<PAGE>
The
Bear Stearns
Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
<TABLE>
<S> <C>
Robert S. Reitzes....................... Chairman of the Board
Neil T. Eigen........................... President
Peter B. Fox............................ Executive Vice President
William J. Montgoris.................... Executive Vice President
Peter M. Bren........................... Trustee
Alan J. Dixon........................... Trustee
John R. McKernan, Jr. .................. Trustee
M.B. Oglesby, Jr. ...................... Trustee
Stephen A. Bornstein.................... Vice President
Frank J. Maresca........................ Vice President and Treasurer
Raymond D. DeAngelo..................... Vice President
Ellen T. Arthur......................... Secretary
Vincent L. Pereira...................... Assistant Treasurer
Eileen M. Coyle......................... Assistant Secretary
Investment Adviser & Sub-Investment Adviser
Administrator Symphony Asset Management
Bear Stearns Funds 555 California Street
Management Inc. Suite 2975
245 Park Avenue San Francisco, CA 94104
New York, NY 10167
Distributor Custodian
Bear, Stearns & Co. Inc. Custodial Trust Company
245 Park Avenue 101 Carnegie Center
New York, NY 10167 Princeton, NJ 08540
Transfer & Dividend Counsel
Disbursement Agent Stroock & Stroock & Lavan
PFPC Inc. 7 Hanover Square
Bellevue Corporate Center New York, NY 10004
400 Bellevue Parkway
Wilmington, DE 19809
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
</TABLE>
This report is submitted for the general information of the shareholders of
the Portfolio. It is not authorized for the distribution to prospective
investors in the Portfolio unless it is preceded or accompanied by a current
prospectus which includes details regarding the Portfolio's objectives,
policies, sales commissions and other information. Total return is based on
historical results and is not intended to indicate future performance. The
investment return and principal value of an investment in the Portfolio
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than original cost.
BSF-R-010-02
<PAGE>
The Insiders
Select Fund
Annual Report
March 31, 1996
[LOGO]
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
LETTER TO SHAREHOLDERS
April 25, 1996
Dear Shareholders,
We are pleased to present the first annual report to the shareholders of The
Insiders Select Fund (the "Portfolio") for the period ended March 31, 1996.
From its inception on June 16, 1995 through March 31, 1996, the Portfolio gained
16.75% and 16.33% (without giving effect to sales charges and contingent
deferred sales charges, if any) for class A and C shares, respectively, compared
to 21.79% for its benchmark, the S&P 500 (Composite) Index (the "S&P 500").
For the period June 20, 1995 (commencement of initial public offering) through
March 31, 1996 the class Y shares gained 15.98% compared to 20.63% for the S&P
500. Further performance data for each class of shares during this reporting
period is available in the "Financial Highlights" section of this report.
The U.S. equity market has been remarkably robust since the Portfolio's
inception, led by strong corporate earnings and declining interest rates. During
this period, insider accumulation has been rather selective due to the
continuing rise in the market. Most of the substantial insider acquisitions have
been in the financial services sector where valuations continue to be
attractive. In addition, insiders have been selectively acquiring stocks in
other sectors, such as health care and technology.
Corporate insiders tend to be value oriented investors with an aptness for the
early discovery of undervalued sectors. With the strong performance of the
equity market, it has become increasingly difficult for insiders to find clearly
undervalued sectors. The Portfolio has remained close to fully invested through
this period. There has also been very limited use of short selling in managing
the Portfolio.
The period from June 16, 1995 (commencement of investment operations) to March
31, 1996 has been characterized by the vigorous performance of large, growth
stocks that dominate the S&P 500. The Portfolio's return was hurt this quarter
due to its emphasis on banking and insurance stocks and its underweighting in
retail stocks. The decline in the bond market in March contributed to the poor
performance of the financial sector while boosting the retail sector as the
perception of a stronger economy tends to do. Additionally, the Portfolio had a
difficult time keeping pace with the S&P 500 during this period due to a
significant number of mid-cap stocks being held in the Portfolio. Over the long
run, we expect these mid-cap stocks to outperform the larger stocks because they
typically have higher growth rates than their larger peers, and their valuation
is not excessive.
Looking ahead, we will continue to invest in companies where insider
accumulation is accompanied by strong valuation characteristics as we feel that
these stocks will have the most potential for capital appreciation and growth.
We appreciate your support and would be pleased to respond to any questions or
comments. If you have any questions concerning the Portfolio, please call
1-800-766-4111.
Sincerely,
<TABLE>
<S> <C>
[SIG] [SIG]
Robert S. Reitzes Praveen Gottipalli
Chairman of the Board Symphony Asset Management
The Bear Stearns Funds Sub-Investment Adviser
Portfolio Manager
The Insiders Select Fund
</TABLE>
1
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund(1)
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
$9,525 INVESTMENT MADE ON JUNE 16, 1995
<S> <C> <C> <C> <C>
Past performance is not predictive of
future performance
The Insiders Select Portfolio (3)(4)
S&P 500 (Composite) National Consumer
Class A Shares Class C Shares Index Price Index
June 16, 1996 $9,525.00 $10,000.00 $10,000.00 $10,000.00
June 30, 1995 9,588.50 10,066.66 10,099.00 10,013.13
July 31, 1995 10,080.63 10,583.33 10,434.00 10,032.83
August 31, 1995 10,136.19 10,633.33 10,461.00 10,045.96
September 30, 1995 10,469.56 10,975.00 10,902.00 10,059.09
October 31, 1995 10,390.19 10,900.00 10,863.00 10,091.92
November 30, 1995 10,795.00 11,316.66 11,340.00 10,091.92
Dcember 31, 1995 10,802.30 11,316.66 11,558.00 10,111.62
January 31, 1996 11,056.47 11,575.00 11,952.00 10,157.58
February 29, 1996 11,151.78 11,666.66 12,063.00 10,177.28
March 31, 1996 11120.01(5) 11533.33(6) 12,179.00 10,216.68
TOTAL RETURN
WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES
AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND
INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND
EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS
--------------------------- ---------------------------
The Insiders Select Fund(1)(4)
Class A shares.......................... 11.20%(5) 16.75%
Class C shares.......................... 15.33(6) 16.33
Class Y shares(2)(7).................... 15.98 15.98
S&P 500 (Composite) Index(3)................ 21.79 --
National Consumer Price Index(3)............ 2.17 --
</TABLE>
- ---------
(1) For the period June 16, 1995 (commencement of investment operations) through
March 31, 1996.
(2) The return of class Y shares (for which June 20, 1995 was the initial public
offering date) would have been higher than class A and class C shares if
operations were commenced on the same day. The higher return is due to the
fact that there is no sales load, CDSC or 12b-1 fee charged to class Y
shares.
(3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio
and reflects Portfolio expenses. Investors should note that the Portfolio is
a professionally managed mutual fund while the indices are either unmanaged
and do not incur sales charges or expenses and/or are not available for
investment.
(4) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to
voluntarily reimburse a portion of the Portfolio's operating expenses to
maintain the expense limitation, as set forth in the notes to financial
statements.
(5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and
expense reimbursements, the total return would have been 9.93% with a sales
load charged and 15.42% without a sales load charged.
(6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense
reimbursements, the total return would have been 13.92% with a CDSC charged
at the end of the period and 14.92% without a CDSC charged at the end of the
period.
(7) Excluding fee waivers and expense reimbursements, the total return would
have been 14.85%.
CDSC -- Contingent Deferred Sales Charge.
2
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
(AS A PERCENTAGE OF TOTAL NET ASSETS)
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Banks 7.75%
<S> <C>
Cash & Cash Equivalents 2.24%
Chemicals & Fertilizers 3.66%
Computers & Office Equipment 4.16%
Computer Services 3.26%
Credit & Finance 12.01%
Drugs & Hospital Supplies 14.27%
Electrical Equipment 3.77%
Electronics 3.39%
Food & Beverages 3.55%
Holding Companies 2.54%
Lodging 2.21%
Miscellaneous Manufacturing 8.19%
Oil & Gas 10.46%
Telecommunications 5.51%
Utilities 2.85%
Other 10.18%
</TABLE>
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
RANK HOLDING SECTOR NET ASSETS
- ------------------------------------------------------ --------------------------- ----------
<C> <S> <C> <C>
1. Johnson & Johnson................................. Drugs & Hospital Supplies 3.00
2. Federal National Mortgage Association............. Credit & Finance 2.95
3. Dover Corp........................................ Miscellaneous Manufacturing 2.94
4. American International Group, Inc................. Credit & Finance 2.89
5. Merck & Co., Inc.................................. Drugs & Hospital Supplies 2.88
6. Mobil Corp........................................ Oil & Gas 2.88
7. Jefferson-Pilot Corp.............................. Credit & Finance 2.71
8. Texaco, Inc. ..................................... Oil & Gas 2.32
9. Becton, Dickinson & Co............................ Drugs & Hospital Supplies 2.31
10. City National Corp. .............................. Banks 2.04
</TABLE>
3
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------
<C> <S> <C>
MARKET
SHARES VALUE
<CAPTION>
------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--97.75%
AEROSPACE & DEFENSE - 0.50%
2,000 General Dynamics Corp....................................... $ 117,000
-----------
BANKS - 7.75%
1,800 BankAmerica Corp............................................ 139,500
4,100 Bank of Boston Corp......................................... 203,462
3,300 Central Fidelity Banks, Inc. ............................... 112,200
35,000 City National Corp.......................................... 476,875
2,000 First Chicago NBD Corp. .................................... 83,000
2,800 First Virginia Banks, Inc................................... 113,050
3,900 Green Tree Financial Corp. ................................. 134,062
9,800 Huntington Bancshares Inc. ................................. 233,975
4,200 Provident Bankshares Corp................................... 139,650
4,700 Summit Bancorp.............................................. 173,900
-----------
1,809,674
-----------
BUILDING MATERIALS - 0.94%
2,900 Conseco Industries Ltd...................................... 209,887
400 USG Corp.*.................................................. 10,150
-----------
220,037
-----------
CHEMICALS & FERTILIZERS - 3.66%
1,500 DuPont (E.I.) de Nemours & Co............................... 124,500
6,600 Eastman Chemical Co......................................... 456,225
4,400 Hercules Inc................................................ 272,800
-----------
853,525
-----------
COMPUTERS & OFFICE EQUIPMENT - 4.16%
5,450 Computer Associates International, Inc...................... 390,356
19,500 Computervision Corp*........................................ 202,312
3,400 International Business Machines Corp........................ 377,825
-----------
970,493
-----------
COMPUTER SERVICES - 3.26%
8,300 American Management Systems*................................ 211,650
4,400 Cisco Systems, Inc.*........................................ 204,050
6,700 National Data Corp.......................................... 228,638
3,400 SunGard Data Systems, Inc. *................................ 116,450
-----------
760,788
-----------
<CAPTION>
------------------------------------------------------------------------------
MARKET
SHARES VALUE
------------------------------------------------------------------------------
<C> <S> <C>
CREDIT & FINANCE - 12.01%
7,200 American International Group, Inc........................... $ 674,100
21,600 Federal National Mortgage Association....................... 688,500
11,750 Jefferson-Pilot Corp........................................ 633,031
2,700 J.P. Morgan & Co............................................ 224,100
3,700 Merrill Lynch & Co. ........................................ 224,775
2,100 Morgan Stanley Group Inc. .................................. 108,675
1,900 Price (T. Rowe) Associates ................................. 100,700
2,000 Student Loan Marketing Association.......................... 153,000
-----------
2,806,881
-----------
DRUGS & HOSPITAL SUPPLIES - 14.27%
6,600 Becton, Dickinson & Co...................................... 540,375
3,600 Bristol-Myers Squibb Co..................................... 308,250
2,600 Guidant Corp................................................ 140,725
7,600 Johnson & Johnson........................................... 701,100
6,600 Medtronic, Inc.............................................. 393,525
10,800 Merck & Co., Inc. .......................................... 672,300
7,975 Pharmacia & Upjohn, Inc..................................... 318,003
1,400 Schering-Plough............................................. 81,375
5,700 Sola International, Inc.*................................... 177,413
-----------
3,333,066
-----------
ELECTRICAL EQUIPMENT - 3.77%
14,300 Belden, Inc................................................. 421,850
8,300 Honeywell, Inc.............................................. 458,575
-----------
880,425
-----------
ELECTRONICS - 3.39%
7,800 Applied Materials, Inc.*.................................... 272,025
7,100 Atmel Corp.*................................................ 181,050
10,500 BMC Industries, Inc......................................... 225,750
3,100 National Service Industries, Inc............................ 112,375
-----------
791,200
-----------
ENTERTAINMENT & LEISURE - 1.90%
8,900 MGM Grand, Inc.*............................................ 341,538
1,600 The Walt Disney Co. ........................................ 102,200
-----------
443,738
-----------
ENVIRONMENTAL CONTROLS - 1.31%
9,700 Browning-Ferris Industries, Inc............................. 305,550
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
MARKET
SHARES VALUE
------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
FOOD & BEVERAGES - 3.55%
3,000 Pepsico, Inc................................................ $ 189,750
3,600 Philip Morris Cos. Inc. .................................... 315,900
6,200 Sara Lee Corp............................................... 202,275
900 Unilever N.V. .............................................. 122,175
-----------
830,100
-----------
FOREST PRODUCTS & PAPER - 1.89%
3,600 Consolidated Papers, Inc.................................... 202,500
3,200 Kimberly-Clark Corp. ....................................... 238,400
-----------
440,900
-----------
HOLDING COMPANIES - 2.54%
2,300 Eastern Enterprises......................................... 81,650
3,400 ITT Corp, new shares*....................................... 204,000
11,000 Teledyne, Inc............................................... 308,000
-----------
593,650
-----------
LODGING - 2.21%
5,500 Hilton Hotels Corp.......................................... 517,000
-----------
MISCELLANEOUS MANUFACTURING - 8.19%
3,700 Case Corp................................................... 188,237
15,000 Dover Corp.................................................. 686,250
3,800 Eastman Kodak Co............................................ 269,800
4,200 Harsco Corp................................................. 278,250
7,900 Helix Technology Corp....................................... 222,188
4,300 ITT Industries, Inc......................................... 109,650
4,500 Lam Research Corp.*......................................... 157,500
-----------
1,911,875
-----------
OIL & GAS - 10.46%
5,800 Consolidated Natural Gas Co. ............................... 252,300
5,800 Mobil Corp.................................................. 672,075
4,200 Oneok, Inc. ................................................ 100,275
2,300 Royal Dutch Petroleum Co. .................................. 324,875
1,500 Schlumberger, Ltd........................................... 118,688
6,300 Texaco Inc. ................................................ 541,800
8,600 The Williams Cos., Inc...................................... 433,225
-----------
2,443,238
-----------
PACKAGING & CONTAINERS - 1.96%
13,400 Sealed Air Corp.*........................................... 457,275
-----------
<CAPTION>
------------------------------------------------------------------------------
MARKET
SHARES VALUE
------------------------------------------------------------------------------
<C> <S> <C>
RETAILING, - 1.67%
12,800 Safeway Inc.*............................................... $ 364,800
1,000 The TJX Companies, Inc...................................... 25,125
-----------
389,925
-----------
TELECOMMUNICATIONS - 5.51%
1,000 360 Communications Company *................................ 23,875
4,500 ADC Telecommunications, Inc.*............................... 155,250
3,000 Century Telephone Enterprises, Inc. ........................ 95,250
5,400 Equifax Inc................................................. 108,675
10,200 GTE Corp.................................................... 447,525
6,500 SBC Communications Inc. .................................... 342,063
3,000 Sprint Corp................................................. 114,000
-----------
1,286,638
-----------
UTILITIES - 2.85%
7,500 Entergy Corp. .............................................. 210,000
6,100 Texas Utilities Co.......................................... 252,388
7,500 Unicom Corp................................................. 202,500
-----------
664,888
-----------
Total Common Stocks
(cost - $21,342,374)........................................ 22,827,866
-----------
PREFERRED STOCK--0.01%
HOLDING COMPANY - 0.01%
96 Teledyne Inc., Cumulative Preferred
Series E, 6.00% (cost - $1,416)............................. 1,392
-----------
SHORT-TERM INVESTMENT - 0.02%
INVESTMENT COMPANY - 0.02%
5,698 The Milestone Funds Treasury Obligations Portfolio,
Institutional Shares**
(cost - $5,698)............................................. 5,698
-----------
Total Investments
(cost - $21,349,488) - 97.78%............................... 22,834,956
Other assets in excess of liabilities - 2.22%............... 517,998
-----------
Net Assets - 100.00%........................................ $23,352,954
-----------
-----------
SHORT SALE OF COMMON STOCK
RETAILING
4,200 Talbots, Inc.
