
Under a Plan adopted by the Board of Trustees of The Bear Stearns Funds pursuant
to Rule 12b-1 under the 1940 Act (the "Distribution Plan") for Class B shares,
the Income Portfolio will pay Bear Stearns an annual fee of 0.75% of the average
daily net assets of Class B shares. Amounts paid under the Distribution Plan
compensates Bear Stearns for distributing Portfolio shares. Bear Stearns may pay
third parties that sell Portfolio shares such amount as it may determine.
The Income Portfolio understands that these third parties may also charge fees
for 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 Distribution Plan.
SHAREHOLDER SERVICING PLAN-CLASS B AND C SHARES
The Bear Stearns Funds has adopted a shareholder servicing plan on behalf of the
Portfolio's Class B and C shares (the "Shareholder Servicing Plan"). In
accordance with the Shareholder Servicing Plan, the Portfolio may enter into
shareholder service agreements under which the Income Portfolio pays a fee of up
to 0.25% of the average daily net assets of Class B and C shares of the Income
Portfolio for fees incurred in connection with the personal service and
maintenance of accounts holding Portfolio shares for responding to inquiries of,
and furnishing assistance to, shareholders regarding ownership of the shares or
their accounts or similar services not otherwise provided on behalf of the
Portfolio. Fees paid under the Shareholder Servicing Plan may also include a
service fee paid to broker-dealers or others who provide services in connection
with "no transaction fee" or similar programs for the purchase of shares.
EXPENSE LIMITATION
BSAM 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 advisory fee and fees paid under the Plan and the Distribution
Plan, exceed 0.80% of the average daily net assets of the Class A shares of the
Income Portfolio, 1.45% of the average daily net assets of the Class B shares of
the Income Portfolio and 1.45% of the average daily net assets of the Class C
shares of the Income Portfolio for the fiscal year, BSAM may waive a portion of
its investment advisory fee or bear other expenses to the extent of the excess
expenses.
HIGH YIELD PORTFOLIO
DISTRIBUTION PLAN-CLASS A, B AND C SHARES
Under a plan adopted by the Board of Trustees of The Bear Stearns Funds pursuant
to Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the High Yield
Portfolio will pay Bear Stearns an annual fee of 0.10%, 0.75% and 0.75% of the
average daily net assets of Class A, B and C shares, respectively. Amounts paid
under the Distribution Plan compensate Bear Stearns for distributing Portfolio
shares. Bear Stearns may pay third parties that sell Portfolio shares such
amount as it may determine.
The High Yield Portfolio understands that these third parties may also charge
fees for 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 Distribution
Plan.
SHAREHOLDER SERVICING PLAN-CLASS A, B AND C SHARES
The Bear Stearns Funds has adopted a shareholder servicing plan on behalf of the
High Yield Portfolio's Class A, B and C shares (the "Shareholder Servicing
Plan"). In accordance with the Shareholder Servicing Plan, the Fund may enter
into shareholder service agreements under which the Portfolio pays fees of up to
0.25% of the average daily net assets of Class A, B or C shares for fees
incurred in connection with the personal service and maintenance of accounts
holding Portfolio shares for responding to inquiries of, and furnishing
assistance to, shareholders regarding ownership of the shares or their accounts
or similar services not otherwise provided on behalf of the Portfolio.
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<PAGE>
EXPENSE LIMITATION
BSAM 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 of the High
Yield Portfolio, including the investment advisory fee, exceed 1.00% of Class
A's average daily net assets, 1.65% of Class B's average daily net assets and
1.65% of Class C's average daily net assets for the fiscal year, BSAM may waive
a portion of its investment advisory fee or bear other expenses to the extent of
the excess expense.
DEBT PORTFOLIO
DISTRIBUTION PLAN-CLASS A AND C SHARES
Under a plan adopted by the Board of Trustees of Bear Stearns Investment Trust
pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Portfolio pays Bear
Stearns for distributing Portfolio shares and for providing personal services
to, and/or maintaining accounts of, Portfolio shareholders.
The Debt Portfolio will pay Bear Stearns an annual fee of .35% and 0.75% of the
Portfolio's average daily net assets for Class A shares and Class C shares,
respectively.
With respect to Class A shares of the Debt Portfolio, Bear Stearns will waive
the distribution fee to the extent that the fees would otherwise exceed the NASD
limitations on asset-based sales charges. The 6.25% limitation is imposed on the
Portfolio rather than on a per shareholder basis. Therefore, a long- term
shareholder of the Portfolio may pay more in distribution fees than the economic
equivalent of 6.25% of such shareholder's investment in such shares.
Under the Plan, Bear Stearns may pay third parties in respect of these services
such amount as it may determine. The fees paid to Bear Stearns under the Plan
are payable without regard to actual expenses incurred. With respect to Class A
of the Portfolio, up to 0.25% of the average daily net assets of each class will
compensate institutions for personal service and maintenance of accounts holding
the Portfolio's shares. The Fund understands that these third parties also may
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. Fees
paid under the Plan may also include a service fee paid to broker-dealers or
others who provide services in connection with "no transaction fee" or similar
programs for the purchase of shares.
DISTRIBUTION PLAN-CLASS B SHARES
Under a plan adopted by the Board of Trustees of Bear Stearns Investment Trust
pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan") for Class B
shares, the Debt Portfolio will pay Bear Stearns an annual fee of 0.75% of the
average daily net assets of Class B shares. Amounts paid under the Distribution
Plan compensate Bear Stearns for distributing Portfolio shares. Bear Stearns may
pay third parties that sell Portfolio shares such amount as it may determine.
The Portfolio understands that these third parties may also charge fees for
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 Distribution Plan.
SHAREHOLDER SERVICING PLAN-CLASS B AND C SHARES
Bear Stearns Investment Trust has adopted a shareholder servicing plan on behalf
of the Debt Portfolio's Class B and Class C shares. In accordance with the
shareholder servicing plan, the Portfolio may enter into shareholder service
agreements under which the Debt Portfolio pays fees of up to 0.25% of the
average daily net assets of Class B shares and Class C shares for fees incurred
in connection with the personal service and maintenance of accounts holding
Portfolio shares for responding to inquires of, and furnishing assistance to
shareholders regarding ownership of the shares or their accounts or similar
services not otherwise provided on behalf of the Portfolio. Fees paid under the
shareholder servicing plans may also include a service fee paid to
broker-dealers or others who provide services in connection with "no transaction
fee" or similar programs for the purchase of shares.
EXPENSE LIMITATION
All expenses incurred in the operation of the Debt Portfolio will be borne by
the Portfolio, except to the extent specifically assumed by BSAM. See
"Management of the Portfolio--Expenses" in the Statement of Additional
Information.
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BSAM has undertaken that, if in any fiscal year, certain expenses, including the
investment management fee and fees under the distribution plan, exceed 1.75% of
Class A's average daily net assets, 2.40% of Class B's average daily net assets
and 2.40% of Class C's average daily net assets for the fiscal year, BSAM 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 $1,000, or $500 if the investment is for Keogh
Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant. Subsequent
investments ordinarily must be at least $50, or $25 for retirement plans. Share
certificates are issued only upon written request. No certificates are issued
for fractional shares. The Funds reserve the right to reject any purchase order.
The Funds reserve the right to vary the initial and subsequent investment
minimum requirements at any time. Investments by employees of Bear Stearns and
its affiliates are not subject to minimum investment requirements.
Purchases of a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the NASD who have sales agreements with Bear Stearns (an "Authorized
Dealer"). Purchases of a Portfolio's shares also may be made directly through
the Transfer Agent. When purchasing Portfolio shares, investors must specify
which class is being purchased. If you do not specify in your instructions to
the Funds which class of shares you wish to purchase, the Funds will assume that
your instructions apply to Class A shares.
Purchases are effected at the net asset value next determined after a purchase
order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent
(the "trade date"). Payment for Portfolio shares generally is due to Bear
Stearns or the Authorized Dealer on the third business day (the "settlement
date") 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 Dealer
will benefit from the temporary use of the funds if payment is made before the
settlement date.
CHOOSING A CLASS OF SHARES
Once you decide to buy shares of a Portfolio, you must determine which class of
shares to buy. Each Portfolio offers Class A, Class B and Class C shares. Each
class has its own cost structure and features that will affect the results of
your investment over time in different ways. Your financial adviser or Account
Executive can help you choose the class of shares that best suits your
investment needs.
. Class A shares have a front-end sales charge, which is added to the
offering price of your investment.
. Class B shares and C shares do not have a front-end sales charge, which
means that your entire investment is available to work for you right away.
However, Class B shares and C shares have a contingent deferred sales
charge (CDSC) that you must pay if you redeem your shares within a
specified period of time. In addition, the annual expenses of Class B
shares and C shares are higher than the annual expenses of Class A shares.
In deciding which class is best, you may consider:
. how much you intend to invest
. the length of time you expect to hold your investment
. the features and services available for each class
. how well you expect the market to perform in the coming months.
For example, you may consider Class A shares if you have a long-term investment
horizon or if you plan to invest a large amount of money, because Class A shares
have a lower expense structure and the amount of the initial sales charge
decreases as you invest more money. You may find Class B shares more attractive,
because there is no front-end sales charge and the full amount of your
investment is put to work right away. If you plan to invest for a shorter time
period, you may consider Class C shares, because the CDSC is lower than that of
Class B shares and declines to 0 after one year. In any event, you should
consult your financial adviser or Account Executive before investing in a
Portfolio.
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The following table summarizes the differences in the expense structures of the
three classes of shares:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Front-End Sales Charge Debt Portfolios--4.50% None None
- -------------------------------------------------------------------------------------------------------------------
Contingent Deferred None* 5% to 0%, declining the longer 1% if you sell shares
Sales Charge you hold your shares within one year of purchase
- -------------------------------------------------------------------------------------------------------------------
Annual Expenses Lower than Class B Higher than Class A shares Higher than Class A shares;
and C shares (Note: Class B shares convert to same as Class B shares
Class A shares 8 years after purchase)**
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* For purchases of $1 million or more, you will be charged a CDSC of 1% if
you sell shares within one year of purchase.
** The conversion of Class B shares to Class A shares will not occur at any
time the Portfolios are advised that such conversion may constitute a
taxable event for Federal tax purposes. If Class B shares are not converted
to Class A shares, they will continue to be subject to higher expenses than
Class A shares for an indefinite period of time.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling shares
of one class of shares than for selling another class. The purpose of both the
CDSC and the asset-based sales charge is to compensate Bear Stearns and the
brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds-[Name of
Portfolio]" or "Bear Stearns Investment Trust--Emerging Markets Debt Portfolio"
if purchased directly from the Portfolio, and should be directed to the Transfer
Agent: PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio] or Bear
Stearns Investment Trust--Emerging Markets Debt Portfolio, P.O. Box 8960,
Wilmington, Delaware 19899-8960. Direct overnight deliveries to PFPC, Inc., 400
Bellevue Parkway, Suite 108, Wilmington, Delaware 19809. Payment by check or
Federal Reserve draft must be received within three business days of receipt of
the purchase order by Bear Stearns or an Authorized Dealer. Shareholders may not
purchase shares of the Portfolio with a check issued by a third party and
endorsed over to the Portfolio. Orders placed directly with the Transfer Agent
must be accompanied by payment. Bear Stearns (or an investor's Authorized
Dealer) is responsible for forwarding payment promptly to the Funds. The Funds
will charge $7.50 for each wire redemption. The payment proceeds of a redemption
of shares recently purchased by check may be delayed as described under "How to
Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares through
the Transfer Agent. To make an initial investment in a Portfolio, an investor
must establish an account with the Portfolio by furnishing necessary information
to the Funds. An account with a 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 to cover the purchase, to PFPC Inc., Attention: The Bear
Stearns Funds-[Name of Portfolio] or Bear Stearns Investment Trust--Emerging
Markets Debt Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to The Bear
Stearns Funds or Bear Stearns Investment Trust and directed to the address set
forth in the preceding paragraph. The Portfolio account number should appear on
the check.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the relevant Portfolio
calculates its net asset value are priced according to the net asset value
determined on that date. Purchase orders received after the close of trading on
the New York Stock Exchange are priced as of the time the net asset value is
next determined.
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<PAGE>
Net Asset Value
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed 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. Each Portfolio's investments are valued based on
market value or, where market quotations are not readily available, based on
fair value as determined in good faith by, or in accordance with procedures
established by, the Funds' Board of Trustees. For further information regarding
the methods employed in valuing each Portfolio's investments, see "Determination
of Net Asset Value" in the Bear Stearns Funds' Statement of Additional
Information and "Net Asset Value" in Bear Stearns Investment Trust's Statement
of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Funds could subject the investor to backup withholding and a $50 penalty imposed
by the Internal Revenue Service.
CLASS A SHARES
The sales charge may vary depending on the dollar amount invested in each
Portfolio. The public offering price for Class A shares of each Portfolio is the
net asset value per share of that class plus a sales load, which is imposed in
accordance with the following schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 4.50% 4.71% 4.25%
At least $50,000 but less
than $100,000............... 4.25 4.44 4.00
At least $100,000 but less
than $250,000............... 3.25 3.36 3.00
At least $250,000 but less
than $500,000............... 2.50 2.56 2.25
At least $500,000 but less
than $1,000,000............. 2.00 2.04 1.75
At least $1,000,000 and
above....................... 0.00* 0.00 1.25
</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 1.00% will
be imposed at the time of redemption. Letter of Intent and Right 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 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 Funds 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; and (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. To take advantage of these exemptions, a
purchaser must indicate its eligibility for an exemption to Bear Stearns along
with its Account Information Form. Such purchaser agrees to notify Bear Stearns
if, at any time of any additional purchases, it is no longer eligible for an
exemption. Bear Stearns reserves the right to request certification or
additional information from a purchaser in order to verify that such purchaser
is eligible for an exemption.
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<PAGE>
Bear Stearns reserves the right to limit the participation of its employees in
Class A shares of each Portfolio. Dividends and distributions reinvested in
Class A shares of a Portfolio will be made at the net asset value per share on
the reinvestment date.
Class A shares of each Portfolio also 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. This includes
shares of a mutual fund which were subject to a contingent deferred sales charge
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. 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. Bear Stearns will offer to pay
Authorized Dealers an amount up to 1.25% of the net asset value of shares
purchased by the dealers' clients or customers in this manner.
In addition, Class A Shares of each 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 Fund shares pursuant to agreements with the Funds 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 sections 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as
amended (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 Portfolio shares.
CLASS B SHARES
The public offering price for Class B shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time of
purchase. A CDSC is imposed, however, on redemptions of Class B shares made
within six years of purchase. See "How to Redeem Shares." The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of that month. In processing redemptions of Class B shares, the Portfolios will
first redeem shares not subject to any CDSC, and then shares held longest during
the eight-year period, resulting in the shareholder paying the lowest possible
CDSC. The amount of the CDSC charged upon redemption is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR SINCE CDSC AS A PERCENTAGE OF DOLLAR
PURCHASE AMOUNT SUBJECT TO CDSC
- --------------------------------------------------------------------------------
<S> <C>
First............................................ 5%
Second........................................... 4%
Third............................................ 3%
Fourth........................................... 3%
Fifth............................................ 2%
Sixth............................................ 1%
Seventh.......................................... 0%
Eighth*.......................................... 0%
</TABLE>
- ------
* As discussed below, Class B shares automatically convert to Class A shares
after the eighth year following purchase.
Class B shares of a Portfolio will automatically convert into Class A shares of
the same Portfolio at the end of the calendar quarter that is eight years after
the initial purchase of the Class B shares. Class B shares acquired by exchange
from Class B shares of another portfolio will convert into Class A shares of
such Portfolio based on the date of the initial purchase. Class B shares
acquired through reinvestment of distributions will convert into Class A shares
based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolios are advised that such conversions may
constitute taxable events for federal tax purposes, which the Portfolios believe
is unlikely. If conversions do not occur as a result of possible taxability,
Class B shares would continue to be subject to higher expenses than Class A
shares for an indeterminate period.
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<PAGE>
The purpose of the conversion feature is to allow the holders of Class B shares
the ability to not bear the burden of distribution-related expenses when the
shares have been outstanding for a duration sufficient for Bear Stearns to have
obtained compensation for distribution-related expenses incurred in connection
with Class B shares.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share 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."