(proceeds received - $125,408).............................. $ (159,600)
-----------
-----------
</TABLE>
- ---------
* Non-income producing security.
** Money market fund.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost -- $21,349,488)..... $22,834,956
Deposit with broker for security sold short
(including margin requirement of $146,173)..... 271,581
Receivable for investments sold................. 167,362
Receivable from investment adviser.............. 159,169
Amount segregated at custodian for security sold
short.......................................... 157,744
Receivable for Portfolio shares sold............ 61,913
Dividends and interest receivable............... 43,516
Deferred organization expenses and other
assets......................................... 205,456
-----------
Total assets.............................. 23,901,697
-----------
LIABILITIES
Security sold short, at value (proceeds received
-- $125,408)................................... 159,600
Loan payable.................................... 75,000
Payable for Portfolio shares repurchased........ 198,929
Payable for investments purchased............... 14,962
Distribution fee payable (class A and C
shares)........................................ 39,585
Administration fee payable...................... 2,982
Custodian fee payable........................... 2,130
Accrued expenses................................ 55,555
-----------
Total liabilities......................... 548,743
-----------
NET ASSETS
Capital stock, $0.001 par value (unlimited
shares of beneficial interest authorized)...... 1,670
Paid-in capital................................. 20,991,856
Undistributed net investment income............. 17,060
Accumulated net realized gain from
investments.................................... 891,092
Net unrealized appreciation on investments...... 1,451,276
-----------
Net assets................................ $23,352,954
-----------
-----------
CLASS A
Net assets...................................... $12,131,893
-----------
Shares of beneficial interest outstanding....... 866,314
-----------
Net asset value per share....................... $14.00
-----------
-----------
Maximum offering price per share (net asset
value plus sales charge of 4.75%* of the
offering price)................................ $14.70
-----------
-----------
CLASS C
Net assets...................................... $ 9,928,357
-----------
Shares of beneficial interest outstanding....... 711,278
-----------
Net asset value and offering price per
share**........................................ $13.96
-----------
-----------
CLASS Y
Net assets...................................... $ 1,292,704
-----------
Shares of beneficial interest outstanding....... 92,191
-----------
Net asset value, offering and redemption price
per share...................................... $14.02
-----------
-----------
</TABLE>
- --------
* On investments of $50,000 or more, the offering price is reduced.
** Redemption price per share is equal to the net asset value per share less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 16, 1995* THROUGH MARCH 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends....................................... $ 264,560
Interest........................................ 32,076
----------
296,636
----------
EXPENSES
Advisory fees................................... 116,606
Distribution fees - class A..................... 38,956
Distribution fees - class C..................... 61,049
Federal and state registration fees............. 59,230
Accounting fees................................. 44,282
Transfer agent fees and expenses................ 44,050
Reports and notices to shareholders............. 42,321
Legal and auditing fees......................... 31,354
Amortization of organization expenses........... 28,847
Administration fees............................. 21,806
Insurance expenses.............................. 19,855
Custodian fees and expenses..................... 17,626
Trustees' fees and expenses..................... 12,446
Other........................................... 5,222
----------
Total expenses before waivers and
reimbursements............................. 543,650
Less: waivers and reimbursements.......... (275,775)
----------
Total expenses after waivers and
reimbursements............................. 267,875
----------
Net investment income........................... 28,761
----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS AND SECURITIES SOLD SHORT
TRANSACTIONS
Net realized gain/(loss) from:
Investments................................... 957,205
Security sold short........................... (66,113)
Net change in unrealized
appreciation/(depreciation) on:
Investments................................... 1,485,468
Security sold short........................... (34,192)
----------
Net realized and unrealized gain on investments
and securities sold short transactions......... 2,342,368
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $2,371,129
----------
----------
</TABLE>
- --------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 16, 1995* THROUGH MARCH 31, 1996
<TABLE>
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income........................... $ 28,761
Net realized gain from investments and security
sold short..................................... 891,092
Net change in unrealized appreciation on
investments and security sold short............ 1,451,276
-----------
Net increase in net assets resulting from
operations..................................... 2,371,129
-----------
DIVIDENDS TO SHAREHOLDERS FROM
Net investment income
Class A shares................................ (8,222)
Class Y shares................................ (3,479)
-----------
(11,701)
-----------
SHARES OF BENEFICIAL INTEREST
Net proceeds from the sale of shares............ 26,820,998
Cost of shares repurchased...................... (5,837,996)
Shares issued in reinvestment of dividends...... 10,500
-----------
Net increase in net assets derived from shares
of beneficial interest transactions............ 20,993,502
-----------
Total increase in net assets.................... 23,352,930
NET ASSETS
Beginning of period............................. 24
-----------
End of period (including undistributed net
investment income of $17,060).................. $23,352,954
-----------
-----------
</TABLE>
- --------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JUNE 16, 1995* THROUGH MARCH 31, 1996
- --------------------------------------------------------------------------------
Contained below is per share operating performance data for each class of shares
outstanding, total investment return, ratios to average net assets and other
supplemental data for the period. This information has been derived from
information provided in the financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS CLASS
CLASS A C Y*
------- ------ ------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period............ $ 12.00 $12.00 $12.12
------- ------ ------
Net investment income/(loss) (1)................ 0.03 (0.01) 0.07
Net realized and unrealized gain on investments
and securities sold short (2).................. 1.98 1.97 1.87
------- ------ ------
Net increase in net assets resulting from
operations..................................... 2.01 1.96 1.94
------- ------ ------
Dividends to shareholders from:
Net investment income........................... (0.01) -- (0.04 )
------- ------ ------
Net asset value, end of period.................. $ 14.00 $13.96 $14.02
------- ------ ------
------- ------ ------
Total investment return (3)(6).................. 16.75% 16.33% 15.98%
------- ------ ------
------- ------ ------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)....... $12,132 $9,928 $1,293
Ratio of expenses to average net assets
(1)(4)......................................... 1.65% 2.15% 1.15%
Ratio of net investment income/(loss) to average
net assets (1)(4)(6)........................... 0.38% (0.12)% 0.97%
Decrease reflected in above expense ratios and
net investment
income/(loss) due to waivers and reimbursements
(4)(6)......................................... 1.87% 1.92% 2.04%
Portfolio turnover rate (5)..................... 93.45% 93.45% 93.45%
Average commission rate per share............... $ 0.03 $ 0.03 $0.03
</TABLE>
- --------
* Commencement of investment operations. Class Y shares commenced its initial
public offering on June 20, 1995.
** Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
the actual shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the respective period is
not in accord with the change in the aggregate gains and losses in
investments during the respective period because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating net asset value
during the period.
(3) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each period
reported and includes reinvestment of dividends and distributions, if any.
Total returns are not annualized.
(4) Annualized.
(5) Not annualized.
(6) The total investment return and ratios for class Y shares are not
necessarily comparable to those of class A and C shares, due to timing
differences in the commencement of the initial public offering of class Y
shares.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business
trust on September 29, 1994 and is registered with the Securities and Exchange
Commission (the "Commission") under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), as an open-end management investment
company. The Fund currently has five separate Portfolios in operation: three
diversified Portfolios, Large Cap Value Portfolio, Small Cap Value Portfolio and
Total Return Bond Portfolio and two non-diversified Portfolios, The Insiders
Select Fund ("Insiders" or the "Portfolio") and S&P STARS Portfolio
(collectively, the "Portfolios"). Each portfolio is treated as a separate entity
for certain matters under the Investment Company Act, and for other purposes,
and a shareholder of one portfolio is not deemed to be a shareholder of any
other portfolio. As of the date hereof, the Portfolio offers three classes of
shares, which have been designated as class A, C and Y shares.
ORGANIZATIONAL MATTERS--Prior to commencing investment operations on June 16,
1995, the Portfolio did not have any transactions other than those relating to
organizational matters and the sale of one class A share and one class C share
of beneficial interest of the Portfolio to Bear, Stearns & Co. Inc. ("Bear
Stearns" or the "Distributor"). Costs of $181,965 which were incurred by the
Portfolio in connection with the organization, registration with the Commission
and initial public offering of its shares, have been deferred and are being
amortized using the straight-line method over the period of benefit not
exceeding sixty months, beginning with the commencement of investment operations
of the Portfolio. In the event that the Distributor or any transferee of the
Distributor redeems any of its original shares in the Portfolio prior to the end
of the sixty month period, the proceeds of the redemption payable in respect of
such shares shall be reduced by the pro rata share (based on the proportionate
share of the original shares redeemed to the total number of original shares
outstanding at the time of the redemption) of the unamortized deferred
organization expenses as of the date of such redemption. In the event that the
Portfolio is liquidated prior to the end of the sixty month period, the
Distributor or the transferee of the Distributor shall bear the unamortized
deferred organization expenses.
PORTFOLIO VALUATION--The Portfolio calculates the net asset value of and
completes orders to purchase or repurchase its shares of beneficial interest on
each business day, with the exception of those days on which the New York Stock
Exchange is closed.
Portfolio securities, including covered call options written by the Portfolio,
are valued at the last sale price on the securities exchange or national
securities market on which such securities primarily are traded. Securities not
listed on an exchange or national securities market, or securities in which
there were no transactions, are valued at the average of the most recent bid and
asked prices, except in the case of open short positions where the asked price
is used for valuation purposes. Bid price is used when no asked price is
available. Short-term investments are carried at amortized cost, which
approximates market value, unless this method does not represent fair value. Any
securities or other assets for which recent market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Portfolio's Board of Trustees. Expenses and fees, including the
investment advisory, administration and distribution fees, are accrued daily and
taken into account for the purpose of determining the net asset value of the
Portfolio's shares. Because of the differences in operating expenses incurred by
each class, the per share net asset value of each class will differ.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized gains and losses from securities are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date.
Interest income is recorded on an accrual basis. The Portfolio's net investment
income (other than distribution fees) and unrealized and realized gains or
losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class at the beginning of the day (after
adjusting for current capital share activity of the respective classes).
10
<PAGE>
SHORT SELLING--When the Portfolio makes a short sale, an amount equal to the
proceeds received by the Portfolio is recorded as a liability and is
subsequently adjusted to the current market value of the short sale. Short sales
represent obligations of the Portfolio to make future delivery of specific
securities and, correspondingly, create an obligation to purchase the security
at market prices prevailing at the later delivery date (or to deliver the
security if already owned by the Portfolio). Upon the termination of a short
sale, the Portfolio will recognize a gain, limited to the price at which the
Portfolio sold the security short, if the market price is less than the proceeds
originally received. The Portfolio will recognize a loss, unlimited in
magnitude, if the market price at termination is greater than the proceeds
originally received. As a result, short sales create the risk that the
Portfolio's ultimate obligation to satisfy the delivery requirements may exceed
the amount of the proceeds initially received or the liability recorded in the
financial statements. The Portfolio has segregated $303,917 in separate accounts
as collateral for open short sales.
Security sold short at March 31, 1996:
<TABLE>
<CAPTION>
MARKET UNREALIZED
SHORT SALE PROCEEDS VALUE LOSS
- -------------------------------------------------- -------- -------- ----------
<S> <C> <C> <C>
Talbots, Inc...................................... $125,408 $159,600 $34,192
</TABLE>
U.S. FEDERAL TAX STATUS--The Portfolio intends to distribute substantially all
of its taxable income and to comply with the other requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies.
Accordingly, no provision for U.S. federal income taxes is required. In
addition, by distributing during each calendar year substantially all of its
ordinary income and capital gains, if any, the Portfolio intends not to be
subject to a U.S. federal excise tax.
DIVIDENDS AND DISTRIBUTIONS--The Portfolio intends to distribute at least
annually to shareholders substantially all of its net investment income.
Distribution of net realized gains, if any, will be declared and paid at least
annually by the Portfolio. Dividends and distributions to shareholders are
recorded on the ex-dividend date. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
During the period ended March 31, 1996, Bear Stearns Funds Management Inc.
("BSFM" or "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies
Inc., serves as the investment adviser pursuant to an Investment Advisory
Agreement with the Portfolio. BSFM has engaged Symphony Asset Management
("Symphony"), a subsidiary of BARRA, Inc., as the Portfolio's sub-investment
adviser to manage the Portfolio's day-to-day investment activities. BSFM and
Symphony are referred to herein collectively as the "Advisers." BSFM is entitled
to receive from the Portfolio a monthly fee equal to an annual rate of 1.00% of
the Portfolio's average daily net assets from which BSFM, in turn, pays Symphony
a monthly fee equal to an annual rate of 0.45% of the Portfolio's average daily
net assets. In addition, starting in the thirteenth month of operation, BSFM is
entitled to a monthly performance adjustment fee which may increase or decrease
the total advisory fee by up to 0.50% per year of the value of the Portfolio's
average daily net assets.
During the period ended March 31, 1996, BSFM (or the "Administrator") serves as
the administrator to the Portfolio pursuant to an Administration Agreement. The
Administrator is entitled to receive from the Portfolio a monthly fee equal to
an annual rate of 0.15% of the Portfolio's average daily net assets. Under the
terms of an Administrative Services Agreement with the Portfolio, PFPC Inc.
provides certain administrative services to the Portfolio. For providing these
services, PFPC Inc. is entitled to receive a monthly fee equal to an annual rate
of 0.10% of the Portfolio's average daily net assets up to $200 million, 0.075%
of the next $200 million, 0.05% of the next $200 million and 0.03% of net assets
above $600 million, subject to a minimum annual fee of approximately $132,000
for the Portfolio. During the period ended March 31, 1996, PFPC Inc. has
voluntarily waived a portion of its fee.
These fees are computed daily and paid monthly, and are subject to reduction in
any year to the extent that the Portfolio's expenses (exclusive of brokerage
commissions, distribution fees, taxes, interest and extraordinary items) exceed
the most stringent limits prescribed by the laws or regulations of any state in
which the Portfolio's shares are offered for sale, based on the average total
net assets of the Portfolio. The Portfolio will not pay BSFM at a later time for
any amounts it may waive, nor will the Portfolio reimburse BSFM for any amounts
it may assume.
During the period ended March 31, 1996, the Adviser has voluntarily undertaken
to limit the Portfolio's total operating expenses (exclusive of brokerage
commissions, taxes, interest and extraordinary items) to a maximum annual level
of 1.65% of the average daily
11
<PAGE>
net assets of its class A shares, 2.15% of the average daily net assets of its
class C shares and 1.15% of the average daily net assets of its class Y shares.
As necessary, this limitation is effected by waivers by the Adviser of its
advisory fees and reimbursements of expenses exceeding the advisory fee. For the
period ended March 31, 1996, the Adviser waived its advisory fee of $116,606. In
addition, the Adviser reimbursed $159,169, in order to maintain the voluntary
expense limitation.
For the period ended March 31, 1996, Bear Stearns, an affiliate of the Adviser
and the Administrator, earned approximately $26,300 in brokerage commissions
from Portfolio transactions executed on behalf of the Portfolio.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc. and an affiliate of the Adviser and the Administrator, serves as custodian
to the Portfolio.
DISTRIBUTION PLAN
The Fund, on behalf of the Portfolio, has entered into a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan
in effect for the period ended March 31, 1996, the Portfolio paid Bear Stearns a
fee at an annual rate of 0.50% for class A shares and 1.00% for class C shares.
Such fees are based on the average daily net assets in each class of the
Portfolio and are accrued daily and paid monthly or at such other intervals as
the Board of Trustees may determine. The fees paid to Bear Stearns under the
Plan are payable without regard to actual expenses incurred. For the period June
16, 1995 (commencement of investment operations) through March 31, 1996, Bear
Stearns earned $100,005 in distribution fees. Bear Stearns uses these fees to
pay dealers whose clients hold Portfolio shares and other distribution-related
activities.
In addition, as Distributor of the Portfolio, Bear Stearns collects the sales
charges imposed on sales of the Portfolio's class A shares, and reallows a
portion of such charges to dealers through which the sales are made. As a result
of an undertaking by the Distributor, it reallowed or will reallow all of the
sales charges to its dealers selling Portfolio shares for the period June 16,
1995 (commencement of investment operations) through September 26, 1995 and the
period February 15, 1996 through June 30, 1996. Furthermore, the Distributor has
increased the compensation paid to its dealers selling Portfolio shares on net
asset value transfers (purchases made by investors with the proceeds from a
redemption of shares of an investment company sold with a sales charge or
commission and not distributed by Bear Stearns) from 0.50% to 1.00% for the
period April 15, 1996 through June 30, 1996. In addition, Bear Stearns advanced
1.00% in sales commissions on the sale of class C shares to dealers at the time
of such sales.
For the period ended March 31, 1996, Bear Stearns has advised the Portfolio that
it received approximately $502,600 in front-end sales charges resulting from
sales of class A shares of the Portfolio. From these fees, Bear Stearns paid
such sales charges to dealers which in turn paid commissions to sales persons.
In addition, Bear Stearns has advised the Portfolio that during the period, it
received approximately $9,000 in contingent deferred sales charges upon certain
redemptions by class C shareholders.
INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at March 31,
1996 was $21,366,467. Accordingly, the net unrealized appreciation of
investments of $1,468,489 was composed of gross appreciation of $1,986,350 for
those investments having an excess of value over cost and $517,861 of gross
depreciation for those investments having an excess of cost over value.
For the period June 16, 1995 (commencement of investment operations) through
March 31, 1996, aggregate purchases and sales of investment securities
(excluding short-term securities) for the Portfolio were $37,386,370 and
$16,895,661, respectively.
SHARES OF BENEFICIAL INTEREST
The Portfolio offers class A, C and Y shares. Class A shares are sold with a
front-end sales charge of up to 4.75%. Class C shares are sold with a contingent
deferred sales charge ("CDSC") of 1.00% during the first year. There is no sales
charge or CDSC on class Y shares, which are offered primarily to institutional
investors.
At March 31, 1996, there was an unlimited amount of $0.001 par value shares of
beneficial interest authorized for the Portfolio, of which Bear Stearns owned
one class A share and one class C share of the Portfolio.
12
<PAGE>
Transactions in the classes of shares of beneficial interest for the period June
16, 1995 (commencement of investment operations) through March 31, 1996 were as
follows:
<TABLE>
<CAPTION>
SALES REINVESTMENTS REPURCHASES
---------------------- --------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Class A shares.................................... 1,179,728 $15,128,116 537 $7,389 313,951 $4,288,010
Class C shares.................................... 801,061 10,158,978 -- -- 89,783 1,224,227
Class Y shares*................................... 116,322 1,533,904 226 3,111 24,357 325,759
</TABLE>
- ---------
*Class Y shares commenced its initial public offering on June 20, 1995.
CREDIT AGREEMENT
The Fund, on behalf of the Portfolio, has entered into a credit agreement with
The First National Bank of Boston. S&P STARS Fund, S&P STARS Portfolio, Large
Cap Value Portfolio, Small Cap Value Portfolio, Total Return Bond Portfolio and
Bear Stearns Investment Trust, which consists of the Emerging Markets Debt
Portfolio, are also parties to the credit agreement. The agreement provides that
each party to the credit agreement is permitted to borrow in an amount up to 15%
of the value of its total assets. Subject to Board approval and upon making
necessary disclosure in its prospectus, each portfolio may, in accordance with
the provisions of the credit agreement, borrow up to 25% of the value of its
total assets, less all liabilities other than liabilities for borrowed money
outstanding at the time. However, at no time is the aggregate outstanding
principal amount of all loans to any of the portfolios to exceed $25,000,000.
The line of credit will bear interest at the greater of: (i) the annual rate of
interest announced from time to time from the bank at its head office as its
Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or at the
borrower's option, the rate quoted by The First National Bank of Boston.
Each loan is payable on demand or upon termination of this credit agreement or,
for money market loans, on the last day of the interest period and, in any
event, not later than 14 days from the date the loan was advanced.
The Portfolio uses the facility to borrow money only for temporary or emergency
(not leveraging) purposes. The Portfolio had $75,000 outstanding under the line
of credit agreement at March 31, 1996.
13
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders,
The Insiders Select Fund
(A series of The Bear Stearns Funds):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Insiders Select Fund (the "Portfolio") as
of March 31, 1996, and the related statements of operations, changes in net
assets and the financial highlights for the period June 16, 1995 (commencement
of operations) to March 31, 1996. These financial statements and financial
highlights are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1996 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Insiders Select
Fund at March 31, 1996, the results of its operations, the changes in its net
assets and the financial highlights for the period presented in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
May 9, 1996
14
<PAGE>
THE BEAR STEARNS FUNDS
The Insiders Select Fund
SHAREHOLDER TAX INFORMATION
(UNAUDITED)
The Portfolio is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise its shareholders within 60 days of the Portfolio's fiscal
year end (March 31, 1996) as to the U.S. federal tax status of distributions
received by the Portfolio's shareholders in respect of such fiscal year.
During the year ended March 31, 1996, the following ordinary income dividends
per share were paid by the Portfolio:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- -------------------------------
CLASS A CLASS C CLASS Y
- --------- --------- ---------
<S> <C> <C>
$ 0.0093 -- $ 0.0363
- --------- --------- ---------
- --------- --------- ---------
</TABLE>
The percentage of total net investment income dividends received from The
Insiders Select Fund qualifying for the corporate dividends received deduction
is 100%. All Portfolio dividends were derived from dividend income.
Because the Portfolio's fiscal year is not the calendar year, another
notification will be sent with respect to calendar year 1996. The second
notification, which will reflect the amount to be used by calendar year
taxpayers on their U.S. federal income tax returns, will be made in conjunction
with Form 1099-DIV and will be mailed in January, 1997.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their dividend. They will generally not be entitled to a foreign tax
credit or deduction for the withholding taxes paid by the Portfolio.
In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs)
need not be reported as taxable income for U.S. federal income tax purposes.
However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may
need this information for their annual information reporting.
Shareholders are advised to consult their own tax advisers with respect to the
tax consequences of their investment in the Portfolio.
15
<PAGE>
The
Bear Stearns
Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
<TABLE>
<S> <C>
Robert S. Reitzes....................... Chairman of the Board
Neil T. Eigen........................... President
Peter B. Fox............................ Executive Vice President
William J. Montgoris.................... Executive Vice President
Peter M. Bren........................... Trustee
Alan J. Dixon........................... Trustee
John R. McKernan, Jr. .................. Trustee
M.B. Oglesby, Jr. ...................... Trustee
Stephen A. Bornstein.................... Vice President
Frank J. Maresca........................ Vice President and Treasurer
Raymond D. DeAngelo..................... Vice President
Ellen T. Arthur......................... Secretary
Vincent L. Pereira...................... Assistant Treasurer
Eileen M. Coyle......................... Assistant Secretary
Investment Adviser & Distributor
Administrator Bear, Stearns & Co. Inc.
Bear Stearns Funds 245 Park Avenue
Management Inc. New York, NY 10167
245 Park Avenue
New York, NY 10167
Custodian Transfer & Dividend
Custodial Trust Company Disbursement Agent
101 Carnegie Center PFPC Inc.
Princeton, NJ 08540 Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel Independent Auditors
Stroock & Stroock & Lavan Deloitte & Touche LLP
7 Hanover Square Two World Financial Center
New York, NY 10004 New York, NY 10281
</TABLE>
This report is submitted for the general information of the shareholders of each
Portfolio. It is not authorized for the distribution to prospective investors in
each Portfolio unless it is preceded or accompanied by a current prospectus
which includes details regarding each Portfolio's objectives, policies, sales
commissions and other information. Total return is based on historical results
and is not intended to indicate future performance. The investment return and
principal value of an investment in each Portfolio will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than original cost.
BSF-R-009-02
<PAGE>
Large Cap
Value Portfolio
Small Cap
Value Portfolio
Total Return
Bond Portfolio
Annual Report
March 31, 1996
[LOGO]
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
LETTER TO SHAREHOLDERS
April 25, 1996
Dear Shareholders,
We are pleased to present the first annual report to shareholders for the Large
Cap Value Portfolio ("Large Cap"), Small Cap Value Portfolio ("Small Cap") and
Total Return Bond Portfolio ("Bond Portfolio") (collectively the "Portfolios")
for the period ended March 31, 1996.
LARGE CAP VALUE PORTFOLIO
Large Cap's total return for the period April 4, 1995 (commencement of
investment operations) through March 31, 1996, was 26.35% and 25.71% (without
giving effect to sales charges and contingent deferred sales charges, if any)
for class A and C shares, respectively. The S&P 500 (Composite) Index (the "S&P
500") returned 30.86% for the same period. For the one year period ended April
4, 1996, Large Cap gained 27.52% and 26.88% (without giving effect to sales
charges and contingent deferred sales charges, if any) for class A and C shares,
respectively. The S&P 500 returned 33.00% for the same time frame.
Since inception on August 11, 1995 through March 31, 1996, class Y shares gained
8.75% compared to 17.03% for the S&P 500. Further performance data for each
class of shares for this reporting period is available in the "Financial
Highlights" section of this report.
The first quarter of 1996 proved to be a continuation of the outstanding equity
market of 1995. For the most part, the investment environment has been favorable
since the Portfolio's inception on April 4, 1995. The U.S. economy has weakened
from its rapid growth pace of a year ago; inflation remains subdued; we have
lower deficits; and we have an enhanced competitive position in world markets.
In March, we saw two changes that affected the equity valuation model. Interest
rates moved higher at a time when the majority of economists were predicting
very slow economic growth for the first quarter. Given the slow growth scenario,
analysts reduced earnings estimates for companies they follow. Since the
beginning of April it was apparent that given the strong employment data, the
reported number for first quarter GDP growth would be stronger than anticipated.
This, and the strong number when it was released, served to further weaken the
bond market and stocks followed suit. We expect the weakness to abate over the
next few months as evidence mounts that the economy is growing only moderately
and inflation continues to be well controlled.
We continue to believe that the U.S. economy is in a sluggish mode and GDP
should grow only in the vicinity of about 2% during 1996. Bond yields have now
moved up to levels that we think will serve to further weaken the economy as the
year progresses. As a result, we believe that the bond sell-off will be
reversed.
We feel that we are well-positioned in the Portfolio and continue to remain
overweighted in the financial sector given our belief that earnings growth for
the sector, in general, will outpace corporate America. We continue to favor the
healthcare sector and the predictable earnings growth these stocks provide.
We remain comfortable about the equity market notwithstanding the possibility of
additional weakness over the near term. We believe stocks are not overvalued and
that equity prices can still move higher.
1
<PAGE>
SMALL CAP VALUE PORTFOLIO
Small Cap's total return for the period April 3, 1995 (commencement of
investment operations) through March 31, 1996, was 34.36% and 33.59% (without
giving effect to sales charges and contingent deferred sales charges, if any)
for class A and C shares, respectively, outperforming the Russell 2000 Index
(the "Russell 2000"), which gained 26.82%. Additionally, Small Cap's performance
for the one year period ended April 3, 1996 was exceptional with returns of
36.47% and 35.71% (without giving effect to sales charges and contingent
deferred sales charges, if any) for class A and C shares, respectively, compared
with the gain of 28.09% for the Russell 2000.
Since inception on June 22, 1995 through March 31, 1996, class Y shares returned
23.52% versus 17.70% for the Russell 2000. Further performance data for each
class of shares for this reporting period is available in the "Financial
Highlights" section of this report.
We believe that the single greatest reason for the success of any money manager
over long periods of time is having an investment discipline and sticking with
it. Briefly stated, our general philosophy is to invest in good companies that
not only meet our value criteria, but have the prospect to become even better
companies going forward. This trait is usually evidenced by an acceleration of
earnings. We are excited about the investment prospects for the next twelve
months for small cap investors in general and this Portfolio, in particular.
Performance during the past twelve months has been driven by successes across a
broad spectrum of industries and has included the take-over of four of our
holdings: SFFed Corp., Emphesys Financial Group Inc., Summit Bancorp Inc., and
most recently The Stop & Shop Cos., Inc. All four of these companies were
purchased based on an inexpensive valuation and accelerated earnings growth. Our
biggest winner of the year, was Cephalon Inc., a biotech company with a large
cash position and several new drugs with potential in the final stages of
testing. Our initial purchase price was $8 per share. It closed on March 29th at
$25 7/8. We have also used recent weakness in price of two of our holdings,
Donnkenny Inc. and M/I Schottenstein Homes, Inc., to add to our positions. We
find Donnkenny Inc. attractive with its 50% earnings growth last year and an
anticipated strong growth this year. Additionally, M/I Schottenstein Homes, Inc.
is generating record orders and backlogs, and currently is selling at less than
its book value. Finally, we have recently added Foodmaker Inc., the parent
company of Jack-in-the-Box restaurants. Foodmaker Inc. is enjoying a major
resurgence in its business due to improved and innovative products, an effective
advertising campaign and a refocus on its business. Looking forward, we will
maintain our emphasis on small banks and insurance companies which should
benefit from both lower interest rates and continued consolidation.
As to small cap investing in general, we see a great deal of value, especially
when compared with larger cap alternatives. Using earnings, growth or book
value, these stocks are not expensive on a relative basis. While this bullish
condition has existed for several quarters now, recent surveys indicate that
small cap managers have been building up their cash levels in the wake of record
cash inflows into mutual funds. This is critical, because once it becomes
apparent that an improvement in the economy is forthcoming, this money should
provide a powerful impetus for small cap performance. Whether the prior two
months of outperformance versus the S&P 500 is an indication of this dynamism is
not of great significance to us; our efforts are on things that we believe that
we can control, which is to invest in companies that can outperform the Russell
2000 over long periods of time.
TOTAL RETURN BOND PORTFOLIO
The Bond Portfolio's total return for the period April 5, 1995 (commencement of
investment operations) through March 31, 1996, was 8.54% and 8.13% (without
giving effect to sales charges and contingent deferred sales charges, if any)
for class A and C shares, respectively. The Salomon Brothers Broad Investment
Grade ("BIG") Bond Index returned 10.23% for the same time frame. For the one
year period ended April 5, 1996, the Bond Portfolio gained 8.65% and 8.74%
(without giving effect to sales charges and contingent deferred sales charges,
if any) for class A and C shares, respectively, compared to the Salomon Brothers
BIG Bond Index, which returned 10.31%.
Since inception on September 8, 1995 through March 31, 1996, class Y shares
gained 2.92% versus 3.10% for the Salomon Brothers BIG Bond Index. Further
performance data for each class of shares for this reporting period is available
in the "Financial Highlights" section of this report.
2
<PAGE>
In the first quarter of 1996, the Federal Reserve lowered the federal funds
rates. In February, Alan Greenspan commented that the economy was stable and
that the objective of price stability had been achieved. Bond market investors
interpreted this as a sign that the Fed was probably going to lower interest
rates further in the near term; as a result, bond yields rose significantly. On
March 8th when the February Employment Report was released, it showed that
705,000 new jobs were created during the month and that the unemployment rate
had declined to 5.5%. This report of economic strength erased any doubt about
Federal Reserve easings in the near term and caused treasury bond and note rates
to rise by 25-35 basis points in one trading session.