RIGHT OF ACCUMULATION--CLASS A SHARES
Pursuant to the Right of Accumulation, certain investors are permitted to
purchase Class A shares of any 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 Portfolios, shares of the Funds'
other portfolios and shares of certain other funds sponsored or advised by Bear
Stearns, including the Debt Portfolio of Bear Stearns Investment Trust, then
held by the investor. The following purchases of 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); or (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 $50 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 each Portfolio, Class A
shares of the Fund's other portfolios and shares of certain other funds
sponsored or advised by Bear Stearns, including The Bear Stearns Funds or the
Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, as applicable,
purchased in a 13-month period pursuant to the terms and under the conditions
set forth herein. 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 business days, the Transfer Agent, as attorney-in-fact, 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 above-listed funds, the investor must
indicate its intention to do so under the Letter of Intent section of the
Account Information Form.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan permits investors to purchase shares of a
Portfolio (minimum initial investment of $250 and minimum subsequent investments
of $50 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 or about the twentieth day. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be
42
<PAGE>
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 a 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 Fund may modify or terminate the Systematic Investment Plan at any time or
charge a service fee. No such fee currently is contemplated.
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a class of a Portfolio, shares of the same class of the Funds' other
portfolios or shares of certain other funds sponsored or advised by Bear
Stearns, including The Bear Stearns Funds, or the Emerging Markets Debt
Portfolio of Bear Stearns Investment Trust, as applicable, 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 at an 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 may be difficult to
complete and shareholders may have to submit exchange requests to the Transfer
Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for losses
or expenses arising out of telephone instructions reasonably believed to be
genuine.
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 described below. 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 Funds on 60 business days' notice to the affected
portfolio or fund shareholders. The Funds, BSAM 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 Funds 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. Except in the case of Personal
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
43
<PAGE>
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. No CDSC will be
imposed on Class B or C shares at the time of an exchange. The CDSC applicable
on redemption of Class B or C shares will be calculated from the date of the
initial purchase of the Class B or C shares exchanged. If an investor is
exchanging Class A shares into a portfolio or fund that charges a sales load,
the investor may qualify for share prices which do not include the sales load or
which reflect a reduced sales load, if the shares of the portfolio or fund from
which the investor is exchanging were: (a) purchased with a sales load; (b)
acquired by a previous exchange from shares purchased with a sales load; or (c)
acquired through reinvestment of dividends or distributions paid with respect to
the foregoing categories of shares. 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 Funds reserve
the right, upon not less than 60 business days' written notice, to charge
shareholders a $5.00 fee in accordance with rules promulgated by the Securities
and Exchange Commission. The Funds reserve 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 recognize a taxable
gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest automatically
dividends and/or capital gain distributions, if any, paid by a Portfolio in
shares of the same class of another portfolio of the Funds or a fund advised or
sponsored by Bear Stearns of which the shareholder is an investor, or the Money
Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund
will be purchased at the current net asset value. If an investor is investing in
a class that charges a CDSC, the shares purchased will be subject upon
redemption to the CDSC, if 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 Funds 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 Funds impose no charges (other than any
applicable CDSC) when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within three
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if an investor has purchased Portfolio shares by check and subsequently
submits a redemption request by mail, the redemption proceeds will not be
transmitted until the check used for investment has cleared, which may take up
to 15 business days.
44
<PAGE>
The Funds will reject requests to redeem shares by telephone or wire for a
period of 15 business days after receipt by the Transfer Agent of the purchase
check against which such redemption is requested. This procedure does not apply
to shares purchased by wire payment.
The Funds reserve the right to redeem investor accounts at its option upon not
less than 60 business days written notice if the account's net asset value is
$750 or less, for reasons other than market conditions, and remains so during
the notice period. Shareholders who have redeemed Class A shares may reinstate
their Portfolio account without a sales charge up to the dollar amount redeemed
by purchasing Class A shares of the same Portfolio or of any other Bear Stearns
Funds within 60 business days of the redemption. Shareholders should obtain and
read the applicable prospectuses of such other funds and consider their
objectives, policies and applicable fees before investing in any of such funds.
To take advantage of this reinstatement privilege, shareholders must notify
their Bear Stearns account executive, Authorized Dealer or the Transfer Agent at
the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE-CLASS A SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class A
shares within one year of the date of purchase by any investor that purchased
Class A shares as part of an investment of at least $1,000,000. A CDSC of 1% is
also imposed on any redemption of Class A shares within one year of the date of
purchase by any investor that purchased the shares 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. No CDSC will be imposed to the
extent that the net asset value of the Class A shares redeemed does not exceed
(i) the current net asset value of Class A shares acquired through reinvestment
of dividends or capital gain distributions, plus (ii) increases in the net asset
value of an investor's Class A shares above the dollar amount of all such
investor's payments for the purchase of Class A shares held by the investor at
the time of redemption. See the Statement of Additional Information for more
information.
CONTINGENT DEFERRED SALES CHARGE-CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of Class
B shares within six years of the date of purchase. No CDSC will be imposed to
the extent that the net asset value of the Class B shares redeemed does not
exceed (i) the current net asset value of Class B shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases in
the net asset value of an investor's Class B shares above the dollar amount of
all such investor's payments for the purchase of Class B shares held by the
investor at the time of redemption.
If the aggregate value of Class B 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 B shares above the
total amount of payments for the purchase of Class B 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 a Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5 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 5% for a
total CDSC of $12.00.
CONTINGENT DEFERRED SALES CHARGE-CLASS C SHARES
A CDSC of 1% payable to Bear Stearns 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.
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<PAGE>
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 a Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5 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% for a
total CDSC of $2.40.
WAIVER OF CDSC-CLASS A, B AND C SHARES
The CDSC applicable to Class A, B and 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 a 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) to the extent that shares redeemed have been withdrawn from the
Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the automatic
withdrawal is established. If the Funds' Trustees determine to discontinue the
waiver of the CDSC, the disclosure in the Portfolios' 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 Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
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
Funds' agent, Bear Stearns or Authorized Dealers may honor a redemption request
by repurchasing Fund shares from a redeeming shareholder at the shares' net
asset value next computed after receipt of the request by Bear Stearns or the
Authorized Dealer. Under normal circumstances, within three 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.
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 Funds 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 Funds may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Funds nor the
Transfer Agent will be liable for following telephone instructions reasonably
believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
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 Fund shares
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through the Transfer Agent. Mail redemption requests should be sent to the
Transfer Agent at: PFPC Inc., Attention: The Bear Stearns Funds-[Name of
Portfolio] or Bear Stearns Investment Trust--Emerging Markets Debt Portfolio,
P.O. Box 8960, Wilmington, Delaware 19899-8960.
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 will 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 share certificates have been issued, written redemption instructions,
indicating the Portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. A signature guarantee is designed to protect the shareholders and
the Portfolio against fraudulent transactions by unauthorized persons. A
signature guarantee may be obtained from a domestic bank or trust company,
recognized broker, dealer, clearing agency or savings association who are
participants in a medallion program by the Securities Transfer Association. The
three recognized medallion programs are Securities Transfer Agent Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock
Exchange, Inc. Medallion Signature Program (MSP). Signature guarantees which are
not a part of these programs will not be accepted. Please note that a notary
public stamp or seal is not acceptable. The Fund 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. Any questions with respect to signature guarantees should be
directed to the Transfer Agent by calling 1- 800-447-1139.
During times of drastic economic or market conditions, investors may experience
difficulty in contacting Bear Stearns or Authorized Dealers by telephone to
request a redemption of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the redemption request being processed
at a later time than it would have been if telephone redemption had been used.
During the delay, each Portfolio's net asset value may fluctuate.
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 Funds or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through
Automatic Withdrawal. Purchases of additional shares concurrent with withdrawals
generally are undesirable.
Dividends and Distributions
INCOME PORTFOLIO AND HIGH YIELD PORTFOLIO
All expenses are accrued daily and deducted before declaration of dividends to
investors. Dividends paid by each class of a Portfolio will be calculated at the
same time and in the same manner and will be of the same amount, except that the
expenses attributable solely to a particular class will be borne exclusively by
such class. Class B and C shares will receive lower per share dividends than
Class A shares because of the higher expenses borne by Class B and C shares. See
"Fee Table."
Dividends will be automatically reinvested in additional shares of each
Portfolio at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution Option.
Each Portfolio ordinarily pays dividends from its net investment income monthly
and 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 1940 Act. Neither Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired.
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DEBT PORTFOLIO
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 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.
Taxes
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid by
a Portfolio will be taxable to U.S. shareholders as ordinary income, whether
received in cash or reinvested in additional shares of such Portfolio or
redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of a Portfolio will be taxable to U.S. shareholders
as long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio shares and whether such
distributions are received in cash or reinvested in, or redirected into, other
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28% and certain
capital gains of individuals may be subject to a lower tax rate. Dividends and
distributions may be subject to state and local taxes.
Each Portfolio may enter into short sales "against the box." See "Description of
the Portfolio-Investment Instruments and Strategies." Any gains realized by a
Portfolio on such sales will be recognized at the time the Portfolio enters into
the short sales.
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Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of market discount bonds, paid by a Portfolio to a foreign investor
generally are subject to U.S. nonresident withholding taxes at the rate of 30%,
unless the foreign investor claims the benefit of a lower rate specified in a
tax treaty. Distributions from net realized long-term securities gains paid by a
Portfolio to a foreign investor as well as the proceeds of any redemptions from
a foreign investor's account, regardless of the extent to which gain or loss may
be realized, generally will not be subject to U.S. nonresident withholding tax.
However, such distributions may be subject to backup withholding, as described
below, unless the foreign investor certifies his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of their
accounts which will include information as to dividends and distributions from
securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for shares
of another fund or portfolio advised or sponsored by BSAM 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.
Federal regulations generally require the Portfolios to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on a
federal income tax return. Furthermore, the IRS may notify the Portfolios to
institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a federal income tax return.
A TIN is either the Social Security number or employer identification number of
the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's federal income
tax return.
While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state or local taxes in respect of their
investment in Portfolio shares.
Management of the Portfolios intends to have each Portfolio qualify as a
"regulated investment company" under the Code and, thereafter, to continue to so
qualify if such qualification is in the best interests of its shareholders. Such
qualification relieves a Portfolio of any liability for federal income tax to
the extent its earnings are distributed in accordance with applicable provisions
of the Code. In addition, a Portfolio is subject to a non- deductible 4% excise
tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
If, for any reason, a Portfolio fails to qualify as a regulated investment
company, the Portfolio would be subject to federal income tax on its net income
at regular corporate rates (without a deduction for distributions to
shareholders). When distributed, such income would then be taxable to
shareholders as ordinary income to the extent of the Portfolio's earnings and
profits. Although management intends to have each Portfolio qualify as a
regulated investment company, there can be no assurance that it will achieve
this goal.
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 of Bear Stearns Investment Trust and the Bear Stearns
Funds. Shareholders are urged to consult their own tax advisors regarding
specific questions as to Federal, state and local taxes as well as to any
foreign taxes.
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Performance Information
For purposes of advertising, performance for Class A, B and C shares of each
Portfolio 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 a 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 B and 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 each 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, if any, 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 the Portfolio's 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 each 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, if any. 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 B total return will reflect the deduction of the CDSC.
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 each
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 B or C.
Calculations based on the net asset value per share do not reflect the deduction
of the sales load on each Portfolio's Class A shares, which, if reflected, would
reduce the performance quoted.
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 High Yield Total Return Portfolio's shares, including data from
Lipper Analytical Services, Inc., Lehman Brothers High Yield Bond Index, Credit
Suisse First Boston High Yield Bond Index and other industry sources.
Performance information that may be used in advertising or marketing the Income
Portfolio's shares may include data from Lipper Analytical Services, Inc.,
Morningstar, Inc., Bond Buyer's 20-Bond Index, Moody's Bond Survey Bond Index,
Lehman Brothers Aggregate Bond Index, Salomon Brothers Broad Investment-Grade
Index and components thereof, Mutual Fund Values, Mutual Fund Forecaster, Mutual
Fund Investing and other industry publications. Comparative performance
information may be used from time to time in advertising or marketing the
Emerging Markets Debt 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.
DEBT PORTFOLIO
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 Debt 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 Debt 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 Debt Portfolio may earn or what
the Debt Portfolio's performance may be in any future period.
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In addition to information provided in shareholder reports, the Debt Portfolio
may from time to time, in its discretion, make a list of the Debt Portfolio's
holdings available to investors upon request. A discussion of the Debt
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.
General Information
The Bear Stearns Funds was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
(the "Trust Agreement") dated September 29, 1994, and commenced operations on or
about April 3, 1995.
The Bear Stearns Investment Trust was organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992, as a Massachusetts business
trust pursuant to a Trust Agreement and commenced investment operations on May
3, 1993.
The Funds are authorized to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Each Portfolio's shares are classified
into four classes--Class A, B, C and Y. Each share has one vote and shareholders
will vote in the aggregate and not by class, except as otherwise required by
law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Funds or a Trustee. The Trust Agreement provides for
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Portfolios" in the Portfolios' Statement of
Additional Information, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of 10 portfolios of
shares. All consideration received by the Funds for shares of one of the
portfolios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Funds) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Funds
have the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Funds, 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 not 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, Rule 18f-2 exempts the
selection of independent accountants and the election of Trustees from the
separate voting requirements of Rule 18f-2.
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 Funds at PFPC Inc., Attention: The Bear Stearns Funds, P.O. Box
8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling
Bear Stearns at 1-800-766-4111.
ADDITIONAL INFORMATION
The term "majority of the outstanding shares" of each 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.
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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, Martin Luther King Day, 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 each
Portfolio's official sales literature in connection with the offer of a
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.
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Appendix A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of each Fund's Portfolios may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. 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--Bonds 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
bonds. They are rated lower than the best bonds 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--Bonds which are rated A possess many favorable investment qualities 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--Bonds 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 bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds 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 thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds 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.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. 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 the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or
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changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
A-2
<PAGE>
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P 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.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal 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.
D&P COMMERCIAL PAPER RATINGS
Duff 1+--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
----------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Funds, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Funds. Neither event
will require a sale of such security by the Funds. However, BSAM will consider
such event in its determination of whether the Funds should continue to hold the
security. To the extent that the ratings given by Moody's, S&P or D&P may change
as a result of changes in such organizations or their rating systems, the Funds
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statements of Additional Information.
A-3
<PAGE>
Appendix B
MONEY MARKET INSTRUMENTS
Each Portfolio may invest, for temporary defensive purposes, in the following
types of money market instruments, each of which of purchase must have or be
deemed to have under rules of the Securities and Exchange Commission remaining
maturities of 13 months or less.
U.S. TREASURY SECURITIES
U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury
Bonds that differ in their interest rates, maturities and times of issuance.
Treasury Bills have initial maturities of one year or less; Treasury Notes have
initial maturities of one to ten years; and Treasury Bonds generally have
initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES
In addition to U.S. Treasury securities, U.S. Government securities include
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
BANK OBLIGATIONS
Each Portfolio may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Portfolio may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. No Portfolio will invest more than 15% of
the value of its net assets in time deposits maturing in more than seven days
and in other securities that are illiquid.
Banker's acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
B-1
<PAGE>
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS (ALL PORTFOLIOS)
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by each
Portfolio will consist only of direct obligations which, at the time of their
purchase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1 by
Fitch or Duff-1 by Duff, (b) issued by companies having an outstanding unsecured
debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or
Duff, or (c) if unrated, determined by BSAM to be of comparable quality to those
rated obligations which may be purchased by a Portfolio. Each Portfolio may
purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time or at specified
intervals.
B-2
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Custodian
Emerging Markets Debt Portfolio
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
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Counsel Emerging Markets Debt Porfolio
Mayer Brown & Platt
1675 Broadway
New York, NY 10019
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN
THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOS' SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-016-01
<PAGE>
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds and
Bear Stearns Investment Trust
CLASS Y SHARES
The Bear Stearns Funds and Bear Stearns Investment Trust are separate open-end
management investment companies, known as mutual funds (together the "Funds").
By this Prospectus, the Funds offer Class Y shares of one non-diversified
portfolio, the Emerging Markets Debt Portfolio (the "Debt Portfolio") and two
diversified portfolios, the Income Portfolio (formerly, the Total Return Bond
Portfolio) and the High Yield Total Return Portfolio (the "High Yield
Portfolio"), (each a "Portfolio" and together the "Portfolios").