We remain optimistic on the prospects for lower rates during the course of 1996,
notwithstanding the strong recovery in the first quarter, as the picture of slow
growth and moderate inflation unfolds. The Portfolio is overweighted in both
corporate and mortgage-backed sectors. Corporate bonds are benefiting from a
light new-issue calendar and no competition from CMO issuance. The
mortgage-backed sector has performed well and continues to offer attractive
yields in the Portfolio. Under the current market conditions, we reduced the
duration of the Portfolio to correspond to the Salomon Brothers BIG Bond Index,
its benchmark. We are awaiting signs of stabilization in bond prices before
lengthening the portfolio duration.
In conclusion, we appreciate your support and would be pleased to respond to any
questions or comments. If you have any questions concerning these Portfolios,
please call 1-800-766-4111.
Sincerely,
<TABLE>
<S> <C> <C>
[SIG] [SIG] [SIG]
Robert S. Reitzes Neil T. Eigen Peter E. Mahoney
Chairman of the Board President Portfolio Manager
The Bear Stearns Funds The Bear Stearns Funds Total Return Bond Portfolio
Portfolio Manager
Large Cap Value Portfolio
Small Cap Value Portfolio
</TABLE>
3
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio(1)
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CLASS A NATIONAL CONSUMER PRICE INDEX CLASS C S&P 500
<S> <C> <C> <C> <C>
April 4, 1995 $9,525 $10,000 $10,000 $10,000
April 30, 1995 9,581 10,040 10,050 10,193
May 31, 1995 9,993 10,066 10,483 10,605
June 30, 1995 10,192 10,079 10,683 10,851
July 31, 1995 10,501 10,099 11,008 11,211
August 31, 1995 10,771 10,112 11,292 11,240
Sep 30, 1995 11,295 10,126 11,825 11,714
October 31, 1995 10,851 10,159 11,358 11,672
November 30,1995 11,835 10,159 12,400 12,184
December 31, 1995 11,915 10,178 12,463 12,419
January 31, 1996 11,995 10,225 12,538 12,842
February 29, 1996 11,955 10,245 12,488 12,961
March 31, 1996 12,034 10,284 12,471 13,086
TOTAL RETURN
WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES
AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND
INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND
EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS
--------------------------- ---------------------------
Large Cap Value Portfolio(1)(4)
Class A shares .......................... 20.34%(5) 26.35%
Class C shares........................... 24.71(6) 25.71
Class Y shares(2)(7)..................... 8.75 8.75
S&P 500 (Composite) Index(3)................. 30.86 --
National Consumer Price Index(3)............. 2.84 --
</TABLE>
- ---------
(1) For the period April 4, 1995 (commencement of investment operations) through
March 31, 1996.
(2) The return of class Y shares (for which August 11, 1995 was the initial
public offering date) would have been higher than class A and C shares if
operations were commenced on the same day. The higher return is due to the
fact that there is no sales load, CDSC or 12b-1 fee charged to class Y
shares.
(3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio
and reflects Portfolio expenses. Investors should note that the Portfolio is
a professionally managed mutual fund while the indices are either unmanaged
and do not incur sales charges or expenses and/or are not available for
investment.
(4) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to
voluntarily reimburse a portion of the Portfolio's operating expenses to
maintain the expense limitation, as set forth in the notes to financial
statements.
(5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and
expense reimbursements, the total return would have been 16.52% with a sales
load charged and 22.33% without a sales load charged.
(6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense
reimbursements, the total return would have been 21.08% with a CDSC charged
at the end of the period and 22.08% without a CDSC charged at the end of the
period.
(7) Excluding fee waivers and expense reimbursements, the total return would
have been 6.90%.
CDSC -- Contingent Deferred Sales Charge.
4
<PAGE>
THE BEAR STEARNS FUNDS
Small Cap Value Portfolio(1)
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CLASS A NATIONAL CONSUMER PRICE INDEX CLASS C RUSSEL 2000
<S> <C> <C> <C> <C>
April 3, 1995 $9,525 $10,000 $10,000 $10,000
April 30, 1995 9,660 10,040 10,142 10,362
May 31, 1995 9,938 10,066 10,425 10,875
June 30, 1995 10,343 10,079 10,842 11,492
July 31, 1995 11,216 10,099 11,758 11,708
August 31, 1995 11,914 10,112 12,475 11,901
Sep 30, 1995 12,057 10,126 12,625 11,359
October 31, 1995 11,216 10,159 11,733 11,832
November 30,1995 11,533 10,159 12,067 12,115
December 31, 1995 12,128 10,178 12,674 12,092
January 31, 1996 11,951 10,225 12,488 12,092
February 29, 1996 12,435 10,245 12,995 12,458
March 31, 1996 12,797 10,284 13,259 12,682
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN
WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES
AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND
INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND
EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS
--------------------------- ---------------------------
<S> <C> <C>
Small Cap Value Portfolio(1)(4)
Class A shares .......................... 27.97%(5) 34.36%
Class C shares........................... 32.59(6) 33.59
Class Y shares(2)(7)..................... 23.52 23.52
Russell 2000 Index(3)........................ 26.82 --
National Consumer Price Index(3)............. 2.84 --
</TABLE>
- ---------
(1) For the period April 3, 1995 (commencement of investment operations) through
March 31, 1996.
(2) The return of class Y shares (for which June 22, 1995 was the initial public
offering date) would have been higher than class A and C shares if
operations were commenced on the same day. The higher return is due to the
fact that there is no sales load, CDSC or 12b-1 fee charged to class Y
shares.
(3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio
and reflects Portfolio expenses. Investors should note that the Portfolio is
a professionally managed mutual fund while the indices are either unmanaged
and do not incur sales charges or expenses and/or are not available for
investment.
(4) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to
voluntarily reimburse a portion of the Portfolio's operating expenses to
maintain the expense limitation, as set forth in the notes to financial
statements.
(5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and
expense reimbursements, the total return would have been 26.22% with a sales
load charged and 32.51% without a sales load charged.
(6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense
reimbursements, the total return would have been 31.71% with a CDSC charged
at the end of the period and 32.71% without a CDSC charged at the end of the
period.
(7) Excluding fee waivers and expense reimbursements, the total return would
have been 23.33%.
CDSC -- Contingent Deferred Sales Charge.
5
<PAGE>
THE BEAR STEARNS FUNDS
Total Return Bond Portfolio(1)
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CLASS A CLASS C NATIONAL CONSUMER PRICE INDEX SALOMON BROTHERS
<S> <C> <C> <C> <C>
April 5, 1995 $9,625 $10,000 $10,000 $10,000
April 30, 1995 9,659 10,036 10,040 10,080
May 31, 1995 9,960 10,345 10,066 10,480
June 30, 1995 10,027 10,412 10,079 10,553
July 31, 1995 10,005 10,385 10,099 10,532
August 31, 1995 10,114 10,495 10,112 10,653
Sep 30, 1995 10,206 10,587 10,126 10,753
October 31, 1995 10,335 10,737 10,159 10,897
November 30,1995 10,502 10,886 10,159 11,066
December 31, 1995 10,679 11,064 10,178 11,219
January 31, 1996 10,705 11,089 10,225 11,296
February 29, 1996 10,510 10,884 10,245 11,104
March 31, 1996 10,447 10,713 10,284 11,023
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN
WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES
AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND
INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND
EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS
--------------------------- ---------------------------
<S> <C> <C>
Total Return Bond Portfolio(1)(4)
Class A shares .......................... 4.47%(5) 8.54%
Class C shares........................... 7.13(6) 8.13
Class Y shares(2)(7)..................... 2.92 2.92
Salomon Brothers Broad Investment Grade Bond
Index(3).................................... 10.23 --
National Consumer Price Index(3)............. 2.84 --
</TABLE>
- ---------
(1) For the period April 5, 1995 (commencement of investment operations) through
March 31, 1996.
(2) The return of class Y shares (for which September 8, 1995 was the initial
public offering date) would have been higher than class A and C shares if
operations were commenced on the same day. The higher return is due to the
fact that there is no sales load, CDSC or 12b-1 fee charged to class Y
shares.
(3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio
and reflects Portfolio expenses. Investors should note that the Portfolio is
a professionally managed mutual fund while the indices are either unmanaged
and do not incur sales charges or expenses and/or are not available for
investment.
(4) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to
voluntarily reimburse a portion of the Portfolio's operating expenses to
maintain the expense limitation, as set forth in the notes to financial
statements.
(5) Reflects the initial maximum 3.75% sales load. Excluding fee waivers and
expense reimbursements, the total return would have been 1.55% with a sales
load charged and 5.51% without a sales load charged.
(6) Reflects the maximum 1.00% CDSC. Excluding fee waivers and expense
reimbursements, the total return would have been 3.93% with a CDSC charged
at the end of the period and 4.93% without a CDSC charged at the end of the
period.
(7) Excluding fee waivers and expense reimbursements, the total return would
have been 1.34%.
CDSC -- Contingent Deferred Sales Charge.
6
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
(AS A PERCENTAGE OF TOTAL NET ASSETS)
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AEROSPACE 2.66%
<S> <C>
Automobiles 5.79%
Banks 5.87%
Building & Housing 2.66%
Chemicals & Fertilizers 2.74%
Computers & Office Equipment 9.52%
Credit & Finance 11.72%
Cash & Cash Equivalents 2.32%
Drugs & Hospital Supplies 11.85%
Electrical Equipment 16.09%
Food & Beverages 2.91%
Forest Products & Paper 3.97%
Furnishings & Appliances 3.24%
Insurance 7.42%
Miscellaneous Industrials 3.19%
Retailing 3.52%
Services 4.53%
</TABLE>
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
RANK HOLDING SECTOR NET ASSETS
- ----- -------------------------------------------------- --------------------------- ----------
<C> <S> <C> <C>
1. Stewart & Stevenson Services, Inc. ............... Electrical Equipment 5.07
2. ADT Ltd. ......................................... Electrical Equipment 5.01
3. Digital Equipment Corp. .......................... Computers & Office
Equipment 4.70
4. Great Western Financial Corp. .................... Credit & Finance 4.57
5. Humana Inc. ...................................... Services 4.53
6. Medtronic, Inc. .................................. Drugs & Hospital Supplies 4.52
7. Union Planters Corp. ............................. Credit & Finance 4.01
8. Kimberly-Clark Corp. ............................. Forest Products & Paper 3.97
9. Bristol-Myers Squibb Co. ......................... Drugs & Hospital Supplies 3.90
10. Equitable Cos., Inc. ............................. Insurance 3.75
</TABLE>
7
<PAGE>
THE BEAR STEARNS FUNDS
Small Cap Value Portfolio
MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
(AS A PERCENTAGE OF TOTAL NET ASSETS)
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BANKS 4.30%
<S> <C>
Building & Housing 4.91%
Cash & Cash Equivalents 2.92%
Coal 3.91%
Computers & Office Equipment 4.18%
Cosmetics & Soaps 2.12%
Credit & Finance 7.83%
Electronics 5.27%
Entertainment & Leisure 2.52%
Grocery Products 4.02%
Insurance 3.61%
Investment Company 3.53%
Lodging & Catering 4.29%
Miscellaneous Industrials 8.09%
Non-Ferrous Metals 3.98%
Other 3.90%
Publishing & Broadcasting 2.14%
Retailing 6.13%
Services 3.73%
Telecommunications 3.52%
Textiles & Shoes 15.10%
</TABLE>
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
RANK HOLDING SECTOR NET ASSETS
- ----- -------------------------------------------------- --------------------------- ----------
<C> <S> <C> <C>
1. Donnkenny Inc. ................................... Textiles & Shoes 5.44
2. Ann Taylor, Inc. ................................. Textiles & Shoes 4.86
3. Ornda Healthcorp ................................. Miscellaneous Industrials 4.53
4. Dialogic Corp. ................................... Computers & Office
Equipment 4.18
5. The Stop & Shop Cos., Inc. ....................... Retailing 4.01
6. Mueller Industries, Inc. ......................... Non-Ferrous Metals 3.98
7. Zeigler Coal Holding Co. ......................... Coal 3.91
8. Cephalon Inc. .................................... Services 3.73
9. Ace, Ltd. ........................................ Insurance 3.61
10. Furon Co. ........................................ Miscellaneous Industrials 3.56
</TABLE>
8
<PAGE>
THE BEAR STEARNS FUNDS
Total Return Bond Portfolio
MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
(AS A PERCENTAGE OF TOTAL NET ASSETS)
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN BOND PORTFOLIO SALOMON BROTHERS BROAD INVESTMENT GRADE INDEX
<S> <C> <C>
TSY/GSE 28.7 52.0
Corporations 31.7 18.0
Asset-Backed 7.2 1.0
Mortgage-Backed Securities 29.8 29.0
Cash and Cash Equivalents 2.6 0
</TABLE>
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN SALOMON BROTHERS BROAD
BOND INVESTMENT GRADE BOND
PORTFOLIO INDEX
------------- -------------------------
8.62 years 8.50 years
Average Maturity....................................
<S> <C> <C>
4.97 years 4.73 years
Duration............................................
7.38% 7.46%
Coupon..............................................
6.81% 6.72%
Yield to Maturity...................................
- ----------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------
MARKET
SHARES VALUE
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--97.68%
AEROSPACE - 2.66%
2,500 United Technologies Corp. ........ $ 280,625
-----------
AUTOMOBILES - 5.79%
10,500 Ford Motor Co. ................... 360,937
4,700 General Motors Corp. ............. 250,275
-----------
611,212
-----------
BANKS - 5.87%
5,000 BankAmerica Corp. ................ 387,500
4,500 Bank of New York Co., Inc. ....... 231,750
-----------
619,250
-----------
BUILDING & HOUSING - 2.66%
7,000 Owens-Corning Fiberglas Corp.*.... 280,875
-----------
CHEMICALS & FERTILIZERS - 2.74%
3,700 Grace (W.R.) & Co................. 289,525
-----------
COMPUTERS & OFFICE EQUIPMENT -
9.52%
9,000 Digital Equipment Corp.*.......... 496,125
29,000 Tandem Computers Inc.*............ 257,375
2,000 Xerox Corp. ...................... 251,000
-----------
1,004,500
-----------
CREDIT & FINANCE - 11.72%
20,000 Great Western Financial Corp. .... 482,500
5,000 Travelers Group, Inc. ............ 330,000
14,000 Union Planters Corp. ............. 423,500
-----------
1,236,000
-----------
DRUGS & HOSPITAL SUPPLIES - 11.85%
8,000 Baxter International, Inc. ....... 362,000
4,800 Bristol-Myers Squibb Co. ......... 411,000
8,000 Medtronic, Inc. .................. 477,000
-----------
1,250,000
-----------
ELECTRICAL EQUIPMENT - 16.09%
30,000 ADT Ltd.*......................... 528,750
5,000 General Electric Co. ............. 389,375
3,800 Raychem Corp. .................... 245,100
19,000 Stewart & Stevenson Services,
Inc. ............................. 534,375
-----------
1,697,600
-----------
<CAPTION>
----------------------------------------------------------
MARKET
SHARES VALUE
- ------------------------------------------------------------
<C> <S> <C>
FOOD & BEVERAGES - 2.91%
3,500 Philip Morris Cos. Inc. .......... $ 307,125
-----------
FOREST PRODUCTS & PAPER - 3.97%
5,620 Kimberly-Clark Corp. ............. 418,690
-----------
FURNISHINGS & APPLIANCES - 3.24%
5,500 Armstrong World Industries,
Inc. ............................. 341,688
-----------
INSURANCE - 7.42%
16,300 Equitable Cos., Inc. ............. 395,275
25,000 USF&G Corp. ...................... 387,500
-----------
782,775
-----------
MISCELLANEOUS INDUSTRIALS - 3.19%
12,000 Dial Corp. ....................... 336,000
-----------
RETAILING - 3.52%
7,700 May Department Stores Co. ........ 371,525
-----------
SERVICES - 4.53%
19,000 Humana Inc.* ..................... 477,375
-----------
Total Common Stocks
(cost - $9,165,412)............... 10,304,765
-----------
SHORT-TERM INVESTMENT--0.36%
INVESTMENT COMPANY - 0.36%
37,581 The Milestone Funds Treasury
Obligations
Portfolio, Institutional Shares**
(cost - $37,581).................. 37,581
-----------
Total Investments
(cost - $9,202,993) - 98.04%...... 10,342,346
Other assets in excess of
liabilities - 1.96%............... 206,827
-----------
Net Assets - 100.00%.............. $10,549,173
-----------
-----------
</TABLE>
- ---------
* Non-income producing security.
** Money market fund.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE BEAR STEARNS FUNDS
Small Cap Value Portfolio
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------
MARKET
SHARES VALUE
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--97.08%
BANKS - 4.30%
17,000 Bay View Capital Corp. ........... $ 552,500
19,750 California Financial Holding
Co. .............................. 402,406
-----------
954,906
-----------
BUILDING & HOUSING - 4.91%
51,520 Fedders Corp. Class A............. 294,688
25,000 Giant Cement Holding, Inc.*....... 315,625
47,000 M/I Schottenstein Homes, Inc.*.... 481,750
-----------
1,092,063
-----------
COAL - 3.91%
60,000 Zeigler Coal Holding Co. ......... 870,000
-----------
COMPUTERS & OFFICE EQUIPMENT -
4.18%
22,000 Dialogic Corp. *.................. 929,500
-----------
COSMETICS & SOAPS - 2.12%
38,500 Guest Supply, Inc.*............... 471,625
-----------
CREDIT & FINANCE - 7.83%
31,000 LaSalle Re Holdings, Ltd. ........ 666,500
20,000 RenaissanceRe Holdings Ltd. ...... 550,000
20,000 Security-Connecticut Corp. ....... 522,500
-----------
1,739,000
-----------
DRUGS & HOSPITAL SUPPLIES - 0.50%
15,000 Health Images, Inc. .............. 110,625
-----------
ELECTRICAL EQUIPMENT - 1.32%
30,000 Windmere Corp. ................... 292,500
-----------
ELECTRONICS - 5.27%
22,600 Cubic Corp. Designs............... 607,375
60,000 Griffon Corp.*.................... 562,500
-----------
1,169,875
-----------
ENTERTAINMENT & LEISURE - 2.52%
25,000 Avondale Industries, Inc.*........ 434,375
40,000 Graff Pay-Per-View Inc.*.......... 125,000
-----------
559,375
-----------
FURNISHINGS & APPLIANCES - 1.14%
100,000 QSound Labs, Inc.*................ 253,125
-----------
GROCERY PRODUCTS - 4.02%
22,650 ERLY Industries, Inc.*............ 198,895
43,400 FoodBrands America, Inc.*......... 694,400
-----------
893,295
-----------
INSURANCE - 3.61%
18,000 Ace, Ltd. ........................ 803,250
-----------
INVESTMENT COMPANY - 3.53%
61,000 The Argentina Fund, Inc. ......... 785,375
-----------
<CAPTION>
----------------------------------------------------------
MARKET
SHARES VALUE
- ------------------------------------------------------------
<C> <S> <C>
LODGING & CATERING - 4.29%
90,000 Foodmaker Inc.*................... $ 630,000
29,700 John Q. Hammons Hotels, Inc.*..... 322,988
-----------
952,988
-----------
MACHINERY - 0.94%
22,500 Lamson & Sessions Co.*............ 208,125
-----------
MISCELLANEOUS INDUSTRIALS - 8.09%
36,000 Furon Co. ........................ 792,000
35,000 Ornda Healthcorp*................. 1,006,250
-----------
1,798,250
-----------
NON-FERROUS METALS - 3.98%
25,000 Mueller Industries, Inc.*......... 884,375
-----------
PUBLISHING & BROADCASTING - 2.14%
27,700 Cadmus Communications Corp. ...... 474,362
-----------
RETAILING - 6.13%
39,700 American Eagle Outfitters,
Inc.*............................. 392,038
13,000 Tandycrafts, Inc.*................ 78,000
27,000 The Stop & Shop Cos., Inc.*....... 891,000
-----------
1,361,038
-----------
SERVICES - 3.73%
32,000 Cephalon Inc.*.................... 828,000
-----------
TELECOMMUNICATIONS - 3.52%
59,000 Davel Communications Group,
Inc.*............................. 781,750
-----------
TEXTILES & SHOES - 15.10%
60,000 Ann Taylor, Inc.*................. 1,080,000
38,000 Cone Mills Corp.*................. 441,750
75,000 Donnkenny Inc.*................... 1,209,375
30,000 Fieldcrest Cannon, Inc.*.......... 622,500
-----------
3,353,625
-----------
Total Common Stocks
(cost - $18,880,634).............. 21,567,027
-----------
SHORT-TERM INVESTMENT--0.86%
INVESTMENT COMPANY - 0.86%
191,368 The Milestone Funds Treasury
Obligations
Portfolio, Institutional Shares**
(cost - $191,368)................. 191,368
-----------
Total Investments
(cost - $19,072,002) - 97.94%..... 21,758,395
Other assets in excess of
liabilities - 2.06%............... 457,850
-----------
Net Assets - 100.00%.............. $22,216,245
-----------
-----------
</TABLE>
- ---------
* Non-income producing security.
** Money market fund.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
THE BEAR STEARNS FUNDS
Total Return Bond Portfolio
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT MARKET
DESCRIPTION (000'S) VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--97.44%
CORPORATE OBLIGATIONS - 38.94%
Associates Corp. N.A., Senior Notes, 7.50%, 05/15/99............................................. $ 150 $ 155,063
Caterpillar Financial Services Corp., MTN, 6.56%, 11/03/97....................................... 150 151,068
Chevron Trust Fund, Debentures, Chevron Corp. Guaranteed, 8.11%, 12/01/04........................ 475 514,209
CIT Group Holdings, Inc., Notes, 6.75%, 04/30/98................................................. 150 152,063
Columbia HCA Healthcare, Inc., Debentures, 7.19%, 11/15/15....................................... 325 313,219
Cox Communications, Inc., Debentures, 7.25%, 11/15/15............................................ 250 238,917
Ford Credit 1995-B Grantor Trust, Asset-Backed Certificates, Class A, 5.90%, 10/15/00............ 621 623,505
General Motors Acceptance Corp., MTN, 6.125%, 09/08/97........................................... 425 427,945
Kansas Electric & Power Co-op, Collateral Trust, Grantor Trust Notes, 9.73%, 12/15/17............ 200 219,750
News America Holdings, Inc., Senior Debentures, News Corp. Ltd. Guaranteed, 7.60%, 10/11/15...... 400 382,000
Penney J.C. & Co., MTN, 6.375%, 09/15/00......................................................... 600 597,750
Phillips Petroleum Co., Notes, 8.49%, 01/01/23................................................... 600 610,098
Province of Quebec, Yankee Debentures, 7.50%, 07/15/23........................................... 500 485,625
Salomon Inc., Senior Notes, MTN, 5.34%, 12/17/96................................................. 500 496,720
Salomon Inc., Senior Notes, 6.75%, 02/15/03...................................................... 500 477,500
Sears Credit Account Trust 1991-B, Credit Account Pass Through Certificates, 8.60%, 05/15/98..... 500 501,450
Secured Finance Inc., Debentures, FSA Insured, 9.05%,12/15/04.................................... 550 634,562
Standard Credit Card Trust 1990-6, Credit Card Participation Certificates, Class A, 9.375%,
07/10/97........................................................................................ 190 198,398
-----------
Total Corporate Obligations (cost - $7,267,796).................................................. 7,179,842
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 29.77%
Federal Home Loan Mortgage Corporation
9.00%, 03/01/25................................................................................ 1,423 1,492,586
9.00%, 03/01/25................................................................................ 408 428,147
9.00%, 04/01/25................................................................................ 356 372,840
Federal National Mortgage Association
9.00%, 04/01/25................................................................................ 221 232,256
Government National Mortgage Association
6.50%, 11/15/23................................................................................ 491 465,785
6.50%, 03/15/24................................................................................ 467 442,839
7.00%, 03/15/26................................................................................ 1,530 1,492,228
9.00%, 05/15/25................................................................................ 355 374,270
6.50%, 04/15/25 TBA............................................................................ 200 189,375
-----------
Total U.S. Government Agency Obligations (cost - $5,447,182)..................................... 5,490,326
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
THE BEAR STEARNS FUNDS
Total Return Bond Portfolio
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT MARKET
DESCRIPTION (000'S) VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT OBLIGATIONS - 28.73%
U.S. Treasury Bond
7.625%, 02/15/25............................................................................... $ 800 $ 880,704
U.S. Treasury Notes
5.875%, 08/15/98............................................................................... 400 400,272
6.25%, 05/31/00................................................................................ 1,000 1,005,700
6.375%, 08/15/02............................................................................... 1,000 1,006,390
6.50%, 08/15/05................................................................................ 525 528,607
7.75%,11/30/99................................................................................. 620 654,094
7.875%,11/15/04................................................................................ 750 822,352
-----------
Total U.S. Government Obligations (cost - $5,405,701)............................................ 5,298,119
-----------
Total Long-Term Investments (cost - $18,120,679)................................................. 17,968,287
-----------
SHARES
-----------
SHORT-TERM INVESTMENT--2.98%
INVESTMENT COMPANY - 2.98%
The Milestone Funds Treasury Obligations Portfolio, Institutional Shares* (cost - $549,055)...... 549,055 549,055
-----------
Total Investments (cost - $18,669,734) - 100.42%................................................. 18,517,342
Liabilities in excess of other assets - (0.42)%.................................................. (76,626)
-----------
Net Assets - 100.00%............................................................................. $18,440,716
-----------
-----------
</TABLE>
- ---------
FSA Financial Security Assurance.
MTN Medium-Term Notes.
TBA To be Announced. TBA securities are purchased on a firm commitment basis
with an approximate principal and maturity. The actual principal amount and
maturity date is determined upon settlement.
* Money market fund, of which $204,000 was segregated as collateral for TBA
securities.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
THE BEAR STEARNS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- ------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost--$9,202,993,
$19,072,002,
$18,669,734, respectively)..................... $ 10,342,346 $ 21,758,395 $18,517,342
Cash............................................ -- -- 538
Receivable from investment adviser.............. 224,658 191,607 282,573
Receivable for investments sold................. 72,598 -- --
Receivable for Portfolio shares sold............ 47,530 474,066 8,654
Dividends and interest receivable............... 14,224 13,683 255,185
Deferred organization expenses and other
assets......................................... 94,734 101,579 81,005
-------------- -------------- ------------
Total assets.............................. 10,796,090 22,539,330 19,145,297
-------------- -------------- ------------
LIABILITIES
Loan payable.................................... 50,000 -- --
Payable for investments purchased............... 105,620 214,958 189,688
Payable for Portfolio shares repurchased........ -- -- 374,989
Dividends payable............................... -- -- 27,918
Distribution fee payable (class A and C
shares)........................................ 12,113 20,793 7,140
Administration fee payable...................... 9,106 17,782 17,290
Custodian fee payable........................... 2,860 3,878 1,936
Organization expenses payable................... 8,520 -- 7,095
Accrued expenses................................ 58,698 65,674 78,525
-------------- -------------- ------------
Total liabilities......................... 246,917 323,085 704,581
-------------- -------------- ------------
NET ASSETS
Capital stock, $0.001 par value (unlimited
shares of beneficial interest authorized)...... 698 1,403 1,505
Paid-in capital................................. 9,311,947 19,324,664 18,540,798
Undistributed net investment income/(loss)...... 5,140 (69,561) --
Accumulated net realized gain from
investments.................................... 92,035 273,346 50,805
Net unrealized appreciation/(depreciation) on
investments.................................... 1,139,353 2,686,393 (152,392)
-------------- -------------- ------------
Net assets................................ $ 10,549,173 $ 22,216,245 $18,440,716
-------------- -------------- ------------
-------------- -------------- ------------
CLASS A
Net assets...................................... $ 3,616,446 $ 6,473,911 $ 4,467,447
-------------- -------------- ------------
Shares of beneficial interest outstanding....... 239,011 408,008 364,510
-------------- -------------- ------------
Net asset value per share....................... $15.13 $15.87 $12.26
-------------- -------------- ------------
-------------- -------------- ------------
Maximum offering price per share (net asset
value plus sales charge of 4.75%*, 4.75%* and
3.75%*, respectively, of the offering price)... $15.88 $16.66 $12.74
-------------- -------------- ------------
-------------- -------------- ------------
CLASS C
Net assets...................................... $ 3,519,628 $ 6,753,520 $ 1,774,795
-------------- -------------- ------------
Shares of beneficial interest outstanding....... 233,419 427,631 144,805
-------------- -------------- ------------
Net asset value and offering price per
share**........................................ $15.08 $15.79 $12.26
-------------- -------------- ------------
-------------- -------------- ------------
CLASS Y
Net assets...................................... $ 3,413,099 $ 8,988,814 $12,198,474
-------------- -------------- ------------
Shares of beneficial interest outstanding....... 225,713 567,076 995,312
-------------- -------------- ------------
Net asset value, offering and redemption price
per share...................................... $15.12 $15.85 $12.26
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
- ---------
* On investments of $50,000 or more, the offering price is reduced.