Class Y shares are sold at net asset value without a sales charge to investors
whose minimum investment is $2.5 million. Each Portfolio also issues three other
classes of shares (Class A, B and C shares), which have different expenses that
would affect performance. Investors desiring to obtain information about these
other classes of shares should call 1-800-766-4111.
INCOME PORTFOLIO
Seeks high current income consistent with preservation of capital.
HIGH YIELD TOTAL RETURN PORTFOLIO
Seeks total return through high current income and capital appreciation.
EMERGING MARKETS DEBT PORTFOLIO
Seeks high current income by primarily investing in debt obligations of
issuers located in emerging countries and seeks to provide capital appreciation.
BEAR STEARNS ASSET MANAGEMENT INC. ("BSAM" or the "Adviser"), a wholly-owned
subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's
investment adviser. Bear Stearns Funds Management Inc. ("BSFM"), a wholly- owned
subsidiary of The Bear Stearns Companies Inc., is the Administrator of each
Portfolio. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSAM,
serves as each Portfolio's distributor. Bear Stearns is also referred to herein
as the "Distributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT EACH PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Part B (also known as the Statement of Additional Information), dated October
16, 1998, which may be revised from time to time, provides a further discussion
of certain areas in this Prospectus and other matters which may be of interest
to some investors. It has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. For a free copy, write to the address
or call one of the telephone numbers listed under "General Information" in this
prospectus. Additional information, including this Prospectus and the Statement
of Additional Information, may be obtained by accessing the Internet Web site
maintained by the Securities and Exchange Commission (http://www.sec.gov).
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank; are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency; and are subject to
investment risks, including possible loss of the principal amount invested.
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.
OCTOBER 16, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 6
Description of the Portfolios.............................................. 7
Investment Objectives and Policies......................................... 7
Investment Techniques...................................................... 11
Risk Factors............................................................... 21
Management of the Portfolios............................................... 30
How to Buy Shares.......................................................... 32
Net Asset Value............................................................ 33
Shareholder Services....................................................... 33
How to Redeem Shares....................................................... 35
Dividends and Distributions................................................ 36
Taxes...................................................................... 37
Performance Information.................................................... 38
General Information........................................................ 39
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
INCOME HIGH YIELD TOTAL RETURN EMERGING MARKETS DEBT
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS Y CLASS Y CLASS Y
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed On Purchases
(as a Percentage of
offering price)........ None None None
Maximum Deferred Sales
charge Imposed on
Redemptions (as a
percentage of the
amount subject to
charge)................ None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
Advisory Fees (after
fee waiver)............ 0.00%(1) 0.00%(2) 0.28%(3)
12b-1 Fees............. 0.00% 0.00% 0.00%
Other Expenses (after
expense reimbursement). 0.45%(1) 0.65%(2) 1.12%(3)
---- ---- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement). 0.45%(1) 0.65%(2) 1.40%(3)
==== ==== ====
</TABLE>
- ------
See Notes on page 4.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming 5% annual return.
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class Y Shares............... $ 5 $ 5 $ 14 $ 14
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class Y Shares............... 7 7 20 20
EMERGING MARKETS DEBT
PORTFOLIO
Class Y Shares............... 14 14 44 44
- ------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class Y Shares............... $25 $25 $ 57 $ 57
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class Y Shares............... 35 35 77 77
EMERGING MARKETS DEBT
PORTFOLIO
Class Y Shares............... 76 76 166 166
</TABLE>
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the Portfolios and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For
a description of the expense reimbursement or waiver arrangements in effect, see
"Management of The Portfolios."
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH
PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
3
<PAGE>
(1) With respect to the Income Portfolio, BSAM has undertaken to waive its
investment advisory fee and assume certain expenses of the Income Portfolio
other than brokerage commissions, extraordinary items, interest and taxes
to the extent Total Portfolio Operating Expenses exceed 0.45% for Class Y
shares. Without such fee waiver and expense reimbursement, Advisory Fees
stated above would have been 0.45%, Other Expenses would have been 1.78%
and Total Portfolio Operating Expenses would have been 2.23%.
(2) With respect to the High Yield Portfolio, Other Expenses are based on
estimated amounts for the current fiscal year. BSAM has undertaken to waive
its investment advisory fee and assume certain expenses of the High Yield
Portfolio other than brokerage commission, extraordinary items, interest
and taxes to the extent Total Portfolio Operating Expenses exceed 0.65% for
Class Y shares. Without such waiver and expense reimbursement, (which may
be discontinued at any time upon notice to shareholders), Advisory Fees
would have been 0.60%, Other Expenses are estimated to be 1.72%, and Total
Portfolio Operating Expenses are estimated to be 2.32%.
(3) With respect to the Debt Portfolio, Other Expenses are based on estimated
amounts for the current fiscal year. BSAM has undertaken to waive its
investment management fee and assume certain expenses of the Debt Portfolio
other than brokerage commissions, extraordinary items, interest and taxes
to the extent Total Portfolio Operating Expenses exceed 1.40% for Class Y
shares. Without such waiver and expense reimbursement, (which may be
discontinued at any time upon notice to shareholders), Management Fees
would have been 1.15%, Other Expenses are estimated to be 1.26%, and Total
Portfolio Operating Expenses are estimated to be 2.41%.
4
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
Financial Highlights
The information in the table below covering each Portfolio's investment results
for the periods indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in the Portfolio's Annual Report for the
fiscal year ended March 31, 1998 which is incorporated by reference into each
Portfolio's Statement of Additional Information which is available upon request.
Contained below are per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class Y
shares of the Income Portfolio for the periods indicated. This information has
been derived from information provided in each Portfolio's financial statements.
Further information about performance is contained in the Annual Report, which
may be obtained without charge by writing to the address or calling one of the
telephone numbers listed under "General Information."
<TABLE>
<CAPTION>
For the period
For the fiscal year For the fiscal year September 8, 1995
ended March 31, 1998 ended March 31, 1997 through March 31, 1996
-------------------- -------------------- ----------------------
INCOME
PORTFOLIO(1)
<S> <C> <C> <C>
Net asset value,
beginning of period .............. $ 12.03 $ 12.26 $ 12.35
-------- -------- -------
Net investment income(2) ......... 0.80 0.77 0.41
Net realized and unrealized
gain/(loss) on investments(3) ... 0.36 (0.20) (0.05)
-------- --------- --------
Dividends and distributions
to shareholders from
Net investment income ........... (0.80) (0.77) (0.41)
Net realized
capital gains ................... (0.02) (0.03) (0.04)
--------- --------- --------
(0.82) (0.80) (0.45)
--------- --------- --------
Net asset value, end of
period .......................... $ 12.37 $ 12.03 $ 12.26
======== ======== ========
Total investment return(4)....... 9.81% 4.77% 2.92%
======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's omitted) .......... $ 4,339 $ 13,486 $ 12,199
Ratio of expenses to
average net assets(2) .......... 0.45% 0.45% 0.45%(5)
Ratio of net investment income
to average net assets(2) ........ 6.39% 6.34% 5.93%(5)
Increase/(Decrease) reflected
in expense ratios and net
investment income due to waivers
and related reimbursements ...... 1.78% 1.73% 2.89%(5)
Portfolio turnover rate ......... 244.78% 262.95% 107.35%
</TABLE>
- -----
* Calculated based on 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) Class Y shares commenced its initial public offering on September 8, 1995
and currently has no shareholders.
(2) Reflects waivers and related reimbursements.
(3) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
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.
(4) Total investment return does not consider the effects of sales charges 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.
(5) Annualized.
6
<PAGE>
Description of the Portfolios
GENERAL
Each of The Bear Stearns Funds and Bear Stearns Investment Trust is known as a
"series fund," which is a mutual fund divided into separate portfolios. Each
portfolio is treated as a separate entity for certain purposes under the
Investment Company Act of 1940, as amended (the "1940 Act"), and for other
purposes. A shareholder of one portfolio is not deemed to be a shareholder of
any other portfolio. As described below, for certain matters the Funds
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, shares of the Debt Portfolio, the Income
Portfolio and the High Yield Portfolio are being offered. From time to time,
other portfolios may be established and sold pursuant to other offering
documents. See "General Information."
NON-DIVERSIFIED STATUS
The Debt Portfolio is a non-diversified portfolio of Bear Stearns Investment
Trust. The Portfolio's classification as a "non-diversified" investment company
means that the proportion of its assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. However, the Portfolio
intends to conduct its operations so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"), which generally requires that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Portfolio's total
assets be invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Portfolio's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets be invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies). Since a relatively high percentage of the Portfolio's assets may be
invested in the securities of a limited number of issuers, some of which may be
within the same industry or economic sector, the Portfolio's portfolio
securities may be more susceptible to any single economic, political or
regulatory occurrence than the portfolio securities of a diversified investment
company.
Investment Objectives and Policies
The investment objectives and principal investment policies of each Portfolio
are described below. Each Portfolio's investment objective cannot be changed
without approval by the holders of a majority (as defined in the 1940 Act) of
such Portfolio's outstanding voting shares. There can be no assurance that a
Portfolio's investment objective will be achieved.
INCOME PORTFOLIO
The Income Portfolio's investment objective is to seek higher current income,
consistent with preservation of capital.
The Income Portfolio invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds (which it
defines as bonds, debentures and other fixed-income securities). The Portfolio
is permitted to invest in a broad range of investment grade, U.S. dollar
denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of domestic
and foreign issuers. These debt securities include bonds, debentures, notes,
money market instruments (including foreign bank obligations, such as time
deposits, certificates of deposit and bankers' acceptances, commercial paper and
other short-term corporate debt obligations, and repurchase agreements),
mortgage-related securities (including interest-only and principal-only stripped
mortgage-backed securities), asset-backed securities, municipal obligations and
convertible debt obligations. The issuers may include domestic and foreign
corporations, partnerships or trusts, and governments or their political
subdivisions, agencies or instrumentalities. Under normal market conditions, the
Portfolio seeks to provide performance results that equal or exceed the Salomon
Brothers BIG Bond Index, which is a market-capitalization weighted index that
includes U.S. Treasury, Government- sponsored, mortgage and investment grade
fixed-rate corporate fixed-income securities with a maturity of one year or
longer and a minimum of $50 million amount outstanding at the time of inclusion
in the Salomon Brothers BIG Bond Index. As of March 31, 1998, the weighted
average maturity of securities comprising the Salomon Brothers BIG Bond
7
<PAGE>
Index was approximately eight and 1/2 years and their average duration was
approximately four and 1/2 years. Under normal market conditions, the Portfolio
invests in a portfolio of securities with a dollar-weighted average maturity of
approximately seven years.
As a measure of a fixed-income security's cash flow, duration is an alternative
to the concept of "term to maturity" in assessing the price volatility
associated with changes in interest rates. Generally, the longer the duration,
the more volatility an investor should expect. For example, the market price of
a bond with a duration of five years would be expected to decline 5% if interest
rates rose 1%. Conversely, the market price of the same bond would be expected
to increase 5% if interest rates fell 1%. The market price of a bond with a
duration of 10 years would be expected to increase or decline twice as much as
the market price of a bond with a five year duration. Duration measures a
security's maturity in terms of the average time required to receive the present
value of all interest and principal payments as opposed to its term to maturity.
The maturity of a security measures only the time until final payment is due; it
does not take account of the pattern of a security's cash flows over time, which
would include how cash flow is affected by prepayments and by changes in
interest rates. Incorporating a security's yield, coupon interest payments,
final maturity and option features into one measure, duration is computed by
determining the weighted average maturity of a bond's cash flows, where the
present values of the cash flows serve as weights. In computing the duration of
the Portfolio, BSAM will estimate the duration of obligations that are subject
to prepayment or redemption by the issuer, taking into account the influence of
interest rates on prepayments, coupon flows and other factors which may affect
the maturity of the security. This method of computing duration is known as
effective duration.
BSAM anticipates actively managing the Portfolio's assets in response to changes
in the business cycle. BSAM seeks to identify and respond to phases in the
business cycle--simplistically, the expansion, topping out, recession and trough
phases--and to invest the Portfolio's assets by shifting among market sectors,
maturities and relative credit quality in a way which it believes will achieve
the Portfolio's objective in a relatively conservative manner taking into
account the volatility and risk associated with investing in a portfolio of
relatively longer-term fixed-income securities. While the Portfolio seeks, as
part of its investment objective, to preserve capital, investors should
recognize that the net asset value per share of the Portfolio should be expected
to be more volatile than the net asset value per share of a fund that invested
in portfolio securities with a shorter duration.
At least 65% of the value of the Portfolio's total assets must consist of
securities which, in the case of bonds and other debt instruments, are rated no
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB or higher by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P") or the equivalent by other rating agencies, or, if unrated, deemed to be
of comparable quality by BSAM. Up to 25% of the value of the Portfolio's total
assets may consist of securities which, in the case of bonds and other debt
instruments, are rated no lower than Ba or B by Moody's, BB or B by S&P, or the
equivalent by other rating agencies, or, if unrated, deemed to be of comparable
quality by BSAM. The Portfolio may invest in short-term fixed-income obligations
which are rated in the two highest rating categories by Moody's, S&P, Fitch or
Duff. See "Risk Factors--Fixed-Income Securities and High Yield Securities"
below, and "Appendix" in the Statement of Additional Information.
HIGH YIELD TOTAL RETURN PORTFOLIO ("HIGH YIELD PORTFOLIO")
The High Yield Portfolio's investment objective is total return through high
current income and capital appreciation.
The High Yield Portfolio will invest, under normal circumstances, at least 80%
of its total assets in high yield fixed-income securities (as defined below),
including domestic and foreign debt securities, convertible securities and
preferred stocks. The balance of the Portfolio's assets may be invested in any
other securities which BSAM believes are consistent with the Portfolio's
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. The Portfolio is designed for investors seeking to
diversify an all-equity portfolio with securities that offer greater income with
capital appreciation potential. The Portfolio is not a market-timing vehicle.
Securities offering the high current yield and capital appreciation potential
characteristics that the Portfolio seeks are generally found in rapidly growing
companies requiring debt to fund plant expansion plans or pay for acquisitions
and large, well-known companies with a high degree of leverage. These securities
are also generally rated in the medium to lower categories by recognized rating
services. The Portfolio expects to seek high current income by investing at
least 80% of its total
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assets in "high yield fixed-income securities," which for this purpose
constitute fixed income securities rated Ba or lower by Moody's Investors
Service (Moody's), or BB or lower by Standard & Poor's Ratings Group (Standard &
Poor's) or comparably rated by any other Nationally Recognized Statistical
Rating Organization (NRSRO), or unrated securities determined by the Adviser to
be of comparable quality. Corporate bonds rated Ba or lower by Moody's and BB or
lower by Standard & Poor's are considered speculative. The Portfolio may invest
up to 10%, and will normally hold no more than 25% (as a result of market
movements or downgrades), of its assets in bonds rated below Caa by Moody's or
CCC by Standard & Poor's, including bonds in the lowest ratings categories (C
for Moody's and D for Standard and Poor's) and unrated bonds of comparable
quality. Such securities are highly speculative and may be in default of
principal and/or interest payments. A description of corporate bond ratings is
contained in the Appendix to this Prospectus.
In selecting a security for investment by the Portfolio, BSAM will perform its
own investment analysis and will not rely principally on the ratings assigned by
the rating services, although such ratings will be considered by BSAM. BSAM will
consider, among other things, the financial history and condition, the prospects
and the management of an issuer in selecting securities for the Portfolio. BSAM
will be free to invest in high yield, high risk debt securities of any maturity
and duration, and the interest rates on such securities may be fixed or
floating.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than higher rated securities. Some of such
investments may be non-performing when purchased. See "Risk Factors."
In addition to providing the potential for high current income, high yield
securities may provide the potential for capital appreciation. The Portfolio
will seek capital appreciation by investing in securities which may be expected
by BSAM to appreciate in value as a result of declines in long-term interest
rates or favorable developments affecting the business or prospects of the
issuer, which may improve the issuer's financial condition and credit rating, or
a combination of both.
As stated above, normally at least 80% of the Portfolio's total assets will be
invested in high yield fixed-income securities, including medium- to lower-
rated high yield fixed-income securities and unrated securities of comparable
quality. The balance of the Portfolio's assets may be invested in any other
securities believed by BSAM to be consistent with the Portfolio's investment
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. When prevailing economic conditions cause a narrowing
of the spreads between the yields derived from medium to lower-rated or
comparable unrated securities and those derived from higher rated issues, the
Portfolio may invest in higher-rated fixed-income securities that provide
similar yields but have less risk. Generally, the Portfolio's average weighted
maturity will range from three to twelve years.