** Redemption price per share is equal to the net asset value per share less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
THE BEAR STEARNS FUNDS
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 3, 1995* THROUGH MARCH 31, 1996
<TABLE>
<CAPTION>
TOTAL
LARGE CAP SMALL CAP RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends....................................... $ 115,115 $ 104,932 --
Interest........................................ 2,830 5,353 $ 750,674
---------- ---------- ----------
117,945 110,285 750,674
---------- ---------- ----------
EXPENSES
Federal and state registration fees............. 65,693 57,283 85,314
Accounting fees................................. 62,405 62,532 63,913
Advisory fees................................... 45,531 88,955 51,869
Transfer agent fees and expenses................ 45,781 55,800 42,929
Legal and auditing fees......................... 24,404 24,444 31,818
Reports and notices to shareholders............. 19,848 25,750 35,000
Distribution fees - class A..................... 13,300 22,762 14,093
Distribution fees - class C..................... 23,333 37,577 11,638
Amortization of organization expenses........... 19,720 21,434 15,220
Insurance expenses.............................. 15,603 15,421 15,686
Administration fees............................. 9,106 17,782 17,290
Custodian fees and expenses..................... 11,029 15,989 14,357
Trustees' fees and expenses..................... 9,240 10,724 5,300
Other........................................... 2,930 3,955 10,255
---------- ---------- ----------
Total expenses before waivers and
reimbursements........................... 367,923 460,408 414,682
Less: waivers and reimbursements.......... (270,189 ) (280,562 ) (334,442 )
---------- ---------- ----------
Total expenses after waivers and
reimbursements........................... 97,734 179,846 80,240
---------- ---------- ----------
Net investment income/(loss).................... 20,211 (69,561 ) 670,434
---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS
Net realized gain from investments.............. 95,147 544,848 105,601
Net change in unrealized
appreciation/(depreciation) on investments..... 1,139,353 2,686,393 (152,392 )
---------- ---------- ----------
Net realized and unrealized gain/(loss) on
investments.................................... 1,234,500 3,231,241 (46,791 )
---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $1,254,711 $3,161,680 $ 623,643
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- --------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
THE BEAR STEARNS FUNDS
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD APRIL 3, 1995* THROUGH MARCH 31, 1996
<TABLE>
<CAPTION>
TOTAL
LARGE CAP SMALL CAP RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income/(loss).................... $ 20,211 $ (69,561 ) $ 670,434
Net realized gain from investments.............. 95,147 544,848 105,601
Net change in unrealized
appreciation/(depreciation) on investments..... 1,139,353 2,686,393 (152,392 )
----------- ----------- -----------
Net increase in net assets resulting from
operations..................................... 1,254,711 3,161,680 623,643
----------- ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A shares............................... (4,557 ) -- (232,740 )
Class C shares................................ -- -- (84,059 )
Class Y shares............................... (10,514 ) -- (353,635 )
----------- ----------- -----------
(15,071 ) -- (670,434 )
----------- ----------- -----------
Net realized capital gains
Class A shares............................... (1,184 ) (64,256 ) (13,644 )
Class C shares................................ (1,037 ) (72,361 ) (5,746 )
Class Y shares............................... (891 ) (134,885 ) (35,406 )
----------- ----------- -----------
(3,112 ) (271,502 ) (54,796 )
----------- ----------- -----------
SHARES OF BENEFICIAL INTEREST
Net proceeds from the sale of shares............ 10,493,529 23,204,316 19,389,794
Cost of shares repurchased...................... (1,214,980 ) (4,151,186 ) (1,253,726 )
Shares issued in reinvestment of dividends...... 9,088 247,929 381,251
----------- ----------- -----------
Net increase in net assets derived from shares
of beneficial interest transactions............ 9,287,637 19,301,059 18,517,319
----------- ----------- -----------
Total increase in net assets.................... 10,524,165 22,191,237 18,415,732
NET ASSETS
Beginning of period............................. 25,008 25,008 24,984
----------- ----------- -----------
End of period................................... $10,549,173 $22,216,245 $18,440,716
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- --------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
THE BEAR STEARNS FUNDS
FINANCIAL HIGHLIGHTS
FOR THE PERIOD APRIL 3, 1995* THROUGH MARCH 31, 1996
- --------------------------------------------------------------------------------
Contained below is per share operating performance data for each class of shares
outstanding, total investment return, ratios to average net assets and other
supplemental data for the period. This information has been derived from
information provided in the financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LARGE CAP VALUE
PORTFOLIO (1) SMALL CAP VALUE TOTAL RETURN BOND
---------------------- PORTFOLIO (2) PORTFOLIO (3)
CLASS CLASS CLASS ------------------------------ ---------------------------
A C Y CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y
------ ------ ------ -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of
period.......................... $12.00 $12.00 $13.98 $12.00 $12.00 $13.09 $12.00 $12.00 $ 12.35
------ ------ ------ -------- -------- -------- ------- ------- -------
Net investment
income/(loss)(4)................ 0.06 (0.01 ) 0.07 (0.07) (0.10) -- 0.71 0.67 0.41
Net realized and unrealized
gain/(loss) on investments(5)... 3.10 3.10 1.16 4.17 4.11 3.05 0.30 0.30 (0.05)
------ ------ ------ -------- -------- -------- ------- ------- -------
Net increase in net assets
resulting from operations....... 3.16 3.09 1.23 4.10 4.01 3.05 1.01 0.97 0.36
------ ------ ------ -------- -------- -------- ------- ------- -------
Dividends and distributions to
shareholders from:
Net investment income............ (0.02 ) -- (0.08 ) -- -- -- (0.71) (0.67) (0.41)
Net realized capital gains....... (0.01 ) (0.01 ) (0.01 ) (0.23) (0.22) (0.29) (0.04) (0.04) (0.04)
------ ------ ------ -------- -------- -------- ------- ------- -------
(0.03 ) (0.01 ) (0.09 ) (0.23) (0.22) (0.29) (0.75) (0.71) (0.45)
------ ------ ------ -------- -------- -------- ------- ------- -------
Net asset value, end of period... $15.13 $15.08 $15.12 $15.87 $15.79 $15.85 $12.26 $12.26 $ 12.26
------ ------ ------ -------- -------- -------- ------- ------- -------
------ ------ ------ -------- -------- -------- ------- ------- -------
Total investment return(6)(9).... 26.35% 25.71% 8.75% 34.36% 33.59% 23.52% 8.54% 8.13% 2.92%
------ ------ ------ -------- -------- -------- ------- ------- -------
------ ------ ------ -------- -------- -------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)................. $3,616 $3,520 $3,413 $6,474 $6,753 $8,989 $4,467 $1,775 $12,199
Ratio of expenses to average net
assets(4)(7).................... 1.50% 2.00% 1.00% 1.50% 2.00% 1.00% 0.85% 1.25% 0.45%
Ratio of net investment
income/(loss) to average net
assets(4)(7)(9)................. 0.46% (0.06 )% 0.76% (0.66)% (1.09)% -- 5.76% 5.38% 5.93%
Decrease reflected in above
expense ratios and net
investment income/ (loss) due to
waivers and
reimbursements(7)(9)............ 4.34% 4.39% 4.41% 2.32% 2.39% 2.45% 2.87% 2.95% 2.89%
Portfolio turnover rate(8)....... 45.28% 45.28% 45.28% 40.79% 40.79% 40.79% 107.35% 107.35% 107.35%
Average commission rate per
share........................... $0.06 $0.06 $0.06 $ 0.06 $ 0.06 $ 0.06 -- -- --
</TABLE>
- ---------
* Commencement of operations.
** Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
actual shares outstanding on the dates of distributions.
(1) Commenced investment operations on April 4, 1995. Class Y shares commenced
its initial public offering on August 11, 1995.
(2) Commenced investment operations on April 3, 1995. Class Y shares commenced
its initial public offering on June 22, 1995.
(3) Commenced investment operations on April 5, 1995. Class Y shares commenced
its initial public offering on September 8, 1995.
(4) Reflects waivers and reimbursements.
(5) The amount shown for a share outstanding throughout the respective period
is not in accord with the change in the aggregate gains and losses in
investments during the respective period because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
value during the period.
(6) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each
period reported and includes reinvestment of dividends and distributions,
if any. Total returns are not annualized.
(7) Annualized.
(8) Not annualized.
(9) The total investment return and ratios for class Y shares are not
necessarily comparable to those of class A and C shares, due to timing
differences in the commencement of the initial public offering of class Y
shares.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business
trust on September 29, 1994 and is registered with the Securities and Exchange
Commission (the "Commission") under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), as an open-end management investment
company. The Fund currently has five separate portfolios in operation: three
diversified portfolios, Large Cap Value Portfolio ("Large Cap"), Small Cap Value
Portfolio ("Small Cap") and Total Return Bond Portfolio ("Bond Portfolio")
(collectively, the "Portfolios") and two non-diversified portfolios, The
Insiders Select Fund and S&P STARS Portfolio. Each portfolio is treated as a
separate entity for certain matters under the Investment Company Act, and for
other purposes, and a shareholder of one portfolio is not deemed to be a
shareholder of any other portfolio. As of the date hereof, each Portfolio offers
three classes of shares, which have been designated as class A, C and Y shares.
ORGANIZATIONAL MATTERS--Prior to commencing operations on April 3, 1995, the
Portfolios did not have any transactions other than those relating to
organizational matters and the sale of 1,042, 1,042 and 1,041 class A shares and
1,042, 1,042 and 1,041 class C shares of beneficial interest of Large Cap, Small
Cap and Bond Portfolio, respectively, to Bear, Stearns & Co. Inc., ("Bear
Stearns" or the "Distributor"). Costs of $99,875, $107,203 and $76,571 which
were incurred by Large Cap, Small Cap and Bond Portfolio, respectively, in
connection with the organization, registration with the Commission and initial
public offering of its shares, have been deferred and are being amortized using
the straight-line method over the period of benefit not exceeding sixty months,
beginning with the commencement of investment operations of each Portfolio. The
Portfolios commenced investment operations on April 3, 1995, April 4, 1995 and
April 5, 1995 for Small Cap, Large Cap and Bond Portfolio, respectively. In the
event that the Distributor or any transferee of the Distributor redeems any of
its original shares in any of the Portfolios prior to the end of the sixty month
period, the proceeds of the redemption payable in respect of such shares shall
be reduced by the pro rata share (based on the proportionate share of the
original shares redeemed to the total number of original shares outstanding at
the time of the redemption) of the unamortized deferred organization expenses as
of the date of such redemption. In the event that any of the Portfolios are
liquidated prior to the end of the sixty month period, the Distributor or the
transferee of the Distributor shall bear the unamortized deferred organization
expenses.
PORTFOLIO VALUATION--Each Portfolio calculates the net asset value of and
completes orders to purchase or repurchase its shares of beneficial interest on
each business day, with the exception of those days on which the New York Stock
Exchange is closed.
The Equity Portfolios' (consisting of Large Cap and Small Cap) securities,
including covered call options written by the Equity Portfolios, are valued at
the last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available. For the
Bond Portfolio, substantially all of the investments (including short-term
investments) are valued at each business day by one or more independent pricing
services (the "Service") approved by the Fund's Board of Trustees. Securities
valued by the Service for which quoted bid prices in the judgment of the Service
are readily available and are representative of the bid side of the market, are
valued at the mean between the quoted bid prices (as obtained by the Service
from dealers in such securities) and asked prices (as calculated by the Service
based upon its evaluation of the market for such securities). Securities which
mature in 60 days or less are valued at amortized cost, which approximates
market value, unless this
18
<PAGE>
method does not represent fair value. Expenses and fees, including the
investment advisory, administration and distribution fees, are accrued daily and
taken into account for the purpose of determining the net asset value of a
Portfolio's shares. Because of the differences in operating expenses incurred by
each class, the per share net asset value of each class will differ.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized gains and losses from securities are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date.
Interest income is recorded on an accrual basis. Discounts are treated as
adjustments to interest income and identified costs of investments over the
lives of respective investments.
The Equity Portfolios' net investment income (other than distribution fees) and
unrealized and realized gains or losses are allocated daily to each class of
shares based upon the relative proportion of net assets of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). The Bond Portfolio's net investment income (other than
distribution fees) and unrealized and realized gains or losses are allocated
daily to each class of shares based upon the relative proportion of the settled
shares value of each class at the beginning of the day.
U.S. FEDERAL TAX STATUS--Each Portfolio intends to distribute substantially all
of its taxable income and to comply with the other requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies.
Accordingly, no provision for U.S. federal income taxes is required. In
addition, by distributing during each calendar year substantially all of its
ordinary income and capital gains, if any, each Portfolio intends not to be
subject to a U.S. federal excise tax.
DIVIDENDS AND DISTRIBUTIONS--Each Equity Portfolio intends to distribute at
least annually to shareholders substantially all of its net investment income.
The Bond Portfolio declares dividends from net investment income on each day the
New York Stock Exchange is open for business. These dividends on the Bond
Portfolio are paid usually on or about the twentieth day of each month.
Distribution of net realized gains, if any, will be declared and paid at least
annually by all Portfolios. Dividends and distributions to shareholders are
recorded on the ex-dividend date. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
During the period ended March 31, 1996, Bear Stearns Funds Management Inc.
("BSFM" or "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies
Inc., serves as the investment adviser pursuant to an Investment Advisory
Agreement with each Portfolio. The Adviser is entitled to receive from the
Portfolios a monthly fee equal to an annual rate of 0.75% of each Equity
Portfolio's average daily net assets and 0.45% of the Bond Portfolio's average
daily net assets.
During the period ended March 31, 1996, BSFM (or the "Administrator") serves as
administrator to each Portfolio pursuant to an Administration Agreement. The
Administrator is entitled to receive from each Portfolio a monthly fee equal to
an annual rate of 0.15% of each Portfolio's average daily net assets. Under the
terms of an Administrative Services Agreement with each Portfolio, 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 the Portfolio's average daily net assets up
to $200 million, 0.075% of the next $200 million, 0.05% of the next $200 million
and 0.03% of net assets above $600 million, subject to a minimum annual fee of
$132,000 for each Portfolio. During the period ended March 31, 1996, PFPC Inc.
has voluntarily waived a portion of its fee.
These fees are computed daily and paid monthly, and are subject to reduction in
any year to the extent that a Portfolio's expenses (exclusive of brokerage
commissions, distribution fees, taxes, interest and extraordinary items) exceed
the most stringent limits prescribed by the laws or regulations of any state in
which the Portfolio's shares are offered for sale, based on the average total
net assets of the Portfolio. The Portfolios will not pay BSFM at a later time
for any amounts it may waive, nor will the Portfolios reimburse BSFM for any
amounts it may assume.
During the period ended March 31, 1996, the Adviser has voluntarily undertaken
to limit each Equity Portfolio's total operating expenses (exclusive of
brokerage commissions, taxes, interest and extraordinary items) to a maximum
annual level of 1.50% of the average daily net assets of its class A shares,
2.00% of the average daily net assets of its class C shares and 1.00% of the
average daily net assets of its class Y shares. During the period April 3, 1995
through August 31, 1995, the Adviser had voluntarily undertaken to limit
19
<PAGE>
the total operating expenses (exclusive of brokerage commissions, taxes,
interest and extraordinary items) of the Bond Portfolio, to a maximum annual
level of 1.00%, 1.40%, and 0.65% of such Portfolio's average daily net assets
for class A, C and Y shares, respectively. Effective September 1, 1995 through
March 31, 1996, the total operating expenses (exclusive of brokerage
commissions, taxes, interest and extraordinary items) were further reduced by
the Adviser with respect to the Bond Portfolio only, to a maximum annual level
of 0.80%, 1.20% and 0.45% of the Bond Portfolio's average daily net assets for
class A, C and Y shares, respectively. As necessary, this limitation is effected
by waivers by the Adviser of its advisory fees and reimbursements of expenses
exceeding the advisory fee. For the period ended March 31, 1996, the Adviser
waived advisory fees of $45,531, $88,955 and $51,869 for Large Cap, Small Cap
and Bond Portfolio, respectively. In addition, the Adviser reimbursed $224,658,
$191,607 and $282,573 for Large Cap, Small Cap and Bond Portfolio, respectively,
in order to maintain the voluntary expense limitation.
For the period ended March 31, 1996, Bear Stearns, an affiliate of the Adviser
and the Administrator, earned approximately $1,200 and $1,700 in brokerage
commissions from portfolio transactions executed on behalf of Large Cap and
Small Cap, respectively.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc. and an affiliate of the Adviser and the Administrator, serves as custodian
to the Portfolios.
DISTRIBUTION PLAN
The Fund, on behalf of each Portfolio, has entered into a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan
in effect for the period ended March 31, 1996, the Equity Portfolios each paid
Bear Stearns a fee at an annual rate of 0.50% for class A shares and 1.00% for
class C shares and the Bond Portfolio paid Bear Stearns a fee at an annual rate
of 0.35% for class A shares and 0.75% for class C shares. Such fees are based on
the average daily net assets in each class of the respective Portfolios and are
accrued daily and paid monthly or at such other intervals as the Board of
Trustees may determine. The fees paid to Bear Stearns under the Plan are payable
without regard to actual expenses incurred. For the period April 3, 1995
(commencement of operations) through March 31, 1996, Bear Stearns earned
$36,633, $60,339 and $25,731 for Large Cap, Small Cap and Bond Portfolio,
respectively, in distribution fees. Bear Stearns uses these fees to pay its
dealers whose clients hold Portfolio shares and for other distribution-related
activities.
In addition, as Distributor of the Portfolios, Bear Stearns collects the sales
charges imposed on sales of each Portfolio's class A shares, and reallows a
portion of such charges to dealers through which the sales are made. As a result
of an undertaking by the Distributor, it reallowed or will reallow all of the
sales charges to its dealers selling Portfolio shares for the period April 3,
1995 (commencement of operations) through September 26, 1995 and the period
February 15, 1996 through June 30, 1996. Furthermore, the Distributor has
increased the compensation paid to its dealers selling Portfolio shares on net
asset value transfers (purchases made by investors with the proceeds from a
redemption of shares of an investment company sold with a sales charge or
commission and not distributed by Bear Stearns) from 0.50% to 1.00% for the
period April 15, 1996 through June 30, 1996. In addition, Bear Stearns advanced
1.00% in sales commissions on the sale of class C shares to dealers at the time
of such sales.