EMERGING MARKETS DEBT PORTFOLIO ("DEBT PORTFOLIO")
The Debt Portfolio's investment objective is 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.
The Debt Portfolio considers "Debt Obligations" to include fixed or floating
rate bonds, notes, debentures, commercial paper, loans, 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. 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
Debt Portfolio's investment objective will be achieved.
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The Portfolio may invest at least 80% of its total assets in Debt Obligations 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."
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
Debt 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." When BSAM 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.
BSAM 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 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
BSAM'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 its shares 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
Debt 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
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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 BSAM is expected to acquire or utilize
on behalf of the Debt Portfolio are described below.
The Debt 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, BSAM 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 BSAM to adjust the Portfolio's
investments as interest rates change to take advantage of the most attractive
segments of the yield curve.
Investment Techniques
Each Portfolio may engage in various investment techniques as described below.
FIXED-INCOME SECURITIES (ALL PORTFOLIOS)
Each Portfolio invests primarily in fixed-income securities. Investors should be
aware that even though interest-bearing securities are investments which promise
a stable stream of income, the prices of such securities typically are inversely
affected by changes in interest rates and, therefore, are subject to the risk of
market price fluctuations. Thus, if interest rates have increased from the time
a security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its cost. In either instance, if the security was purchased at face value
and held to maturity, no gain or loss would be realized. Certain securities
purchased by a Portfolio, such as those with interest rates that fluctuate
directly or indirectly based on multiples of a stated index, are designed to be
highly sensitive to changes in interest rates and can subject the holders
thereof to extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, a Portfolio will
consider all circumstances deemed relevant in determining whether to continue to
hold the security. Holding such securities that have been downgraded below
investment grade can subject a Portfolio to additional risk. Certain securities
purchased by a Portfolio, such as those rated Baa by Moody's or BBB by S&P,
Fitch or Duff, may be subject to such risk with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. Debt securities which are rated Baa by Moody's are
considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily 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 debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
FOREIGN SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in securities of foreign issuers. When a Portfolio
invests in foreign securities, they may be denominated in foreign currencies.
Thus, a Portfolio's net asset value will be affected by changes in exchange
rates. (See "Risk Factors".) Under normal conditions, the High Yield Portfolio
will not invest more than 25% of its total assets in foreign securities.
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CONVERTIBLE SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks or other securities 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. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique investment characteristics such as
(1) higher yields than common stocks, but lower yields than comparable
nonconvertible securities, (2) a lesser degree of fluctuation in value than the
underlying stock since they have fixed income characteristics, and (3) the
potential for capital appreciation if the market price of the underlying common
stock increases. Convertible debt securities have characteristics of both fixed
income and equity instruments.
No Portfolio has the current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment upon
conversion, although it may do so for temporary purposes. A convertible security
might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by a Portfolio is called for redemption, the Portfolio may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party. Under normal conditions,
the High Yield Portfolio and the Debt Portfolio will not invest more than 10% of
their total assets, respectively, in convertible securities.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS (ALL
PORTFOLIOS)
Each Portfolio may invest in zero coupon securities and pay-in-kind bonds. These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. Each Portfolio also may purchase
pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of their interest in
the form of debt or equity securities. The Portfolios will only purchase
pay-in-kind bonds that pay all or a portion of their interest in the form of
debt securities. Zero coupon securities and pay- in-kind bonds may be issued by
a wide variety of corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Portfolios are required to accrue as income each year the
value of securities received in respect of pay-in-kind bonds and a portion of
the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Portfolios will elect similar treatment for any market discount with respect to
debt securities acquired at a discount. Accordingly, the Portfolios may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate current cash to satisfy certain distribution requirements. Under normal
conditions, the High Yield Portfolio will not invest more than 25% of its total
assets in zero coupon securities, pay-in-kind bonds or discount obligations.
NON-DOLLAR DENOMINATED SECURITIES (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and Debt Portfolios may invest in non-dollar denominated
securities. 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. A
Portfolio will invest in short term or floating rate non-dollar denominated
securities when BSAM 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 a Portfolio's non-dollar
denominated securities. Currently, because of high inflation and other factors,
the currencies of the countries in which the Debt 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. BSAM
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 Portfolios may or
may not hedge or cross hedge its foreign currency exposure. The High Yield
Portfolio may invest up to 25% of its total assets in non-dollar denominated
securities. The Debt Portfolio may invest up to 30% of its total assets in
non-dollar denominated securities provided that no more than 20% of its assets
are expected to be invested in Debt Obligations denominated in the currency of
any one country.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (ALL PORTFOLIOS)
Each Portfolio may purchase securities on a when-issued basis. When-issued
transactions arise when securities are purchased by a 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. Each 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. Each Portfolio may enter into offsetting contracts for the
forward sale of other securities that it owns. Although a 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
BSAM deems it appropriate to do so.
The issuance of some of the securities in which the Debt 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 Debt 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.
The High Yield Portfolio may not invest more than 33 1/3% of its total assets in
when-issued securities and forward commitments. There is no overall limit on the
percentage of the Debt Portfolio's assets which may be committed to the purchase
of securities on a when-issued basis; however, the Debt 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 Debt Portfolio's assets committed to such
purchase of securities on a when-issued basis may increase the volatility of its
net asset value.
Each 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 1940 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.
BORROWING AND LEVERAGE (ALL PORTFOLIOS)
The Debt Portfolio may, solely for temporary or emergency purposes, borrow in an
amount up to 15% of its total assets (including the amount borrowed), less all
liabilities and indebtedness other than the borrowing. The Income Portfolio and
the High Yield Portfolio may borrow money to the extent permitted under the 1940
Act. However, the Income Portfolio currently intends to borrow money only in
temporary or emergency purposes, in an amount up to 15% of the value of its
total assets. A Portfolio may not purchase securities when borrowings exceed 5%
of its total assets. If market fluctuations in the value of the Debt Portfolio's
portfolio holdings or other
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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 Debt
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
Debt Portfolio or to pay dividends and distributions to Shareholders of the
Portfolio, in instances where the Debt Portfolio does not desire to liquidate
its portfolio holdings. The Debt 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 a 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 (ALL PORTFOLIOS)
Each 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. Each 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 BSAM 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 BSAM 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 BSAM and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, the
respective 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, BSAM 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.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
The Portfolios may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies currently include futures contracts and related
options (including interest rate futures contracts and options thereon), options
on securities, financial indices and currencies, and forward currency exchange
contracts. The Portfolios' ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Portfolio Securities"
in the Statement of Additional Information for The Bear Stearns Funds and
"Investment Practices" in the Statement of Additional Information for the Bear
Stearns Investment Trust. New financial products and risk management techniques
continue to be developed and the Portfolios may use these new investments and
techniques to the extent consistent with their investment objective and
policies.
No Portfolio will purchase or sell futures contracts or related options, or
options on stock indices, if immediately thereafter the sum of the amounts of
initial margin deposits on the Portfolio's existing futures and premiums paid
for options exceeds 5% of the Portfolio's total assets. This restriction does
not apply to the purchase and sale of futures contracts and related options made
for "bona fide hedging purposes."
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OPTIONS ON SECURITIES, INDICES AND FOREIGN CURRENCIES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered put and call
options on securities, indices and foreign currencies. Each Portfolio may
purchase call options to gain market exposure in a particular sector while
limiting downside risk. Each Portfolio may purchase put options in order to
hedge against an anticipated loss in value of Portfolio securities. The
principal reason for writing covered call options (which are call options with
respect to which a Portfolio owns the underlying security or securities) is to
realize, through the receipt of premiums, a greater return than would be
realized on each Portfolio's securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. A Portfolio may not invest more than 5% of its assets, represented by
the premium paid, in the purchase of call and put options. A Portfolio may not
write covered call or put option contracts in an amount exceeding 20% of its net
assets at the time such option contracts are written. (See "Risk Factors" and
the Statements of Additional Information for additional risk factors).
FUTURES AND OPTIONS ON FUTURES (ALL PORTFOLIOS)
Each Portfolio may buy and sell futures contracts and related options on
securities indices and related interest rates for a number of purposes. It may
do so to try to manage its exposure to the possibility that the prices of its
portfolio securities and instruments may decline or to establish a position in
the futures or options market as a temporary substitute for purchasing
individual securities or instruments. It may do so in an attempt to enhance its
income or return by purchasing and selling call and put options on futures
contracts on financial indices or securities. It also may use interest rate
futures to try to manage its exposure to changing interest rates. Investments in
futures and options on futures involve certain risks. (See "Risk Factors" and
the Statement of Additional Information.)
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
Each Portfolio may, in seeking to increase its income, lend securities in its
portfolio to securities firms and financial institutions deemed creditworthy by
BSAM. 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 a
Portfolio's investment program and by regulatory agencies and approved by the
Board of Trustees. While the securities loan is outstanding, a 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. Each 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 a Portfolio lends its
portfolio securities will be monitored on an ongoing basis by BSAM pursuant to
procedures adopted and reviewed on an ongoing basis by the Board of Trustees.
The Income Portfolio and the Debt Portfolio may each lend up to 33 1/3% of its
total assets. The High Yield Portfolio may lend up to 30% of its total assets.
The Income and High Yield Portfolios have appointed Custodial Trust Company
(CTC), an affiliate of BSAM, as securities lending agent. CTC receives a fee for
these services.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Each 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 Portfolios to be illiquid.
SHORT SALES (ALL PORTFOLIOS)
Each Portfolio may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales). To complete the transaction,
a Portfolio will borrow the security to make
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delivery to the buyer. A Portfolio is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Portfolio. Until the security is replaced, a Portfolio is required
to pay to the lender any dividends or interest which accrue during the period of
the loan. To borrow the security, a Portfolio may be required to pay a premium,
which would increase the cost of the security sold. The proceeds of the short
sale will be retained by the broker to the extent necessary to meet margin
requirements until the short position is closed out. Until a Portfolio replaces
the borrowed security, it will (a) maintain in a segregated account cash, U.S.
Government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the current
value of the security sold short and will not be less than the market value of
the security at the time it was sold short or (b) otherwise cover its short
position through a short sale "against-the-box," which is a short sale in which
the Portfolio owns an equal amount of the securities sold short or securities
convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in amount to, the
securities sold short. There are certain tax implications associated with this
strategy. See "Dividends, Distributions and Taxes."
A Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Portfolio replaces the borrowed security. A Portfolio will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale. Under
normal conditions, a Portfolio will not engage in short sales to the extent that
the Portfolio would be required to segregate with its Custodian, or deposit as
collateral to replace borrowed securities, more than 25% of its net assets. The
Debt Portfolio may not make short sales of securities, except short sales
against the box.
BRADY BONDS (DEBT PORTFOLIO)
"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
1940 Act rules and regulations, Brady bonds are not considered U.S. Government
securities.
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The Debt 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--Sovereign Debt."
INDEXED SECURITIES (DEBT PORTFOLIO)
The Debt 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.
INVESTMENT IN OTHER FUNDS (INCOME AND DEBT PORTFOLIOS)
In accordance with the 1940 Act, the Income and Debt Portfolios may each invest
a maximum of up to 10% of the value of its total assets in securities of other
investment companies, and each Portfolio may own up to 3% of the total
outstanding voting stock of any one investment company. In addition, up to 5% of
each Portfolio's total assets may be invested in the securities of any one
investment company. The Debt Portfolio may invest in both investment companies
that are registered under the 1940 Act as well as those that are not required to
be so registered. Investment in other investment companies or vehicles may be
the sole or most practical means by which the Debt 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 1940 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 Debt Portfolio's operations. In addition, special tax considerations may
apply. The Portfolios do not intend to invest in such vehicles or funds unless,
in the judgment of BSAM, the potential benefits of such investment justify the
payment of any applicable premium or sales charge. As an investor in an
investment company, each Portfolio would bear its ratable share of that
investment company's expenses, including its administrative and advisory fees.
At the same time, each Portfolio would continue to pay its own investment
management fees and other expenses; however, BSAM has agreed to waive its fees
to the extent necessary to comply with state securities laws. In addition, BSAM
has agreed to waive its fees to the extent necessary to retain its current
expense cap.
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LOANS (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and the Debt Portfolios may each invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a foreign
entity and one or more financial institutions ("Lenders"). The majority of a
Portfolio's investments in Loans in emerging markets is expected to be in the
form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in a Portfolio having a contractual relationship only with
the Lender, not with the borrower government. A Portfolio will have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In connection with purchasing
Participations, a 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 set-off 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, a Portfolio
may be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. A Portfolio will acquire
Participations only if the Lender positioned between the Portfolio and the
borrower is determined by BSAM to be creditworthy. Creditworthiness will be
judged based on the same credit analysis performed by BSAM when purchasing
marketable securities. When a Portfolio purchases Assignments from Lenders, the
Portfolio will acquire direct rights against a borrower on the Loan. However,
since Assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by a
Portfolio as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.
A Portfolio may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Portfolios anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on a Portfolio's ability to dispose of particular
Assignments or Participations 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 borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for a Portfolio
to assign a value to those securities for purposes of valuing the Portfolio and
calculating its net asset value. Under normal conditions, the High Yield
Portfolio will not invest more than 15% of its total assets in Loans and the
Debt Portfolio will not invest more than 20% of its total assets in Loans.
MORTGAGE-RELATED SECURITIES (HIGH YIELD AND INCOME PORTFOLIOS)
The High Yield and Income Portfolios may each invest in mortgage-related
securities, consistent with their investment objectives, that provide funds for
mortgage loans made to residential homeowners. These include securities which
represent interests in pools of mortgage loans made by lenders such as savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled for sale to investors by various governmental,
government-related and private organizations. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Prepayments are caused by repayments of principal resulting from the sale of the
underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect government
guarantees of payments in such pools. However, timely payment of interest and/or
principal of these pools is supported by various forms of insurance or
guarantees, including individual loan, title, pool or hazard insurance. There
can be no assurance that the private insurers can meet their obligations under
the policies. The Portfolios may buy mortgage-related securities without
insurance or guarantees if, through an examination of the loan
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experience and practices of the poolers, BSAM determines that the securities
meet the Portfolios investment criteria. Although the market for such securities
is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. Under normal conditions, the High
Yield Portfolio will not invest more than 20% of its total assets in
mortgage-related securities.
EQUITY SECURITIES (HIGH YIELD PORTFOLIO)
In seeking to meet its objective, the High Yield Portfolio may invest in
"equity" securities, including distressed securities, as described below. These
securities include foreign and domestic common stocks or preferred stocks,
rights and warrants and debt securities or preferred stock which are convertible
or exchangeable for common stock or preferred stock. To the extent the Portfolio
invests in equity securities, there may be a diminution in the Portfolio's
overall yield. See "Distressed Securities" below. Under normal conditions, the
High Yield Portfolio will not invest more than 20% of its total assets in equity
securities.
DISTRESSED SECURITIES (HIGH YIELD PORTFOLIO)
The High Yield Portfolio may invest in debt or equity securities of financially
troubled or bankrupt companies (financially troubled issuers) and in debt or
equity securities of companies, that in the view of the Adviser are currently
undervalued, out of favor or price depressed relative to their long- term
potential for growth and income (operationally troubled issuers) (collectively,
"distressed securities"). Investment in distressed securities involves certain
risks. See "Risk Factors." Under normal conditions, the Portfolio will not
invest more than 20% of its total assets in distressed securities.
ASSET-BACKED SECURITIES (INCOME AND HIGH YIELD PORTFOLIOS)
The Income and High Yield Portfolios may invest in asset-backed securities,
which are a form of derivative securities. The securitization techniques used
for asset-backed securities are similar to those used for mortgage-related
securities. These securities include debt securities and securities with
debt-like characteristics. The collateral for these securities has included home
equity loans, automobile and credit card receivables, boat loans, computer
leases, airplane leases, mobile home loans, recreational vehicle loans and
hospital account receivables.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
generally are unsecured and the debtors are entitled to the protection of a
number of state and Federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. The High Yield Portfolio currently intends to invest no more than 5%
of its assets in asset-backed securities.
MUNICIPAL OBLIGATIONS (INCOME AND HIGH YIELD PORTFOLIOS)
Municipal obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivision, agencies and instrumentalities, multistate agencies or
authorities. While, in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality certain issues of municipal obligations, both taxable and
non-taxable, offer yields comparable and, in some cases, greater than the yields
available on other permissible investments. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Dividends received by shareholders which are attributable to
interest income received by a Portfolio from municipal obligations generally
will be subject to federal income tax. Municipal obligations bear fixed,
floating or variable rates of interest, which are determined in some instances
by formulas under which the municipal obligation's interest rate will change
directly or inversely to changes in interest rates or an index, or multiples
thereof, in many cases subject to a maximum and minimum. The Bond Portfolio
currently intends to invest no more than 25% of its assets in municipal
obligations. However, this percentage may be varied from time to time without
shareholder approval. The High Yield Portfolio currently intends to invest no
more than 5% of its assets in municipal obligations.
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TEMPORARY STRATEGIES (ALL PORTFOLIOS)
Each Portfolio retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with a Portfolio's investment
objectives, BSAM may employ a temporary defensive investment strategy if it
determines such a strategy is warranted. Under such a defensive strategy, a
Portfolio temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality fixed-income securities or money market instruments of U.S. or foreign
issuers, and most or all of the Portfolio's investments may be made in the
United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of a Portfolio shares
or to meet ordinary daily cash needs, a Portfolio temporarily may hold cash
(U.S. dollars, foreign currencies or multinational currency units) and may
invest any portion of its assets in high quality foreign or domestic money
market instruments (See Appendix B).
SIMULTANEOUS INVESTMENTS (ALL PORTFOLIOS)
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by BSAM. However, if such other
investment companies or accounts are prepared to invest in, or desire to dispose
of, securities of the type in which a Portfolio invests at the same time as the
Portfolio, available investments or opportunities for sales will be allocated
equitably to each. In some cases, this procedure may adversely affect the size
of the position obtained for or disposed of by a Portfolio or the price paid or
received by the Portfolio.
MISCELLANEOUS TECHNIQUES (ALL PORTFOLIOS)
In addition to the techniques and investments described above, the High Yield
Portfolio may invest in trade claims, depository receipts and depository shares,
and may engage in forward foreign currency exchange contracts, currency swaps,
mortgage swaps, index swaps and interest rate swaps, caps, floors and collars
and reverse repurchase agreements. The Debt Portfolio may engage in forward
foreign currency agreements. The Debt Portfolio may engage in forward foreign
currency exchange contracts, interest rate swaps, proxy hedging, cross hedging,
settlement hedging, transaction hedging, position hedging and other strategies.
The Income Portfolio may engage in forward currency contracts, currency swaps
and cross currency hedging.
PORTFOLIO TURNOVER
The Portfolios will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because high yield markets can be
especially volatile, securities of emerging market countries may at times be
held only briefly. Under normal conditions, the portfolio turnover rates for the
Income Portfolio, High Yield Portfolio and Debt Portfolio generally will not
exceed 250%, 150% and 150%, respectively, in any one year. However, the
portfolio turnover rates may exceed this rate when BSAM believes the anticipated
benefits of short-term investments outweigh any increase in transaction costs or
increase in short-term gains. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions or transaction costs.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income.
CERTAIN FUNDAMENTAL POLICIES
Each Portfolio may: (i) borrow money to the extent permitted under the 1940 Act;
and (ii) invest up to 25% of the value of its total assets in the securities of
issuers in a single industry, provided that there is no such limitation on
investments in securities issued or guaranteed by the U.S. Government, its
agencies or sponsored enterprises. Each of the Income Portfolio and the High
Yield Portfolio may also (iii) invest up to 5% of the value of its total assets
in the obligations of any issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested, and securities issued or guaranteed by
the U.S. Government, its agencies or sponsored enterprises may be purchased,
without regard to any such limitation. This paragraph describes certain
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares. See "Investment Objectives and Management
Policies--Investment Restrictions" in the relevant Portfolio's Statement of
Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its
assets, but only to secure permitted borrowings; and (ii) invest up to 15% of
the value of its net assets in repurchase agreements providing for settlement in
more than seven days after notice and in other illiquid securities. In addition,
the Debt Portfolio may purchase securities of any company having less than three
years' continuous operation (including operations of any predecessors) if such
purchase does not cause the value of Debt Portfolio's investments in all such
companies to exceed 10%, of the value of its total assets. See "Investment
Objectives and Management Policies--Investment Restrictions" in The Bear Stearns
Funds' Statements of Additional Information, and "Investment Objective and
Policies" in The Bear Stearns Investment Trust's Statement of Additional
Information.
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Risk Factors
No investment is free from risk. Investing in a Portfolio will subject investors
to certain risks which should be considered. The following risks apply to each
Portfolio to the extent that it engages in the investment practices set forth
below.
NET ASSET VALUE FLUCTUATIONS
No Portfolio's net asset value per share is fixed and should be expected to
fluctuate. Investors should purchase Portfolio shares only as a supplement to an
overall investment program and only if investors are willing to undertake the
risks involved.
FIXED-INCOME SECURITIES
Investors should be aware that even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities that may be purchased by the
Portfolios, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, the Portfolio
will consider all circumstances deemed relevant in determining whether to
continue to hold the security. Holding such securities that have been downgraded
below investment grade can subject a Portfolio to additional risk. Certain
securities purchased by a Portfolio, such as those rated Baa by Moody's or BBB
by S&P, Fitch or Duff, may be subject to such risk with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated fixed-income securities. Debt securities which are rated Baa by Moody's
are considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily 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 debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Funds' Board of Trustees. In accordance with
such guidelines, BSAM will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information.
FOREIGN SECURITIES
Foreign securities involve certain risks, which should be considered carefully
by an investor in the Portfolios. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company or government than about a domestic company or the U.S. Government.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could
21
<PAGE>
affect investment. In many instances, foreign debt securities may provide higher
yields than securities of domestic issuers which have similar maturities and
quality. These investments, however, may be less liquid than the securities of
U.S. corporations. In the event of default of any such foreign debt obligations,
it may be more difficult for a Portfolio to obtain or enforce a judgement
against the issuers of such securities.
Investing in the securities markets of developing countries involves exposure to
economies that are generally less diverse and mature and to political systems
which can be expected to have less stability than those of developed countries.
Historical experience indicates that the markets of developing countries have
been more volatile than the markets of developed countries. The risks associated
with investments in foreign securities may be greater with respect to
investments in developing countries and are certainly greater with respect to
investments in the securities of financially and operationally troubled issuers.
Additional costs could be incurred in connection with a Portfolio's
international investment activities. Foreign brokerage commissions are generally
higher than United States brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversion between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of a Portfolio's securities
denominated in that currency. Such changes also will affect the Portfolio's
income and distributions to shareholders. In addition, although the Portfolio
will receive income in such currencies, the Portfolio will be required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency declines after the Portfolio's income has been
accrued and translated into U.S. dollars, the Portfolio could be required to
liquidate portfolio securities to make such distributions, particularly in
instances in which the amount of income the Portfolio is required to distribute
is not immediately reduced by the decline in such currency. Similarly, if an
exchange rate declines between the time the Portfolio incurs expenses in U.S.
dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater than the equivalent amount in any such currency of such
expenses at the time they were incurred.
Each Portfolio may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking-in the
U.S. dollar price of the purchase or sale of securities denominated in a foreign
currency; locking-in the U.S. dollar equivalent of dividends to be paid on such
securities which are held by the Portfolio; and protecting the U.S. dollar value
of such securities which are held by the Portfolio.
RISK OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the
Portfolios would not be subject absent the use of these strategies. The
Portfolios, and thus the investors, may lose money through any unsuccessful use
of these strategies. If BSAM's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options,
foreign currency and futures contracts and options on futures contracts include
(1) dependence on BSAM's ability to predict correctly movements in the direction
of interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to pursue these strategies are different
from those needed to select portfolio securities; (4) the possible absence of a
liquid secondary market for any particular instrument at any time; (5) the
possible need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of a Portfolio to purchase or sell
a portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Portfolio to maintain "cover" or
to segregate securities in connection with hedging transactions. See "Dividends,
Distributions and Taxes" in The Bear Stearns Funds' Statement of Additional
Information and "Taxation" in the Bear Stearns Investment Trust's Statement of
Additional Information.
22
<PAGE>
The Portfolios will generally purchase options and futures on an exchange only
if there appears to be a liquid secondary market for such options or futures;
the Portfolios will generally purchase OTC options only if BSAM believes that
the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or that the other party will continue to make a market. Thus, it may
not be possible to close an options or futures transaction. The inability to
close options and futures positions also could have an adverse impact on a
Portfolio's ability to effectively hedge its portfolio. There is also the risk
of loss by a Portfolio of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Portfolio has an open position in an
option, a futures contract or related option.
HIGH YIELD SECURITIES
GENERAL. The High Yield and Debt Portfolios may invest all or substantially all
of their assets in high yield, high risk debt securities, commonly referred to
as "junk bonds." The Income Portfolio may invest up to 25% of its assets in
securities rated below investment grade. Securities rated below investment grade
and comparable unrated securities offer yields that fluctuate over time, but
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks than
higher-rated securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Certain of the debt securities in which a
Portfolio may invest may have, or be considered comparable to securities having,
the lowest ratings for non-subordinated debt instruments assigned by Moody's,
S&P or D&P (i.e., rated C by Moody's or CCC or lower by S&P or D&P). Under
rating agency guidelines, these securities are considered to have extremely poor
prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default, 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. Such securities are considered speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. Unrated securities deemed
comparable to these lower- and lowest- rated securities will have similar
characteristics. Accordingly, it is possible that these types of factors could,
in certain instances, reduce the value of securities held by a Portfolio with a
commensurate effect on the value of its respective shares. Therefore, an
investment in a Portfolio should not be considered as a complete investment
program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers, and participants in the market
are mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on a
Portfolio's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Portfolio is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Funds' Board of Trustees to value the Portfolio's
securities and the Funds' Trustees may have to use a greater degree of judgment
in making such valuations. Furthermore, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on fundamental
analysis, may tend to decrease the market value and liquidity of such
lower-rated securities. Less liquid secondary markets may also affect a
Portfolio's ability to sell securities at their fair value. In addition, each
Portfolio may invest up to 15% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield, high risk debt
securities contract due to adverse economic conditions or for other reasons,
certain previously liquid securities in a Portfolio may become illiquid and the
proportion of the Portfolio's assets invested in illiquid securities may
increase.
The ratings of fixed-income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
23
<PAGE>
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their Debt Obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default in payment of interest or principal by such issuers is
significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
Many fixed-income securities, including certain U.S. corporate fixed-income
securities in which the Portfolios may invest, contain call or buy-back features
which permit the issuer of the security to call or repurchase it. Such
securities may present risks based on payment expectations. If an issuer
exercises such a "call option" and redeems the security, a Portfolio may have to
replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Portfolio.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose a
Portfolio to the direct or indirect consequences of political, social or
economic changes in the developing and emerging countries that issue the
securities. The ability and willingness of sovereign obligors in developing and
emerging countries or the governmental authorities that control repayment of
their external debt to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which a Portfolio may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
As a result, a governmental obligor may default on its obligations. If such a
default occurs, a Portfolio may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign sovereign debt
securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
sovereign Debt Obligations in the event of default under their commercial bank
loan agreements.
DISTRESSED SECURITIES
Distressed securities involve a high degree of credit and market risk and may be
subject to greater price volatility than other securities in which the Portfolio
invests.
Although a Portfolio will invest in select companies which in the view of BSAM
have the potential over the long term for capital growth, there can be no
assurance that such financially or operationally troubled companies can be
successfully transformed into profitable operating companies. There is a
possibility that the Portfolio may incur substantial or total losses on its
investments. During an economic downturn or recession, securities of financially
troubled issuers are more likely to go into default than securities of other
issuers. In addition, it may be difficult to obtain information about
financially and operationally troubled issuers.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The market
prices of such securities are subject to erratic and abrupt market movements and
the spread between bid and asked prices may be greater than normally expected.
In addition, it is anticipated that many of such portfolio investments may not
be widely traded and that the Portfolio's position in such securities may be
substantially relative to the market for such securities. As a result, the
Portfolio may experience delays and incur losses and other costs in connection
with the sale of its portfolio securities.
Distressed securities which a Portfolio may purchase may also include securities
of companies involved in bankruptcy proceedings, reorganizations and financial
restructurings. To the extent the Portfolio invests in such securities, it may
have a more active participation in the affairs of issuers than
24
<PAGE>
is generally assumed by an investor. This may subject the Portfolio to
litigation risks or prevent the Portfolio from disposing of securities. In a
bankruptcy or other proceeding, the Portfolio as a creditor may be unable to
enforce its rights in any collateral or may have its security interest in any
collateral challenged, disallowed or subordinated to the claims of the
creditors. See "Investment Objective and Management Policies--Portfolio
Securities--Bankruptcy and Other Proceedings--Litigation Risks" in The Bear
Stearns Funds' Statement of Additional Information and "Risk Factors and Special
Considerations--Investing in Securities Markets of Emerging Countries" in The
Bear Stearns Investment Trust's Statement of Additional Information.
Of the Debt Portfolio's total net assets as of March 31, 1998, 94.85% consisted
of portfolio investments and 5.15% 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, 1998 are as follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BBB Baa 3.05%
BB B 16.31%
BB Ba 60.28%
B B 15.38%
NR NR 4.98%
</TABLE>
Based on the weighted average ratings of all investments held during the Debt
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1998),
the percentage of the Debt 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
Debt Portfolio's assets during the most recent period and is not necessarily
representative of the Debt Portfolio's assets as of the end of such period, the
current fiscal period or at any time in the future.
<TABLE>
- --------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB Baa 3.27%
BB B 29.50%
BB Ba 45.38%
B B 16.66%
NR NR 5.19%
</TABLE>
Of the High Yield Portfolio's total net assets as of March 31, 1998, 110.88%
consisted of portfolio investments and -10.88% consisted of liabilities in
excess of other assets. The percentage of the High Yield Portfolio's investments
invested in securities rated by S&P and Moody's as of March 31, 1998 are as
follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 1.33%
BB Ba 0.64%
B Ba 0.64%
B B 67.55%
B Caa 11.25%
CCC B 3.63%
CCC Caa 2.55%
NR NR 12.41%
</TABLE>
25
<PAGE>
Based on the weighted average ratings of all investments held during the High
Yield Portfolio's most recent fiscal period (the fiscal year ended March 31,
1998), the percentage of the High Yield 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 High Yield Portfolio's assets during the most recent period
and is not necessarily representative of the High Yield Portfolio's assets as of
the end of such period, the current fiscal period or at any time in the future.
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 0.68%
BB Ba 0.97%
B Ba 1.31%
B B 63.27%
B Caa 12.45%
CCC B 3.67%
CCC Caa 4.31%
NR NR 13.34%
</TABLE>
- ------
* Equivalent Unrated-These categories represent the comparable quality of
unrated securities as determined by the Adviser. For foreign government
obligations not individually rated by an internationally recognized
statistical rating organization, the Debt Portfolio assigns a rating based
on the rating of the sovereign credit of the issuing government.
Debt Obligations in which the Portfolios 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. A
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 Portfolios expect 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 a 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 a Portfolio and thereby maintain its qualification as a "regulated
investment company" under the Code, a 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 a 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 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.
26
<PAGE>
While BSAM intends to manage the Portfolios 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 a 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 Debt 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 a 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 BSAM intends to manage the
Portfolios in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse political changes will not cause a 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 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.
27
<PAGE>
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 a Portfolio is uninvested and
no return is earned thereon. The inability of a 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 a 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. A 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 a 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 a 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 Funds
may suspend redemption of Portfolio shares for any period during which an
emergency exists, as determined by the Securities and Exchange Commission.
Accordingly, if a Portfolio believes that appropriate circumstances exist, it
will promptly apply to the Securities and Exchange Commission for a
determination that an emergency is present. During the period commencing from a
Portfolio's identification of such condition until the date of the Securities
and Exchange 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
The Debt Obligations of emerging markets countries will not be registered with
the Securities and Exchange Commission or subject to U.S. regulatory or
reporting requirements. Disclosure
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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 Portfolios may engage have
risks associated with them, including possible default by the other party to the
transaction, illiquidity and, to the extent BSAM'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 a 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 entails certain risks. The cost to a
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 a
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 Portfolios, 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 a 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. A 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 a
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.