For the period ended March 31, 1996, Bear Stearns has advised each Portfolio
that it received approximately $60,000, $139,000 and $61,000 in front-end sales
charges resulting from sales of class A shares of Large Cap, Small Cap and Bond
Portfolio, respectively. From these fees, Bear Stearns paid such sales charges
to dealers which in turn paid commissions to sales persons. In addition, Bear
Stearns has advised Large Cap, Small Cap and Bond Portfolio that during the
period, it received approximately $100, $600 and $200 from the Portfolios,
respectively, in contingent deferred sales charges upon certain redemptions by
class C shareholders.
20
<PAGE>
INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the costs of securities owned at March 31,
1996 were $9,202,993, $19,075,998 and $18,669,734 for Large Cap, Small Cap and
Bond Portfolio, respectively. Accordingly, the net unrealized
appreciation/(depreciation) of investments are as follows:
<TABLE>
<CAPTION>
NET
APPRECIATION/
PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION)
- ------------------------------ ------------ ------------ ----------------
<S> <C> <C> <C>
Large Cap..................... $1,313,814 $ (174,461) $1,139,353
Small Cap..................... 3,858,596 (1,176,199) 2,682,397
Bond Portfolio................ 78,512 (230,904) (152,392)
</TABLE>
For the period April 3, 1995 (commencement of operations) through March 31,
1996, aggregate purchases and sales of investment securities (excluding
short-term securities) for each Portfolio were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ------------------------------ ------------ ------------
<S> <C> <C>
Large Cap..................... $12,048,795 $ 2,878,529
Small Cap..................... 23,498,834 5,163,049
Bond Portfolio................ 31,380,166 12,507,625
</TABLE>
SHARES OF BENEFICIAL INTEREST
Each Portfolio offers class A, C and Y shares. Class A shares are sold with a
front-end sales charge of up to 4.75% (3.75% in the case of the Bond Portfolio).
Class C shares are sold with a contingent deferred sales charge ("CDSC") of
1.00% during the first year. There is no sales charge or CDSC on class Y shares,
which are offered primarily to institutional investors.
At March 31, 1996, there was an unlimited amount of $0.001 par value shares of
beneficial interest authorized for each Portfolio, of which Bear Stearns owned
63,675, 73,811 and 59,598 of class A shares and 63,564, 73,763 and 59,598 of
class C shares of Large Cap, Small Cap and Bond Portfolio, respectively.
Transactions in the classes of shares of beneficial interest for the period
April 3, 1995 (commencement of operations) through March 31, 1996 were as
follows:
<TABLE>
<CAPTION>
SALES REINVESTMENTS REPURCHASES
------------------------------- ----------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------------------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
LARGE CAP
Class A shares............. 315,696 $ 4,132,049 332 $ 4,945 78,059 $1,135,562
Class C shares............. 233,174 3,029,455 68 1,009 865 12,818
Class Y shares (1)......... 230,011 3,332,025 211 3,134 4,509 66,600
SMALL CAP
Class A shares............. 670,342 9,119,686 3,827 55,602 267,203 3,916,200
Class C shares............. 431,865 5,897,544 4,544 65,802 9,820 142,216
Class Y shares (2)......... 564,644 8,187,086 8,725 126,525 6,293 92,770
BOND PORTFOLIO
Class A shares............. 412,635 5,005,133 11,440 142,125 60,606 761,370
Class C shares............. 146,761 1,778,698 3,450 42,916 6,447 81,056
Class Y shares (3)......... 1,013,077 12,605,963 15,678 196,210 33,443 411,300
</TABLE>
- ---------
(1) Class Y shares commenced its initial public offering on August 11, 1995.
(2) Class Y shares commenced its initial public offering on June 22, 1995.
(3) Class Y shares commenced its initial public offering on September 8, 1995.
21
<PAGE>
CREDIT AGREEMENT
The Fund, on behalf of the Portfolios, has entered into a credit agreement with
The First National Bank of Boston. S&P STARS Fund, The Insiders Select Fund, S&P
STARS Portfolio and Bear Stearns Investment Trust, which consists of the
Emerging Markets Debt Portfolio, are also parties to the credit agreement. The
agreement provides that each party to the credit agreement is permitted to
borrow in an amount up to 15% of the value of its total assets. Subject to Board
approval and upon making necessary disclosure in its prospectus, each portfolio
may, in accordance with the provisions of the credit agreement, borrow up to 25%
of the value of its total assets, less all liabilities other than liabilities
for borrowed money outstanding at the time. However, at no time is the aggregate
outstanding principal amount of all loans to any of the portfolios to exceed
$25,000,000. The line of credit will bear interest at the greater of: (i) the
annual rate of interest announced from time to time from the bank at its head
office as its Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or
at the borrower's option, the rate quoted by The First National Bank of Boston.
Each loan is payable on demand or upon termination of this credit agreement or,
for money market loans, on the last day of the interest period and, in any
event, not later than 14 days from the date the loan was advanced.
The Portfolios use the facility to borrow money only for temporary or emergency
(not leveraging) purposes. Large Cap had $50,000 outstanding under the line of
credit agreement at March 31, 1996. Small Cap and Bond Portfolio had no amounts
outstanding under the line of credit agreement at March 31, 1996.
22
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders,
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
(Series of The Bear Stearns Funds):
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Large Cap Value Portfolio, Small Cap Value
Portfolio, and Total Return Bond Portfolio (collectively the "Portfolios") as of
March 31, 1996, and the related statements of operations, changes in net assets
and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Portfolios'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1996 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Large Cap Value
Portfolio, Small Cap Value Portfolio, and Total Return Bond Portfolio at March
31, 1996, the results of their operations, the changes in their net assets and
the financial highlights for the periods presented in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
New York, New York
May 9, 1996
23
<PAGE>
THE BEAR STEARNS FUNDS
Large Cap Value Portfolio
Small Cap Value Portfolio
Total Return Bond Portfolio
SHAREHOLDER TAX INFORMATION
(UNAUDITED)
Each Portfolio is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise its shareholders within 60 days of the Portfolio's fiscal
year end (March 31, 1996) as to the U.S. federal tax status of distributions
received by the Portfolio's shareholders in respect of such fiscal year.
During the year ended March 31, 1996, the following ordinary income dividends
per share were paid by each of the Portfolios:
LARGE CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
NET INVESTMENT INCOME SHORT-TERM CAPITAL GAINS
- ---------------------------------------- ----------------------------------------
CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y
- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 0.0247 -- $ 0.0752 $ 0.0064 $ 0.0052 $ 0.0064
- ------------ ------------ ------------ ------------ ------------ ------------
- ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The percentage of total net investment income dividends received from the Large
Cap Value Portfolio qualifying for the corporate dividends received deduction is
100%.
SMALL CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
SHORT-TERM CAPITAL GAINS
- ----------------------------------------
CLASS A CLASS C CLASS Y
- ------------ ------------ ------------
<S> <C> <C>
$ 0.2314 $ 0.2211 $ 0.2911
- ------------ ------------ ------------
- ------------ ------------ ------------
</TABLE>
There were no dividends for Small Cap Value Portfolio which would qualify for
the dividends received deduction available to corporate shareholders.
TOTAL RETURN BOND PORTFOLIO
<TABLE>
<CAPTION>
NET INVESTMENT INCOME SHORT-TERM CAPITAL GAINS
- ---------------------------------------- ----------------------------------------
CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y
- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 0.7101 $ 0.6651 $ 0.4088 $ 0.0410 $ 0.0410 $ 0.0410
- ------------ ------------ ------------ ------------ ------------ ------------
- ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
There were no dividends for Total Return Bond Portfolio which would qualify for
the dividends received deduction available to corporate shareholders.
24
<PAGE>
The extent to which dividends were derived from various security types is
presented below. This information relates only to net investment income
referenced above.
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
U.S. Government Obligations............ -- -- 24.81%
Federal Farm Credit Bank............... -- -- 0.25
Federal Home Loan Bank................. 0.07% 0.12% 2.27
Federal Home Loan Mortgage
Corporation........................... 0.17 0.04 19.02
Federal National Mortgage
Association........................... -- -- 7.54
Government National Mortgage
Association........................... -- -- 12.21
Corporate Obligations.................. -- -- 32.05
Dividend Income........................ 99.76 99.84 1.85
--------- --------- ------------
Total.................................. 100.00% 100.00% 100.00%
--------- --------- ------------
--------- --------- ------------
</TABLE>
This information is given to meet certain requirements of the Internal Revenue
Code of 1986, as amended.
Because the Portfolios' fiscal year is not the calendar year, another
notification will be sent with respect to calendar year 1996. The second
notification, which will reflect the amount to be used by calendar year
taxpayers on their U.S. federal income tax returns, will be made in conjunction
with Form 1099-DIV and will be mailed in January, 1997.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their dividend. They will generally not be entitled to a foreign tax
credit or deduction for the withholding taxes paid by the Portfolios.
In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs)
need not be reported as taxable income for U.S. federal income tax purposes.
However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may
need this information for their annual information reporting.
Shareholders are advised to consult their own tax advisers with respect to the
tax consequences of their investment in the Portfolios.
25
<PAGE>
The
Bear Stearns
Funds
245 Park Avenue
New York, NY 10167
1.800.766.4111
<TABLE>
<S> <C>
Robert S. Reitzes....................... Chairman of the Board
Neil T. Eigen........................... President
Peter B. Fox............................ Executive Vice President
William J. Montgoris.................... Executive Vice President
Peter M. Bren........................... Trustee
Alan J. Dixon........................... Trustee
John R. McKernan, Jr. .................. Trustee
M.B. Oglesby, Jr. ...................... Trustee
Stephen A. Bornstein.................... Vice President
Frank J. Maresca........................ Vice President and Treasurer
Raymond D. DeAngelo..................... Vice President
Ellen T. Arthur......................... Secretary
Vincent L. Pereira...................... Assistant Treasurer
Eileen M. Coyle......................... Assistant Secretary
Investment Adviser & Distributor
Administrator Bear, Stearns & Co. Inc.
Bear Stearns Funds 245 Park Avenue
Management Inc. New York, NY 10167
245 Park Avenue
New York, NY 10167
Custodian Transfer & Dividend
Custodial Trust Company Disbursement Agent
101 Carnegie Center PFPC Inc.
Princeton, NJ 08540 Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel Independent Auditors
Stroock & Stroock & Lavan Deloitte & Touche
7 Hanover Square Deloitte & Touche House
New York, NY 10004 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
This report is submitted for the general information of the shareholders of the
Portfolio. It is not authorized for the distribution to prospective investors in
the Portfolio unless it is preceded or accompanied by a current prospectus which
includes details regarding the Portfolio's objectives, policies, sales
commissions and other information. Total return is based on historical results
and is not intended to indicate future performance. The investment return and
principal value of an investment in the Portfolio will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than original cost.
"Standard & Poor's-Registered Trademark-", "S&P-Registered Trademark-", and
"STARS-Registered Trademark-" are trademarks of The McGraw-Hill Companies, Inc.
and have been licensed for use by Bear, Stearns & Co. Inc. S&P STARS
Portfolio is not sponsored, managed, advised, sold or promoted by Standard
& Poor's.
BSF-R-011-02
<PAGE>
S&P STARS
Portfolio
Annual Report
March 31, 1996
[LOGO]
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
LETTER TO SHAREHOLDERS
April 25, 1996
Dear Shareholders,
We are pleased to present the first annual report to shareholders of the S&P
STARS Portfolio (the "Portfolio") for the period April 5, 1995 (commencement of
investment operations) through March 31, 1996. The Portfolio gained 27.68% and
26.91% (without giving effect to sales charges and contingent deferred sales
charges, if any) for class A and C shares, respectively, for the period ended
March 31, 1996. The S&P 500 (Composite) Index ("S&P 500") returned 30.75% for
the same time frame. For the one year ended April 5, 1996, the total return for
the Portfolio was 29.91% and 29.13% (without giving effect to sales charges and
contingent deferred sales charges) for class A and C shares, respectively,
compared to 32.89% for the S&P 500.
Since inception on August 7, 1995 through March 31, 1996, class Y shares gained
9.09% versus 17.55% for the S&P 500. Further performance data for each class of
shares during this reporting period is available in the "Financial Highlights"
section in this report.
During the year, the Portfolio was heavily invested in the technology,
financial, healthcare and consumer non-durable sectors. The Portfolio had only
modest exposure in cyclical stocks. However, we believe that the economy will
strengthen over the next two quarters and, therefore, have become more weighted
in cyclical stocks.
The Portfolio continues to hold large positions in the technology sector. In
addition, we believe that stocks such as Bay Networks Inc., Oracle Systems Corp.
and Amgen, Inc. have had price corrections, and therefore are attractive on a
valuation basis. We have created new positions or added to our existing
positions as stock prices have dropped. Although the networking stocks have come
under some pressure, we expect the growth in this sector to remain strong for
the foreseeable future. We continue to hold Adaptec Inc., Computer Associates
and Sterling Software, Inc. -- all leaders in the fast-growing networking and
electronic commerce sectors. Although the market is nervous about current
demand, we believe that sales in this group will continue to improve. We believe
that Windows NT and new PC developments will contribute to a new wave of
corporate upgrading for computers in the U.S. Furthermore, we believe that
demand outside the U.S. remains robust for these products.
We continue to maintain significant positions in healthcare and
healthcare-related companies. We believe that these companies will provide
steady earnings growth during an uncertain economic environment. Recently, we
have purchased Columbia/HCA Healthcare Corp. after it slipped 12% from its high.
We expect this company to have strong earnings growth in the future.
In addition, the Portfolio maintains a large position in the drug sector. We
have also purchased several cyclical issues -- with concentrated holdings in
Goodyear Tire & Rubber Co., Delta Air Lines Inc. and Grace (W.R.) & Co. Goodyear
Tire & Rubber Co. is one of our largest holdings and should benefit from
improved consumer demand and growth in the replacement tire market. We continue
to hold Grace (W.R.) & Co. which should benefit from restructuring efforts and
strong growth in its chemical business. Moreover, we have modestly increased our
position in the oil service and energy sectors.
Finally, we have developed a weighting in the defense and telecommunications
industries. These industries appear to be poised to produce solid earnings
gains. Although we have lowered our exposure in the financial stocks, we still
maintain positions in Citicorp, Chubb Corp. and Federal National Mortgage
Association. In short, we are positioning the Portfolio to take advantage of a
modest upturn in the economy.
In conclusion , we appreciate your support and would be pleased to respond to
any questions or comments. If you have any questions concerning the Portfolio,
please call 1-800-766-4111.