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YEAR 2000 RISK
Many of the world's computer systems currently record years in two-digit format.
Such computer systems will be unable to properly interpret dates beyond the year
1999, which could lead to business disruptions in the U.S. and internationally
(the "Year 2000 Issue").
To ensure that the Portfolios are not negatively impacted by the Year 2000
Issue, BSAM's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially arise in internally developed computer systems and to either obtain
representations from or make other inquiries of those parties who provide
computer applications or services that are computer system dependent that BSAM
has determined are critical to the Portfolios.
At the present time, BSAM has been informed by its corporate parent that it
expects that most of its significant Year 2000 corrections should be tested in
production by the end of 1998. Full integration testing of these systems and
testing of interfaces with third party providers will continue through 1999.
However, there can be no assurance that such schedule will be met or the systems
of other companies on which BSAM and the Portfolios are dependent also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Portfolios.
Management of the Portfolios
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. Each Portfolio's Statement of Additional Information contains
the name and general business experience of each Trustee.
PORTFOLIO MANAGEMENT
BSAM uses a team approach to manage each Portfolio. Each team consists of
portfolio managers, assistant portfolio managers and analysts performing as a
dynamic unit to manage the assets of each Portfolio.
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INVESTMENT ADVISER AND MANAGER
The Portfolios' investment adviser and manager is BSAM, a wholly owned
subsidiary of The Bear Stearns Companies Inc., which is located at 575 Lexington
Avenue, New York, New York 10022. 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. BSAM is a registered investment adviser
and offers, either directly or through affiliates, investment advisory services
to open-end and closed-end investment funds and other managed pooled investment
vehicles with net assets at June 30, 1998, of $9.8 billion.
BSAM supervises and assists in the overall management of the Portfolios' affairs
under an Investment Advisory Agreement between BSAM and the Portfolios, subject
to the overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law.
BSAM uses a team approach to money management consisting of portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to manage
the assets of each Portfolio.
Under the terms of an Investment Advisory Agreement, BSAM is entitled to receive
from the Income Portfolio and High Yield Portfolio a monthly fee equal to an
annual rate of 0.45% and 0.60%, respectively, of each Portfolio's average daily
net assets. For the fiscal year ended March 31, 1998, investment advisory fees
accrued by the Income Portfolio and High Yield Portfolio amounted to $91,715 and
$28,723, respectively, all of which was waived.
Under the terms of the Investment Management Agreement, the Debt Portfolio pays
BSAM a fee computed daily and payable monthly, at an annual rate equal to 1.15%
of the Debt Portfolio's average daily net assets up to $50 million, 1.00% of the
Debt Portfolio's average daily net assets of more than $50 million but not in
excess of $100 million, and 0.70% of the Debt Portfolio's average daily net
assets above $100 million. For the fiscal year ended March 31, 1998, investment
management fees earned by the Debt Portfolio amounted to $435,752, of which
$328,977 was waived.
BSAM has agreed that if, in any fiscal year, the sum of the Debt Portfolio's
expenses exceeds the expense limitations applicable to the Debt Portfolio
imposed by state securities administrators, BSAM will reimburse the Debt
Portfolio its fees under the Investment Management Agreement or make other
arrangements to limit Debt Portfolio expenses to the extent required by such
expense limitations. From time to time, BSAM may waive receipt of its fees
and/or voluntarily assume certain of the Debt Portfolio's expenses, which would
have the effect of lowering the Debt Portfolio's expense ratio and increasing
yield to investors at the time such amounts are waived or assumed, as the case
may be. The Debt Portfolio will not pay BSAM at a later time for any amounts it
may waive, nor will the Debt Portfolio reimburse BSAM for any amounts it may
assume until such time as the average net assets of the Debt Portfolio exceed
$50 million or the total operating expenses of the Debt Portfolio are less than
1.75%, 2.40% and 2.40% of the Class A shares, Class B and Class C shares,
respectively, of the Debt Portfolio. The investment management fees paid by the
Debt Portfolio are greater than those paid by most funds, but are believed by
BSAM to be appropriate for fees paid by funds with a global investment strategy.
ADMINISTRATOR
Each Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York
10167. BSFM offers administrative services to open-end and closed-end investment
funds and other managed pooled investment vehicles with assets at June 30, 1998
of over $3.0 billion.
For providing administrative services to each Portfolio, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of 0.15 (before fee waiver) of 1% of
each Portfolio's average daily net assets.
Under the terms of an Administrative Services Agreement with the Funds, PFPC
Inc. provides certain administrative services to each Portfolio. For providing
these services, PFPC Inc. is entitled to receive from each Portfolio a monthly
fee equal to an annual rate of 0.10 of 1% of the Portfolio's average daily net
assets up to $200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of
the next $200 million and 0.03 of 1% of net assets above $600 million, subject
to a minimum annual fee of $150,000 for each portfolio.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
certain Portfolio expenses, which would have the effect of lowering a
Portfolio's expense ratio and increasing yield to
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investors at the time such amounts are waived or assumed, as the case may be. No
Portfolio will pay BSFM at a later time for any amounts it may waive, nor will a
Portfolio reimburse BSFM for any amounts it may assume. From time to time PFPC
Inc. may waive a portion of its fee. PFPC Inc. reserves the right to revoke this
voluntary fee waiver at any time.
Brokerage commissions may be paid to Bear Stearns for executing transactions if
the use of Bear Stearns is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of each
Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional
Information.
Bear Stearns has agreed to permit the Funds to use the name "Bear Stearns" or
derivatives thereof as part of the Funds' name for as long as the Investment
Advisory and Management Agreements are in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
each Portfolio's principal underwriter and distributor of each Portfolio's
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 each Portfolio's Distribution and Shareholder Servicing Plans
described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, acts as the custodian for the Bond Portfolio and the
High Yield Portfolio.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian for the Debt Portfolio's assets.
PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware
19809, acts as each Portfolio's administrator, transfer agent, dividend-paying
agent and registrar.
Rules adopted under the 1940 Act permit the Portfolios to maintain their
securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those rules, the Portfolios' portfolio of securities
and cash invested in securities of foreign countries are held by their
subcustodians, who are approved by the Trustees of the Portfolios in accordance
with the rules of the Securities and Exchange Commission.
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
Fund reserves the right to reject any purchase order. The Fund reserves the
right to vary the initial and subsequent investment minimum requirements at any
time. 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 a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the National Association of Securities Dealers, Inc. who have sales
agreements with Bear Stearns (an "Authorized Dealer"). Purchases of a
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 Shares' net asset value next determined after
a purchase order is received by Bear Stearns, an Authorized Dealer or the
Transfer Agent (the "trade date"). Payment for Portfolio shares generally is due
to Bear Stearns or the Authorized Dealer on the third business day (the
"settlement date") 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 Dealer
will benefit from the temporary use of the funds if payment is made before the
settlement date.
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PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds--[Name of
Portfolio]--Class Y" or "Bear Stearns Investment Trust--Emerging Markets Debt
Portfolio--Class Y" if purchased directly from a Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attention: "The Bear Stearns Funds--
[Name of Portfolio]--Class Y" or "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 Bear Stearns or an Authorized Dealer.
Orders placed directly with the Transfer Agent must be accompanied by payment.
Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding
payment promptly to the Fund. The Fund will charge $7.50 for each wire
redemption. The payment proceeds of a redemption of shares recently purchased by
check may be delayed as described under "How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares through
the Transfer Agent. To make an initial investment in a Portfolio, an investor
must establish an account with the Portfolio by furnishing necessary information
to the Fund. An account with a 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 to cover the purchase, to PFPC Inc., Attention: The Bear
Stearns Funds--[Name of Portfolio]--Class Y, P.O. Box 8960, Wilmington, Delaware
19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The Portfolio
account number should appear on the check.
Shareholders may not purchase shares of the Fund with a check issued by a third
party and endorsed over to the Fund.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the Portfolio calculates its net
asset value are priced according to the net asset value determined on that date.
Purchase orders received after the close of trading on the New York Stock
Exchange are priced as of the time the net asset value is next determined.
Net Asset Value
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed 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. Each Portfolio's investments are valued based on
market value or, where market quotations are not readily available, based on
fair value as determined in good faith by, or in accordance with procedures
established by, the Fund's Board of Trustees. For further information regarding
the methods employed in valuing each Portfolio's investments, see "Determination
of Net Asset Value" in The Bear Stearns Funds' Statement of Additional
Information and "Net Asset Value" in Bear Stearns Investment Trust's Statement
of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Funds could subject the investor to backup withholding and a $50 penalty imposed
by the Internal Revenue Service (the "IRS").
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for Class Y
shares of a Portfolio, Class Y shares of the Fund's other portfolios or shares
of certain other funds sponsored or advised by Bear Stearns, including the
Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and
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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 at an 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
the 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.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for losses
or expenses arising out of telephone instructions reasonably believed to be
genuine. 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 described below. 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 Fund on 60 business days' notice to the
affected portfolio or fund shareholders. The Fund, BSAM 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 Fund 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. Except in the case of Personal
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.
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 Fund 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 Securities and Exchange Commission. The Fund 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 Class Y 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 enables a shareholder to invest automatically
dividends and/or capital gain distributions, if any, paid by a Portfolio in
Class Y shares of another portfolio of the Fund
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or a fund advised or sponsored by Bear Stearns of which the shareholder is an
investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the
other portfolio or fund will be purchased at the 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 Fund 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 Fund imposes no
charges when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within three
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if an investor has purchased Portfolio shares by check and subsequently
submits a redemption request by mail, the redemption proceeds will not be
transmitted until the check used for investment has cleared, which may take up
to 15 business days. The Fund will reject requests to redeem shares by telephone
or wire for a period of 15 business days after receipt by the Transfer Agent of
the purchase check against which such redemption is requested. This procedure
does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 business days' written notice if the account's net asset value is
$750 or less, for reasons other than market conditions, and remains so during
the notice period.
PROCEDURES
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
Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request
by repurchasing Funds shares from a redeeming shareholder at the shares' net
asset value next computed after receipt of the request by Bear Stearns or the
Authorized Dealer. Under normal circumstances, within three 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.
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 Funds 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 Funds may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Funds nor the
Transfer Agent will be liable for following telephone instructions reasonably
believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
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 Funds shares through the Transfer Agent. Mail
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds-[Name of Portfolio], P.O. Box 8960,
Wilmington, Delaware 19899-8960.
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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 will 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 share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. A signature guarantee is designed to protect the shareholders and
the Portfolio against fraudulent transactions by unauthorized persons. A
signature guarantee may be obtained from a domestic bank or trust company,
recognized broker, dealer, clearing agency or savings association who are
participants in a medallion program by the Securities Transfer Association. The
three recognized medallion programs are Securities Transfer Agent Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock
Exchange, Inc. Medallion Signature Program (MSP). Signature Guarantees which are
not a part of these programs will not be accepted. Please note that a notary
public stamp or seal is not acceptable. The Funds 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. Any questions with respect to signature-guarantees should be
directed to the Transfer Agent by calling 1- 800-447-1139.
During times of drastic economic or market conditions, investors may experience
difficulty in contacting Bear Stearns or Authorized Dealers by telephone to
request a redemption of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the redemption request being processed
at a later time than it would have been if telephone redemption had been used.
During the delay, each Portfolio's net asset value may fluctuate.
Dividends and Distributions
INCOME PORTFOLIO AND HIGH YIELD PORTFOLIO
All expenses are accrued daily and deducted before declaration of dividends to
investors. Dividends paid by each class of a Portfolio will be calculated at the
same time and in the same manner and will be of the same amount, except that the
expenses attributable solely to a particular class will be borne exclusively by
such class. Class B and C shares will receive lower per share dividends than
Class A shares because of the higher expenses borne by Class B and C shares. See
"Fee Table."
Dividends will be automatically reinvested in additional shares of each
Portfolio at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution Option.
Each Portfolio ordinarily pays dividends from its net investment income monthly
and 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 1940 Act. Neither Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired .
EMERGING MARKETS DEBT PORTFOLIO
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
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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 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.
Taxes
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid by
a Portfolio will be taxable to U.S. shareholders as ordinary income, whether
received in cash or reinvested in additional shares of such Portfolio or
redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of a Portfolio will be taxable to U.S. shareholders
as long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio shares and whether such
distributions are received in cash or reinvested in, or redirected into, other
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28% and certain
capital gains of individuals may be subject to a lower tax rate. Dividends and
distributions may be subject to state and local taxes.
Each Portfolio may enter into short sales "against the box." See "Description of
the Portfolio-Investment Instruments and Strategies." Any gains realized by a
Portfolio on such sales will be recognized at the time the Portfolio enters into
the short sales.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of market discount bonds, paid by a Portfolio to a foreign investor
generally are subject to U.S. nonresident withholding taxes at the rate of 30%,
unless the foreign investor claims the benefit of a lower rate specified in a
tax treaty. Distributions from net realized long-term securities gains paid by a
Portfolio to a foreign investor as well as the proceeds of any redemptions from
a foreign investor's account, regardless of the extent to which gain or loss may
be realized, generally will not be subject to U.S. nonresident withholding tax.
However, such distributions may be subject to backup withholding, as described
below, unless the foreign investor certifies his non-U.S. residency status.
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Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of their
accounts which will include information as to dividends and distributions from
securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for shares
of another fund or portfolio advised or sponsored by BSAM 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.
Federal regulations generally require the Portfolios to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on a
federal income tax return. Furthermore, the IRS may notify the Portfolios to
institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a federal income tax return.
A TIN is either the Social Security number or employer identification number of
the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's federal income
tax return.
While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state or local taxes in respect of their
investment in Portfolio shares.
Management of the Portfolios intends to have each Portfolio qualify as a
"regulated investment company" under the Code and, thereafter, to continue to so
qualify if such qualification is in the best interests of its shareholders. Such
qualification relieves a Portfolio of any liability for federal income tax to
the extent its earnings are distributed in accordance with applicable provisions
of the Code. In addition, a Portfolio is subject to a non- deductible 4% excise
tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
If, for any reason, a Portfolio fails to qualify as a regulated investment
company, the Portfolio would be subject to federal income tax on its net income
at regular corporate rates (without a deduction for distributions to
shareholders). When distributed, such income would then be taxable to
shareholders as ordinary income to the extent of the Portfolio's earnings and
profits. Although management intends to have each Portfolio qualify as a
regulated investment company, there can be no assurance that it will achieve
this goal.
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 of Bear Stearns Investment Trust and the Bear Stearns
Funds. Shareholders are urged to consult their own tax advisors regarding
specific questions as to Federal, state and local taxes as well as to any
foreign taxes.
Performance Information
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 a 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 a 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, if any, 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 each Portfolio's performance will include the Portfolio's
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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, if any. 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.
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 High Yield Portfolio's shares, including data from Lipper
Analytical Services, Lehman Brothers High Yield Bond Index, Credit Suisse First
Boston High Yield Bond Index and other industry publications. Performance
information that may be used in advertising or marketing the Income Portfolio's
shares can include data from Lipper Analytical Services, Inc., Morningstar,
Inc., Bond Buyer's 20-Bond Index, Moody's Bond Survey Bond Index, Lehman
Brothers Aggregate Bond Index, Salomon Brothers Broad Investment-Grade Index and
components thereof, Mutual Fund Values, Mutual Fund Forecaster, Mutual Fund
Investing and other industry publications. Comparative performance information
may be used from time to time in advertising or marketing the Emerging Markets
Debt 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.
DEBT PORTFOLIO
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 Debt 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 Debt 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 Debt Portfolio may earn or what
the Debt Portfolio's performance may be in any future period.
In addition to information provided in shareholder reports, the Debt Portfolio
may from time to time, in its discretion, make a list of the Debt Portfolio's
holdings available to investors upon request. A discussion of the Debt
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.
General Information
The Bear Stearns Funds was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
(the "Trust Agreement") dated September 29, 1994, and commenced operations on or
about April 3, 1995.
The Bear Stearns Investment Trust was organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992 as a Massachusetts business
trust pursuant to a Trust Agreement and commenced investment operations on May
3, 1993.
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The Funds are authorized to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Each Portfolio's shares are classified
into four classes--Class A, B, C and Y. Each share has one vote and shareholders
will vote in the aggregate and not by class, except as otherwise required by
law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Funds or a Trustee. The Trust Agreement provides for
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Portfolios" in the Portfolios' Statement of
Additional Information, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of 10 portfolios of
shares. All consideration received by the Funds for shares of one of the
portfolios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Funds) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Funds
have the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Funds, 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, Rule 18f-2 exempts the selection of
independent accountants and the election of Trustees from the separate voting
requirements of Rule 18f-2.
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 Funds at PFPC Inc., Attention: The Bear Stearns Funds, P.O. Box
8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling
Bear Stearns at 1-800-766-4111.
ADDITIONAL INFORMATION
The term "majority of the outstanding shares" of each 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, Martin Luther King's Day, 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 each
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.
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Appendix
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of each Fund's Portfolios may invest.
MOODY'S CORPORATE BOND RATINGS Aaa--Bonds which are rated Aaa are judged to be
of the best quality and carry the smallest degree of investment risk. 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--Bonds 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
bonds. They are rated lower than the best bonds 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--Bonds which are rated A possess many favorable investment qualities 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--Bonds 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 bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds 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 thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds 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.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. 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 the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or
A-1
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changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
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Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P 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.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal 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.
D&P COMMERCIAL PAPER RATINGS
Duff 1+--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1---High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
----------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Funds, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Funds. Neither event
will require a sale of such security by the Funds. However, BSAM will consider
such event in its determination of whether the Funds should continue to hold the
security. To the extent that the ratings given by Moody's, S&P or D&P may change
as a result of changes in such organizations or their rating systems, the Funds
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
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MONEY MARKET INSTRUMENTS
Each Portfolio may invest, for temporary defensive purposes, in the following
types of money market instruments, each of which of purchase must have or be
deemed to have under rules of the Securities and Exchange Commission remaining
maturities of 13 months or less.
U.S. TREASURY SECURITIES
U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury
Bonds that differ in their interest rates, maturities and times of issuance.
Treasury Bills have initial maturities of one year or less; Treasury Notes have
initial maturities of one to ten years; and Treasury Bonds generally have
initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES
In addition to U.S. Treasury securities, U.S. Government securities include
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
BANK OBLIGATIONS
Each Portfolio may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Portfolio may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. No Portfolio will invest more than 15% of
the value of its net assets in time deposits maturing in more than seven days
and in other securities that are illiquid.
Banker's acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS (ALL PORTFOLIOS)
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by each
Portfolio will consist only of direct obligations which, at the time of their
purchase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1 by
Fitch or Duff-1 by Duff, (b) issued by companies having an outstanding unsecured
debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or
Duff, or (c) if unrated,
A-4
<PAGE>
determined by BSAM to be of comparable quality to those rated obligations which
may be purchased by a Portfolio. Each Portfolio may purchase floating and
variable rate demand notes and bonds, which are obligations ordinarily having
stated maturities in excess of one year, but which permit the holder to demand
payment of principal at any time or at specified intervals.
A-5
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Custodian
Emerging Markets Debt Portfolio
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
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Counsel
Emerging Markets Debt Portfolio
Mayer Brown & Platt
1675 Broadway
New York, NY 10019
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN
THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOS' SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS.
THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
Emerging Markets Debt Portfolio
a separate portfolio of Bear Stearns Investment Trust
Class A, Class B, Class C and Class Y
STATEMENT OF ADDITIONAL INFORMATION
(October 16, 1998)
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 October 16, 1998
(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.
Bear Stearns Asset Management Inc. ("BSAM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as adviser to the Portfolio. BSAM is also
referred to herein as the "Adviser". As of December 3, 1997, Bear Stearns Funds
Management Inc., the registered investment adviser of the Portfolio, has changed
its name to Bear Stearns Asset Management Inc.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., is the Administrator of the Portfolio. As of
December 4, BSFM formed a new corporate entity under the laws of Delaware to
conduct mutual fund administrative work for the Trust and other affiliated and
non-affiliated investment companies.
Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSAM, serves as the
Portfolio's distributor ("Distributor").
TABLE OF CONTENTS
Page
GENERAL......................................................................1
INVESTMENT OBJECTIVE AND POLICIES............................................1
INVESTMENT PRACTICES.........................................................7
RISK FACTORS AND SPECIAL CONSIDERATIONS......................................8
INVESTMENT LIMITATIONS......................................................15
MANAGEMENT OF THE PORTFOLIO.................................................17
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS..........................25
PORTFOLIO TRANSACTIONS......................................................26
PURCHASE AND REDEMPTION INFORMATION.........................................28
SHARES OF THE PORTFOLIO.....................................................30
NET ASSET VALUE.............................................................31
PERFORMANCE AND YIELD INFORMATION...........................................32
CODE OF ETHICS..............................................................34
TAXATION....................................................................35
SPECIAL TAX CONSIDERATIONS..................................................40
MISCELLANEOUS...............................................................43
FINANCIAL STATEMENTS........................................................45
APPENDIX A - INVESTMENT PRACTICES..........................................A-1
<PAGE>
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 October 16, 1998.
2
<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 adviser,
Bear Stearns Asset Management Inc. ("BSAM" or the "Adviser") 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
Shareholders."
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
Adviser 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 Adviser 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
2
<PAGE>
invest more than 15% of its net assets in Repurchase Agreements maturing in more
than seven (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
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<PAGE>
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 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.
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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, 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 Adviser 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 Adviser
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 Adviser, 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
Adviser 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 15% 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 Adviser. 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 Adviser 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
5
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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, 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. New forms of
such securities continue to be developed. The Portfolio may invest in such
securities to the extent consistent with its investment objectives.
Trade Claims. The Portfolio may invest in trade claims, which are
non-securitized rights of payment arising from obligations other than borrowed
funds. Trade claims typically arise when, in the ordinary course of business,
vendors and suppliers extend credit to a company by offering payment terms.
Generally, when a company files for bankruptcy protection, payments on trade
claims cease and the claims are subject to compromise along with the other debts
of the company. Trade claims typically are bought and sold at a discount
reflecting the degree of uncertainty with respect to the timing and extent of
recovery. In addition to the risks otherwise associated with low-quality
obligations, trade claims have other risks, including (i) the possibility that
the amount of the claim may be disputed by the obligor, (ii) the debtor may have
variety of defenses to assert against the claim under the bankruptcy code, (iii)
volatile pricing due to a less liquid market, including a small number of
brokers for trade claims and a small universe of potential buyers, (iv) the
possibility that the Portfolio may be obligated to purchase a trade claim larger
than initially anticipated, and (v) the risk of failure of sellers of trade
claims to indemnify the Portfolio against loss due to the bankruptcy or
insolvency of such sellers. The negotiation and enforcement of rights in
connection with trade claims may result in higher legal expenses to the
Portfolio, which may reduce return on such investments. It is not unusual for
trade claims to be priced at a discount to publicly traded securities that have
an equal or lower priority claim. Additionally, trade claims may be treated as
non-securities investments. As a result, any gains may be considered
"non-qualifying" under the Internal Revenue Code of 1986, as amended (the
"Code").
Depository Receipts and Depository Shares. The Portfolio may invest in
American Depository Receipts ("ADRs") or other similar securities, such as
american depository shares and global depository shares, convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. Generally, ADRs in registered
form are designed for use in U.S. securities markets. As a result of the absence
of established securities markets and publicly-owned corporations in certain
foreign countries as well as restrictions on direct investment by foreign
entities, the Portfolio may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles. The Adviser expects that the Portfolio, to the extent of its
investment in ADRs, will invest predominantly in ADRs sponsored by the
underlying issuers. The Portfolio, however, may invest in unsponsored ADRs.
Issuers of the stock of unsponsored ADRs are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of such ADRs.
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 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 a 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.
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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 Adviser 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).
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 Adviser.
The Adviser 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.
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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 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.
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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 Adviser 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. 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
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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 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
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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 Adviser 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 Adviser, 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 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
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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.
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
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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 Adviser
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 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
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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
Adviser'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 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
14
<PAGE>
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 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.)
15
<PAGE>
(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.
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.
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<PAGE>
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 Adviser 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.
17
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Portfolio During Past Five Years
- ---------------- --- -------------- ----------------------
<S> <C> <C> <C>
Peter M. Bren 64 Trustee President of The Bren Co. since 1969,
767 Fifth Avenue President of Koll, Bren Realty
New York, NY 10153 Advisors and Senior Partner for
Lincoln Properties prior thereto.
Donalda L. Fordyce 39 Vice President Senior Managing Director of Bear
575 Lexington Avenue Stearns since March, 1996, previously
New York, NY 10022 Vice President, Asset Management
Group, Goldman, Sachs from 1986
to 1996.
Peter B. Fox* 46 Trustee Managing Director - Emeritus since
Three First National Plaza February 1997, Founder, Fox
Chicago, IL 60602 Development Corp. - 1997.
Michael Minikes* 53 Trustee and Chairman Senior Managing Director of Bear
245 Park Avenue Stearns since September 1985,
New York, NY 10167 Chairman of BSFM since December
1997, Treasurer of Bear Stearns since
January 1986, Treasurer of The Bear
Stearns Companies Inc. since
September 1985, Director of The Bear
Stearns Companies Inc. since October
1989.
M.B. Oglesby, Jr. 56 Trustee President and Chief Executive Officer,
5300 Albermarle Street Association of American Railroads
Bethesda, MD 20816 since June 1997 - March 1998, Vice
Chairman of Cassidy Associates
from February 1996 to June 1997,
Senior Vice President of RJR Nabisco,
Inc. from April 1989 to February 1996,
Former Deputy Chief of Staff-White
House from 1988 to January 1989.
John R. McKernan, Jr. 50 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 54 President President of Mutual Funds for Bear
575 Lexington Avenue Stearns Asset Management, Senior
New York, NY 10022 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.
18
<PAGE>
Position(s) Principal Occupation(s)
Name and Address Age with Portfolio During Past Five Years
- ---------------- --- -------------- ----------------------
Stephen A. Bornstein 55 Secretary and Vice President Managing Director, Legal Department,
575 Lexington Avenue Bear Stearns since September 1990,
New York, NY 10022 General Counsel Bear Stearns Asset
Management.
Frank J. Maresca 40 Vice President and Managing Director of Bear Stearns
245 Park Avenue Treasurer since September 1994, Chief Executive
New York, NY 10167 Officer and President of BSFM since
December 4, 1997, Associate 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.
Vincent L. Pereira 33 Assistant Treasurer Associate Director of Bear Stearns
245 Park Avenue since September 1995, Treasurer and
New York, NY 10167 Secretary of BSFM since December 4,
1997, 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.
Christina LaMastro 29 Assistant Secretary Legal Assistant for Bear Stearns Asset
575 Lexington Avenue Management, since May 1997,
New York, NY 10022 Assistant Secretary of BSAM since
December 3, 1997, Compliance Assistant
at Reich & Tang L.P. from April 1996
through April 1997, Legal Assistant
at Fulbright & Jaworski L.P. from
April 1993 through April 1996.
</TABLE>
Certain of the Trustees and officers of the Trust hold comparable positions
with certain other investment companies of which Bear Stearns, BSAM or an
affiliate thereof is the investment adviser, administrator or distributor. As of
September 18, 1998, the Trustees and officers as a group owned less than 1/2 of
1% of the outstanding shares of beneficial interest of the Portfolio.
Compensation Table
The following table shows the compensation paid by the Trust to the
Trustees during the fiscal year ended March 31, 1998:
19
<PAGE>
<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 $20,000
Peter B. Fox None None None None
John R. McKernan, Jr. $5,000 None None $20,000
M.B. Oglesby, Jr. $5,000 None None $20,000
Robert S. Reitzes** None None None None
Michael Minikes** None None None None
</TABLE>
* Amount does not include reimbursable expenses for attending board
meetings, which amounted to approximately $8,600 for Board members of
the fund, as a group.
** Robert S. Reitzes resigned as a Trustee to the Trust on September 8,
1997, and Mr. Minikes was appointed as a replacement for Mr. Reitzes
effective September 8, 1997.
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.
General. On December 3, 1997, Bear Stearns Funds Management Inc.
("BSFM"), the registered investment adviser of the Portfolio, changed its name
to BSAM. On December 4, 1997, BSFM formed a new corporate entity under the laws
of Delaware to conduct mutual fund administrative work for The Bear Stearns
Funds and other affiliated and non-affiliated investment companies.
Adviser and Administrator. As stated in the Portfolio's Prospectus,
BSAM, with principal business offices at 575 Lexington Avenue, New York, New
York 10022, serves as Adviser of the Portfolio. See "Management of the
Portfolio" in the Portfolio's Prospectus for a description of the duties of BSAM
as Adviser of the Portfolio.
The Portfolio's adviser is BSAM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 575 Lexington Avenue, New York, New
York 10022. 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. BSAM 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 June
30, 1998 totaling approximately $9.8 billion.
BSAM has delegated certain of the administrative services pursuant to
the Investment Management Agreement to BSFM, the Portfolio's Administrator. For
providing administrative services to the Portfolio, BSAM has agreed to pay BSFM
a monthly fee at the annual rate of 15% (before fee waiver) of the Portfolio's
average daily net assets.
20
<PAGE>
The Adviser 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 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 Adviser 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 Adviser 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 Adviser 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
Adviser'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 Adviser's selections of individual
securities.
The Portfolio bears all of its own expenses not specifically assumed by
the Adviser. 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 Adviser; (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
21
<PAGE>
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, BSAM 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 BSAM. The Investment Management Agreement also provides that the
Portfolio will indemnify BSAM against certain liabilities, including liabilities
under the Federal securities laws, or, in lieu thereof, that contribute to
resulting losses.
The Investment Management Agreement between BSAM 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
February 4, 1998 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, BSAM 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. BSAM has agreed to
waive its fees to the extent necessary to maintain total operating costs of the
Portfolio at 1.75%, 2.40% and 2.40% of the Class A shares, Class B and Class C
shares, respectively, 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. For the fiscal year ended March 31, 1998, BSAM
earned $106,772 (after fee waivers), which was 0.28% of the Portfolio's average
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 Adviser. However, BSAM
has agreed that if, in any fiscal year, the sum of the Portfolio's expenses
(including the fees payable to the Adviser, 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, BSAM 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
22
<PAGE>
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 years ended March
31, 1995, March 31, 1996, March 31, 1997 and March 31, 1998 respectively, BSAM
subsidized expenses of the Portfolio in the amounts of $50,350, $74,215,
$249,429 and $56,886, 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.
The Adviser 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 Adviser, if a particular
security is deemed suitable for the Portfolio and other advisory accounts,
allocations between accounts will be pro rata based: (i) 50% upon the relative
sizes of such accounts and (ii) 50% 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.
Activities of BSAM and its Affiliates and Other Accounts Managed by
BSAM. The involvement of BSAM, Bear Stearns and their affiliates in the
management of, or their interest in, other accounts and other activities of BSAM
and Bear Stearns may present conflicts of interest with respect to the Portfolio
or limit the Portfolio's investment activities. BSAM, Bear Stearns and its
affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio and/or which engage
in and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the
Portfolio. The results of the Portfolio's investment activities, therefore, may
differ from those of Bear Stearns and its affiliates and it is possible that the
Portfolio could sustain losses during periods in which BSAM, Bear Stearns and
its affiliates and other accounts achieve significant profits on their trading
for proprietary or other accounts. From time to time, the Portfolio's activities
may be limited because of regulatory restrictions applicable to Bear Stearns and
its affiliates, and/or their internal policies designed to comply with such
restrictions.
Administrator. The Portfolio has engaged PFPC Inc. (the "Transfer
Agent") to provide certain administrative services pursuant to the
Sub-Administration and Accounting Services Agreement. The Portfolio pays out of
its own assets the fee paid to the Transfer Agent computed at the rate of 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 with a minimum annual fee of $108,000. From time to time the
Transfer Agent may waive all or a portion of its fees. 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 Adviser and the Transfer Agent 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 Adviser or Transfer Agent in
connection with their services.
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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 which is renewable annually. 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
February 4, 1998.
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 BSAM, 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), 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, 400 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, 1999. 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.
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DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS
As described in its Prospectus, the Portfolio has adopted a
distribution plan with respect to the Class A and Class C shares of the
Portfolio pursuant to Rule 12b-1 under the Investment Company Act and a
distribution plan with respect to the Class B shares of the Portfolio
(collectively, the "Distribution Plans"). In addition, the Portfolio has adopted
separate shareholder servicing plans (the "Shareholder Servicing Plans") for the
Class B and C shares as described in the Prospectus.
The Distribution Plans have been approved by a vote of the Board of
Trustees with respect to Class A, Class B 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 Distribution
Plans, cast in person at a meeting called for the purpose of voting on the
Distribution Plans. The annual compensation payable under the Distribution Plans
are 0.35%, 0.75% and 0.75% per annum of the average daily net asset value of
Class A shares, Class B shares and Class C shares, respectively, of the
Portfolio. The Portfolio's Board of Trustees believe that there is a reasonable
likelihood that the Distribution Plans and the Shareholder Servicing Plans, as
applicable will benefit the Portfolio and the holders of its Class A shares,
Class B shares and Class C shares.
As set forth above, the Portfolio pays 0.35%, 0.75% and 0.75% per annum
of the average daily net asset value of Class A shares, Class B 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.
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
Distribution Plans. With respect to Class A and Class C shares, fees paid under
the Distribution Plan may also include a service fee paid to broker-dealers or
others who provide services in connection with "no transaction fee" or similar
programs for the purchase of shares.
Under the Shareholder Servicing Plans, the Class B and C shares of the
Portfolio will pay fees of up to 0.25% of the average daily net assets of Class
B shares or Class C shares for fees incurred in connection with the personal
service and maintenance of accounts holding Portfolio shares. With respect to
Class A shares, up to 0.25% of the average daily net assets of Class A will
compensate institutions for personal service and maintenance of accounts holding
the Portfolio's Class A 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 Distribution Plans are compensation plans which provide for the
payment of a specified distribution fee without regard to the distribution
expenses actually incurred by Bear Stearns. If the Distribution Plans were
terminated by the Board of Trustees and no successor plan were adopted, the
Trustees would cease to make distribution payments to Bear 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 Distribution Plans.
The types of expenses for which Bear Stearns and Authorized Dealers may
be compensated under the Distribution Plans 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 Distribution Plans, Bear Stearns,
as distributor of the Portfolio's shares, will provide to the
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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 Distribution Plan with respect to the Class A and Class C shares in
its amended and restated form was approved by the Board of Trustees, including
the "non-interested" Trustees, on February 4, 1998. Under its terms, the
Distribution 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 Distribution 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. The Distribution Plan and the Shareholder Servicing Plan, with
respect to the Class B shares, and the Shareholder Servicing Plan with respect
to the Class C shares, were approved on September 8, 1997 and February 4, 1998.
However, because Class B shares automatically convert into Class A shares after
eight years, the Portfolio is required by a Securities and Exchange Commission
rule to obtain the approval of Class B as well as Class A shareholders for a
proposed amendment to each Plan that would materially increase the amount to be
paid by Class A shareholders under such plans. Such approval must be by a
"majority" of the Class A and Class B shares (as defined in the 1940 Act),
voting separately by class. Each Distribution Plan and related agreement is
subject to annual approval by such vote cast in person at a meeting called for
the purpose of voting on such plan. The plans 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 plans are 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 plans 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 Class A shares of the Portfolio. For the fiscal years ended March 31,
1996, March 31, 1997 and March 31, 1998 Bear Stearns earned $99,038, $110,830
and $120,046, 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 and March 31, 1998, Bear Stearns earned $452, $9,356, and $29,812
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.
For the period from January 12, 1998 (commencement of investment
operations) through March 31, 1998 Bears Stearns earned $782 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 B shares of the Portfolio.
With respect to Class A shares of the Portfolio, BSAM will waive the
distribution fee to the extent that it would otherwise cause the Portfolios to
exceed the National Association of Securities Dealers, Inc. (the "NASD")
limitations on asset-based sales charges. Pursuant to NASD rules, the aggregate
deferred sales loads and annual distribution fees may not exceed 6.25% of the
total gross sales, subject to certain exclusions. The 6.25% limitation is
imposed on each Portfolio rather than on a per shareholder basis. Therefore, a
long-term shareholder of a Portfolio may pay more in distribution fees than the
economic equivalent of 6.25% of such shareholder's investment in such shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees, the Adviser
is responsible for the execution of the Portfolio's transactions and the
allocation of brokerage transactions for the Portfolio. In executing portfolio
transactions, the Adviser seeks to obtain the best net results for the
Portfolio, taking into account such factors as
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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 Adviser 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, 1998.
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, 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 Adviser 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
Adviser. 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 Adviser. 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
Adviser, as applicable, determines in good faith that such commission is
reasonable in terms either of the transaction or the overall responsibility of
the Adviser 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 Adviser 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 Adviser 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 Adviser 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 Adviser
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. Current federal income tax laws may restrict
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the extent to which the Portfolio may engage in short term trading of
securities. However, recent changes in the laws have eliminated those
restrictions beginning with the Portfolio's first tax year beginning after
August 5, 1997. 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.
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 B
shares are subject to a contingent deferred sales charge of up to 5% imposed on
redemptions made within the first six years of purchase. Class C shares are
subject to a CDSC of 1% 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
canceled due to non-payment (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 canceled 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.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects
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to hold shares and other relevant circumstances. Investors should understand
that the purpose and function of the deferred sales charge and asset-based sales
charge with respect to Class B and Class C shares are the same as those of the
initial sales charge with respect to Class A shares. Any salesperson or other
person entitled to receive compensation for selling Portfolio shares may receive
different compensation with respect to one class of shares than the other. Bear
Stearns will not accept any order of $500,000 or more of Class B shares or $1
million or more of Class C shares, on behalf of a single investor (not including
dealer "street name" or omnibus accounts) because generally it will be more
advantageous for that investor to purchase Class A shares of a Portfolio
instead. A fourth class of shares may be purchased only by certain institutional
investors at net asset value per share (the "Class Y shares").
The four classes of shares each represent an interest in the same
portfolio investments of the Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of each Portfolio's Class A, B, C and Y shares recognizes two
types of expenses. General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Portfolio's total assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution and
Shareholder Servicing Plan fees, (b) incremental transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
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 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
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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"). Signature- guarantees which are not a part of these programs
will not be accepted. 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.
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.
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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 four classes of shares of the Portfolio: Class A, Class B, 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.
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
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Year's Day, Presidents' Day, Good Friday, Martin Luther King Day, 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 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:
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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 1, 5 and 10 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 B and 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, 1998 was 19.31% for the Class A shares, 7.29% for the Class B
shares, and 18.66% for the Class C shares. The total return calculated using the
above method from inception to March 31, 1998 and was 103.03% for the Class A
shares, 7.29% for the Class B shares, and 97.94% for the Class C shares.
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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 +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 Adviser 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 BSAM, 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
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of securities not eligible for purchase or sale by the Portfolio; (3) purchases
or sales relating to rights issued by an 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 Adviser 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 advisors 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").
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
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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 at a maximum rate of
20% or 28% (see discussion in the following paragraph), 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.
The Taxpayer Relief Act of 1997 (the "Taxpayer Relief Act") made
certain changes to the Code with respect to the taxation of long term capital
gains earned by taxpayers other than a corporation. In general and subject to
certain transition rules, the maximum tax rate for individual taxpayers on net
long-term capital gains (i.e., the excess of net long-term capital gain over net
short-term capital loss) is lowered to 20% for most assets held for more than 18
months at the time of disposition. Capital gains on the disposition of assets
held for more than one year and up to 18 months at the time of disposition will
be taxed as "mid-term gain" at a maximum rate of 28%. A lower rate of 18% will
apply after December 31, 2000 for assets held for more than 5 years. However,
the 18% rate applies only to assets acquired after December 31, 2000 unless the
taxpayer elects to treat an asset held prior to such date as sold for fair
market value on January 1, 2001. In the case of individuals whose ordinary
income is taxed at a 15% rate, the 20% rate for assets held for more than 18
months is reduced to 10% and the 10% rate for assets held for more than 5 years
is reduced to 8%. According to an Internal Revenue Notice, the Portfolio is
entitled to designate which portion of a capital gain dividend will be taxed at
a maximum rate of 20% and which portion will be taxed at a maximum rate of 28%.
If the Portfolio does not make such a designation, the capital gain distribution
will be taxed at a maximum rate of 28%. A recent legislative proposal would
reduce the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months. It is impossible to determine at this time
whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.
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
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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 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.
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
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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.
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
advisors 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 may 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. Shareholders will not be entitled to credit or
deduct their allocable share of foreign taxes imposed on the Portfolio if they
have not held their shares in the Portfolio for 16 days or more at the end of
the Portfolio's tax year. The holding period will be extended if the taxpayer's
risk of loss with respect to such shares is reduced by reason of holding an
offsetting position.
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.
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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 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 which will be effective for dividends paid after
1999, foreign shareholders generally will 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 advisors 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.
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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 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.
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
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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 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.
Constructive Sales of Certain Appreciated Financial Positions. The
Taxpayer Relief Act added new Code Section 1259 which provides for constructive
sale treatment for appreciated financial positions. Code Section 1259 provides
that if there is a "constructive sale" of an "appreciated financial position,"
the taxpayer recognizes gain as if such position were sold, assigned or
otherwise terminated at its fair market value on the date of such constructive
sale. The holding period of such position is deemed to begin on the date of such
constructive sale and any gain or loss subsequently realized with respect to
such position is to be adjusted for any gain taken into account by reason of the
earlier constructive sale of such position.
An appreciated financial position for this purpose means an interest,
including a futures or forward contract, short sale, or option with respect to
any stock, debt instrument or partnership interest if there would be gain if
such
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position were sold, assigned or otherwise terminated at its fair market value. A
forward contract for this purpose means a contract to deliver a substantially
fixed amount of property for a substantially fixed price. An offsetting notional
principal contract for this purpose means, with respect to any property, an
agreement which includes a requirement to pay or provide credit for all or
substantially all of the investment yield (including appreciation) on such
property for a specified period and a right to be reimbursed for or receive
credit for all or substantially all of any decline in the value of such
property. An appreciated financial position, however, does not include any
position which is marked to market for federal income tax purposes, nor does it
include any position with respect to debt if (1) the debt unconditionally
entitles the holder to receive a specified principal amount, (2) the interest
payments (or other similar amounts) with respect to such debt are based on a
fixed rate or certain variable rates or consist of a specified portion of
interest payments on a pool of mortgages, which portion does not vary during the
period the debt is outstanding, and (3) the debt is not convertible directly or
indirectly into stock of the issuer or of any related person.
A taxpayer is treated as having made a constructive sale of an
appreciated financial position if the taxpayer or a related person (1) enters
into a short sale of the same or substantially identical property, (2) enters
into an offsetting notional principal contract with respect to the same or
substantially identical property, (3) enters into a futures or forward contract
to deliver the same or substantially identical property, (4) in the case of an
appreciated financial position that is a short sale, a notional principal
contract or a futures or forward contract with respect to any property, acquires
the same or substantially identical property, or (5) to the extent provided in
regulations, enters into one or more transactions or acquires one or more
positions that have substantially the same effect as a transaction described in
the preceding clauses (1) through (4). A person is related to another person
with respect to a transaction if the relationship is described in Code Section
267(b) or Code Section 707(b) and such transaction is entered into with a view
toward avoiding the purposes of Code Section 1259. A constructive sale, however,
does not include any contract for sale of any stock, debt instrument or
partnership interest for which there is not a market on an established
securities market or otherwise if the contract settles within one year after the
date the contract was entered into. Also, a transaction which would otherwise be
treated as a constructive sale in a taxable year is disregarded if (1) the
transaction is closed before the end of the 30th day after the close of such
taxable year, (2) the taxpayer holds the appreciated financial position
throughout the 60 day period beginning on the date such transaction is closed
and (3) at no time during such 60 day period is the taxpayer's risk of loss with
respect to such position reduced by reason of the taxpayer (x) having an option
to sell, having a contractual obligation to sell, or having made and not closed
a short sale of, substantially identical property, (y) being the grantor of an
option to buy substantially identical property or (z) under regulations, having
diminished his risk of loss by holding one or more positions with respect to
substantially similar or related property. This exception to constructive sale
treatment applies even if the transaction which is closed is reestablished by a
substantially similar transaction (which would also be a constructive sale of
the position) entered into during the 60 day period beginning on the date the
first transaction is closed, provided that the conditions in clauses (1) through
(3) in the preceding sentence are satisfied with respect to the substantially
similar transaction.
In general, Code Section 1259 applies to any constructive sale after
June 8, 1997. However, if before June 9, 1997 the taxpayer entered into any
transaction which is a constructive sale of any appreciated financial position
and before the close of the 30 day period beginning on the date of the enactment
of the Taxpayer Relief Act or before such later date as may be specified by the
Secretary of the Treasury, such transaction and position are clearly identified
in the taxpayer's records as offsetting, such transaction and position shall not
be taken into account in determining whether any other constructive sale after
June 8, 1997 has occurred. This transition rule ceases to apply as of the date
such transaction is closed or the taxpayer ceases to hold such position.
It is possible that the Portfolio may enter into some transactions
which could constitute constructive sales of certain appreciated investments
held by the Portfolio, which could have the affect of accelerating gain
recognition with respect to such investments.
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
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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 Taxpayer Relief Act enacted a rule which permits taxpayers to elect
to mark to market interests in a PFIC each year if stock in the PFIC is
regularly traded on a national securities exchange which is registered with the
Securities and Exchange Commission or the national market system established
pursuant to section 11A of the Securities and Exchange Act of 1934, as amended.
The Internal Revenue Service has the authority to write regulations to include
other exchanges and to apply the mark to market rules to options and interests
in foreign corporations that are comparable to regulated investment companies.
Any gain or loss recognized under these rules will be ordinary income rather
than capital gain. It is uncertain at this time whether the Portfolio will make
the mark to market election permitted under these rules.
The Internal Revenue Service previously had 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 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. It is unclear how the proposed regulations will be
modified following the enactment of the rules in the Taxpayer Relief Act of
1997.
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 ADVISORS 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 Adviser and the Distributor.
Independent Auditors. Deloitte & Touche LLP, Two World Financial
Center, New York, New York 10281, serves as the Portfolio's independent
auditors.
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 18, 1998; the following persons were the owners of record
of 5% or more of the shares of the Portfolios of the Fund:
Bear Stearns Emerging Markets
Investment Trust Debt Portfolio Class A
Beneficial Total Fund
Owner Shares
- ----------- ----------
Northern Trust Co. 10%
FBO HFLP
P.O. Box 92956
Chicago, IL 60675
Bear Stearns Securities 13%
Corp.
FBO 220-23312-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities 10%
Corp.
FBO 102-06476-22
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 8%
FBO 820-11116-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Emerging Markets
Investment Trust Debt Portfolio Class B
Beneficial Total Fund
Owner Shares
- ----------- ----------
Bear Stearns Securities 5.5%
Corp.
FBO 486-02704-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
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Wexford Clearing Services 8%
Corp FBO
Warren W. Littlefield Theresa
FOT I-Littlefield Co-Ttees
Highratings Trust, UA DTD
06 14 91
Pacific Plsds, CA 90272-3904
Lewco Securities Corp. 13%
FBO A C H10-676335-0-D1
34 Exchange Place - 4th Floor
Jersey City, NJ 07311
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, 1998, 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.
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APPENDIX A
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INVESTMENT PRACTICES
A detailed discussion of various hedging and fixed income strategies
that may be pursued by the Adviser 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 Adviser 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 Adviser 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 Adviser 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
Adviser 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 BSAM.
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 BSAM'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 BSAM anticipates. For example, if a currency's value rose at a time
when BSAM had hedged the Portfolio by selling that currency in exchange for
dollars, the Portfolio would not participate in the currency's appreciation. If
BSAM 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 BSAM 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 BSAM'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
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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.
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 Adviser
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 Adviser 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
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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.
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 Adviser 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
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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
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 Adviser
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.
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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 Adviser 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 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 Adviser 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 Adviser 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
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straddle when the Adviser 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 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 Adviser'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
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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 Adviser wishes to shorten
the average duration of the Portfolio's securities, the Portfolio may sell a
futures contract. If the Adviser 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
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in other securities, such as common stocks, or commodities; and (b) in the
Adviser'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 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 Adviser'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
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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 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 Adviser 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 Adviser 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 Adviser. 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
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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.
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