Sincerely,
[SIG]
Robert S. Reitzes
Chairman of the Board
The Bear Stearns Funds
Portfolio Manager
S&P STARS Master Series
1
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio(1)
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CLASS A AND CLASS C SHARES(2) VS. VARIOUS INDICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P STARS PORTFOLIO
<S> <C> <C> <C> <C>
Class A Class C S&P 500 National Consumer Price Index
April 3, 1995 $ 9,525.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
Apr 95 $ 9,636.13 $ 10,116.67 $ 10,189.00 $ 10,039.66
May 95 $ 10,096.50 $ 10,583.33 $ 10,595.00 $ 10,066.09
Jun 95 $ 10,572.75 $ 11,083.33 $ 10,842.00 $ 10,079.31
Jul 95 $ 11,271.25 $ 11,808.33 $ 11,202.00 $ 10,099.14
Aug 95 $ 11,342.69 $ 11,875.00 $ 11,320.00 $ 10,112.36
Sep 95 $ 11,445.88 $ 11,875.00 $ 11,704.00 10125.58
Oct 95 $ 11,263.31 $ 11,783.33 11662 $ 10,158.63
Nov 95 $ 11,652.25 $ 12,183.33 $ 12,174.00 $ 10,158.63
Dec 95 $ 11,648.38 $ 12,176.00 $ 12,409.00 $ 10,178.45
Jan 96 $ 11,941.83 $ 12,477.81 $ 12,831.00 $ 10,224.72
Feb 96 $ 12,259.73 $ 12,802.36 $ 12,950.00 $ 10,244.55
Mar 96 $ 12,161.91 $ 12,566.37 $ 13,075.00 $ 10,284.20
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN
WITH APPLICABLE SALES LOAD WITHOUT APPLICABLE SALES
AND CDSC, IF ANY, AND LOAD AND CDSC, IF ANY, AND
INCLUDING FEE WAIVERS AND INCLUDING FEE WAIVERS AND
EXPENSE REIMBURSEMENTS EXPENSE REIMBURSEMENTS
--------------------------- ---------------------------
<S> <C> <C>
S&P STARS Portfolio(1)(4)
Class A shares.......................... 21.62%(5) 27.68%
Class C shares.......................... 25.91(6) 26.91
Class Y shares(2)(7).................... 9.09 9.09
S&P 500 (Composite) Index(3)................ 30.75 --
National Consumer Price Index(3)............ 2.84 --
</TABLE>
- ----------
(1) For the period April 5, 1995 (commencement of investment operations) through
March 31, 1996.
(2) The return of class Y shares (for which August 7, 1995 was the initial
public offering date) would have been higher than class A and C shares if
operations were commenced on the same day. The higher return is due to the
fact that there is no sales load, CDSC or 12b-1 fee charged to class Y
shares.
(3) The chart assumes a hypothetical $10,000 initial investment in the Portfolio
and reflects Portfolio expenses. Investors should note that the Portfolio
invests in a professionally managed mutual fund while the indices are either
unmanaged and do not incur sales charges or expenses and/or are not
available for investment.
(4) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to
voluntarily reimburse a portion of the Portfolio's operating expenses to
maintain the expense limitation, as set forth in the notes to financial
statements.
(5) Reflects the initial maximum 4.75% sales load. Excluding fee waivers and
expense reimbursements, the total return would have been 20.55% with a sales
load charged and 26.56% without a sales load charged.
(6) Reflects the maximum 1.00% contingent deferred sales charge. Excluding fee
waivers and expense reimbursements, the total return would have been 24.92%
with a CDSC charged at the end of the period and 25.92% without a CDSC
charged at the end of the period.
(7) Excluding fee waivers and expense reimbursements, the total return would
have been 8.63%.
CDSC -- Contingent Deferred Sales Charge.
2
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
(AS A PERCENTAGE OF TOTAL NET ASSETS)
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Aerospace 2.83%
<S> <C>
Air Transport 3.28%
Automotive Equipment 4.97%
Banks 7.86%
Cash & Cash Equivalents 6.52%
Chemicals & Fertilizers 5.45%
Computers & Office Equipment 2.41%
Computer Networks 3.00%
Computer Services 11.06%
Credit & Finance 4.12%
Drugs & Hospital Supplies 9.95%
Electrical Equipment 6.65%
Electronics 5.54%
Food & Beverages 2.72%
Forest Products & Paper 4.09%
Insurance 2.29%
Miscellaneous Manufacturing 2.75%
Oil & Natural Gas 5.12%
Other 5.84%
Telecommunications 3.55%
</TABLE>
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
RANK HOLDING SECTOR NET ASSETS
- ----- -------------------------------------------------- ----------------------------- ----------
<C> <S> <C> <C>
1. General Electric Co. ............................. Electrical Equipment 6.65
2. Sterling Software, Inc. .......................... Computer Services 5.07
3. Goodyear Tire & Rubber Co. ....................... Automotive Equipment 4.97
4. Computer Associates............................... Computer Services 4.50
5. Grace (W.R.) & Co. ............................... Chemicals & Feritilizers 4.39
6. Citicorp.......................................... Banks 4.19
7. Kimberly-Clark Corp. ............................. Forest Products & Paper 4.09
8. Johnson & Johnson................................. Drugs & Hospital Supplies 3.94
9. Delta Air Lines Inc. ............................. Air Transport 3.28
10. Adaptec Inc. ..................................... Electronics 3.24
</TABLE>
3
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
<TABLE>
<S> <C>
ASSETS
Investment in S&P STARS Master Series
("Master Series"), at value.................... $ 81,922,142
Receivable for Portfolio shares sold............ 1,023,063
Receivable for investment sold in Master
Series......................................... 241,862
Receivable from Master Series' investment
adviser........................................ 4,424
Deferred organization expenses and other
assets......................................... 170,568
-------------
Total assets.............................. 83,362,059
-------------
LIABILITIES
Payable for investment purchased in Master
Series......................................... 1,023,063
Payable for Portfolio shares repurchased........ 241,862
Distribution fee payable (class A and C
shares)........................................ 116,760
Administration fee payable...................... 11,547
Accrued expenses................................ 60,311
-------------
Total liabilities......................... 1,453,543
-------------
NET ASSETS
Capital stock, $0.001 par value (unlimited
shares of beneficial interest authorized)...... 5,495
Paid-in capital................................. 73,932,658
Net investment loss............................. (47,440)
Accumulated net realized gain from Master
Series......................................... 2,014,786
Net unrealized appreciation from Master
Series......................................... 6,003,017
-------------
Net assets................................ $81,908,516
-------------
CLASS A
Net assets...................................... $ 45,048,671
-------------
Shares of beneficial interest outstanding....... 3,019,876
-------------
Net asset value per share....................... $14.92
-------------
-------------
Maximum offering price per share (net asset
value plus sales charge of 4.75%* of the
offering price)................................ $15.66
-------------
-------------
CLASS C
Net assets...................................... $ 28,080,540
-------------
Shares of beneficial interest outstanding....... 1,889,079
-------------
Net asset value and offering price per
share**........................................ $14.86
-------------
-------------
CLASS Y
Net assets...................................... $ 8,779,305
-------------
Shares of beneficial interest outstanding....... 586,530
-------------
Net asset value, offering and redemption price
per share...................................... $14.97
-------------
-------------
</TABLE>
- --------
* On investments of $50,000 or more, the offering price is reduced.
** Redemption price per share is equal to the net asset value per share less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Allocated net investment income from Master
Series......................................... $ 695,138
-------------
EXPENSES
Distribution fees - class A..................... 152,980
Distribution fees - class C..................... 176,445
Federal and state registration fees............. 92,577
Administration fees............................. 78,090
Transfer agent fees and expenses................ 76,889
Accounting fees................................. 58,660
Reports and notices to shareholders............. 44,012
Amortization of organization expenses........... 40,563
Trustees' fees and expenses..................... 8,931
Legal and auditing fees......................... 7,910
Custodian fees and expenses..................... 4,945
Other........................................... 5,000
-------------
Total expenses before reimbursements...... 747,002
Less: reimbursements...................... (4,424)
-------------
Total expenses after reimbursements....... 742,578
-------------
Net investment loss............................. (47,440)
-------------
NET REALIZED AND UNREALIZED GAIN FROM MASTER
SERIES
Net realized gain............................... 3,768,620
Net change in unrealized appreciation........... 6,003,017
-------------
Net realized and unrealized gain................ 9,771,637
-------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $ 9,724,197
-------------
-------------
</TABLE>
- --------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996
<TABLE>
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment loss............................. $ (47,440)
Net realized gain from Master Series............ 3,768,620
Net change in unrealized appreciation from
Master Series.................................. 6,003,017
-----------
Net increase in net assets resulting from
operations..................................... 9,724,197
-----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class Y shares................................ (14,755)
-----------
Net realized capital gains
Class A shares ............................... (994,461)
Class C shares................................ (560,676)
Class Y shares................................ (183,942)
-----------
(1,739,079)
-----------
SHARES OF BENEFICIAL INTEREST
Net proceeds from the sale of shares............ 86,911,640
Cost of shares repurchased...................... (14,635,820)
Shares issued in reinvestment of dividends...... 1,537,317
-----------
Net increase in net assets derived from shares
of beneficial interest transactions............ 73,813,137
-----------
Total increase in net assets.................... 81,783,500
NET ASSETS
Beginning of period............................. 125,016
-----------
End of period................................... $81,908,516
-----------
-----------
</TABLE>
- --------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
FINANCIAL HIGHLIGHTS
FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996
- --------------------------------------------------------------------------------
Contained below is per share operating performance data for each class of shares
outstanding, total investment return, ratios to average net assets and other
supplemental data for the period. This information has been derived from
information provided in the financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS C CLASS Y
-------- -------- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of
period.......................... $ 12.00 $ 12.00 $14.13
-------- -------- --------
Net investment income/(loss)
(1)............................. -- (0.06) 0.07
Net realized and unrealized gain
on investment (2)............... 3.31 3.28 1.20
-------- -------- --------
Net increase in net assets
resulting from operations....... 3.31 3.22 1.27
-------- -------- --------
Dividends and distributions to
shareholders from:
Net investment income.......... -- -- (0.03)
Net realized capital gains..... (0.39) (0.36) (0.40)
-------- -------- --------
(0.39) (0.36) (0.43)
-------- -------- --------
Net asset value, end of period... $ 14.92 $ 14.86 $14.97
-------- -------- --------
-------- -------- --------
Total investment return (3)(6)... 27.68% 26.91% 9.09%
-------- -------- --------
-------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted)........................ $ 45,049 $ 28,081 $8,779
Ratio of expenses to average net
assets (1)(4)................... 1.50% 2.00% 1.00%
Ratio of net investment
income/(loss) to average net
assets (1)(4)(6)................ (0.01)% (0.45)% 0.82%
Decrease reflected in above
expense ratios and net
investment income/(loss) due to
waivers and reimbursements
(4)(5)(6)....................... 0.89% 0.92% 0.99%
</TABLE>
- --------
* Commencement of investment operations. Class Y shares commenced its initial
public offering on August 7, 1995.
** Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions which are based on actual
shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the respective period
is not in accord with the change in the aggregate gains and losses in
investments during the respective period because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
value during the period.
(3) Total return does not consider the effects of sales loads or contingent
deferred sales charges. Total return is calculated assuming a purchase of
shares on the first day and a sale of shares on the last day of each
period reported and includes reinvestment of dividends and distributions,
if any. Total returns are not annualized.
(4) Annualized.
(5) Includes Portfolio's share of Master Series' expenses.
(6) The total investment return and ratios for class Y shares are not
necessarily comparable to those of class A or C shares, due to timing
differences in the commencement of the initial public offering of class Y
shares.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business
trust on September 29, 1994 and is registered with the Securities and Exchange
Commission (the "Commission") under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), as an open-end management investment
company. The Fund currently has five portfolios in operation: three diversified
portfolios, Large Cap Value Portfolio, Small Cap Value Portfolio and Total
Return Bond Portfolio, and two non-diversified portfolios, The Insiders Select
Fund and S&P STARS Portfolio. Each portfolio is treated as a separate entity for
certain matters under the Investment Company Act and for other purposes, and a
shareholder of one portfolio is not deemed to be a shareholder of any other
portfolio. As of the date hereof, S&P STARS Portfolio (the "Portfolio") offers
three classes of shares which have been designated as class A, C and Y shares.
The Portfolio invests all of its assets in S&P STARS Master Series (the "Master
Series"), a separate series of S&P STARS Fund (the "Master Fund"), which has the
same objective as the Portfolio. The Master Fund was organized as a Delaware
business trust on October 5, 1994 and is registered under the Investment Company
Act as an open-end management investment company. The Master Fund currently has
one fund in operation, the Master Series, a non-diversified fund. The value of
the Portfolio's investment in the Master Series reflects the Portfolio's
proportionate beneficial interest in the net assets of the Master Series (99.9%
at March 31, 1996). The performance of the Portfolio is directly affected by the
performance of the Master Series. The financial statements of the Master Series,
including the portfolio of investments, should be read in conjunction with the
Portfolio's financial statements.
ORGANIZATIONAL MATTERS--Prior to commencing investment operations on April 5,
1995, the Portfolio had not had any transactions other than those relating to
organizational matters and the sale of 5,209 class A shares and 5,209 class C
shares of beneficial interest of S&P STARS Portfolio to Bear, Stearns & Co. Inc.
("Bear Stearns" or the "Distributor"). Costs of $203,596 incurred by the Fund in
connection with the organization, its registration with the Commission and the
initial public offering of its shares, have been deferred and are being
amortized using the straight-line method over the period of benefit not
exceeding sixty months, beginning with the commencement of investment operations
of the Portfolio. In the event that the Distributor or any transferee of the
Distributor redeems any of its original shares prior to the end of the sixty
month period, the proceeds of the redemption payable in respect of such shares
shall be reduced by the pro rata share (based on the proportionate share of the
original shares redeemed to the total number of original shares outstanding at
the time of the redemption) of the unamortized deferred organization expenses as
of the date of such redemption. In the event that the Portfolio is liquidated
prior to the end of the sixty month period, the Distributor or the transferee of
the Distributor shall bear the unamortized deferred organization expenses.
INVESTMENT VALUATION--The Portfolio invests all of its assets in the Master
Series, rather than in a portfolio of securities. Valuation of securities by the
Master Series is discussed in the Master Series' Notes to Financial Statements
which are included elsewhere in this report. Expenses and fees, including
administrative and distribution fees are accrued daily and taken into account
for the purposes of determining the net asset value of the Portfolio's shares.
Because of the differences in operating expenses incurred by each class the per
share net asset value of each class will differ.
INVESTMENT INCOME--The Portfolio accrues its share of income, net of Master
Series' expenses, daily on its investment in the Master Series. Net investment
income and realized and unrealized gains and losses from investment transactions
conducted by the Master Series, are allocated to the Portfolio based on the
Portfolio's proportional beneficial interest in the net assets of the Master
Series.
The Portfolio's allocated investment income and realized and unrealized gains
and losses from the Master Series is further allocated each day to each class of
shares based upon the relative proportion of net assets of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes).
8
<PAGE>
U.S. FEDERAL TAX STATUS--The Portfolio intends to distribute substantially all
of its taxable income and to comply with the other requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies.
Accordingly, no provision for U.S. federal income taxes is required. In
addition, by distributing during each calendar year substantially all of its
ordinary income and capital gains, if any, the Portfolio intends not to be
subject to a U.S. federal excise tax.
DIVIDENDS AND DISTRIBUTIONS--The Portfolio intends to distribute at least
annually to shareholders substantially all of its net investment income.
Distribution of net realized gains, if any, will be declared and paid at least
annually by the Portfolio. Dividends and distributions to shareholders are
recorded on the ex-dividend date. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
During the period ended March 31, 1996, Bear Stearns Funds Management Inc.
("BSFM" or the "Administrator") served as administrator to the Portfolio
pursuant to an Administration Agreement. The Administrator is entitled to
receive from the Portfolio a monthly fee equal to an annual rate of 0.15% of the
Portfolio's average daily net assets. Under the terms of an Administrative
Services Agreement with the Portfolio, PFPC Inc. provides certain administrative
services to the Portfolio. For providing these services, PFPC Inc. is entitled
to receive from the Portfolio a monthly fee of $5,500. During the period ended
March 31, 1996 PFPC Inc. has voluntarily waived a portion of its fee.
These fees are computed daily and paid monthly, and are subject to reduction in
any year to the extent that the Portfolio's expenses (exclusive of brokerage
commissions, distribution fees, taxes, interest and extraordinary items) exceed
the most stringent limits prescribed by the laws or regulations of any state in
which the Portfolio's shares are offered for sale, based on the average total
net assets of the Portfolio.
During the period ended March 31, 1996, BSFM as the Master Series' Adviser (the
"Adviser") has voluntarily undertaken to limit the Portfolio's total operating
expenses (other than brokerage commissions, taxes, interest and extraordinary
items) to the extent that total Portfolio operating expenses exceeded 1.50% of
the average daily net assets of the Portfolio's class A shares, 2.00% of the
average daily net assets of the Portfolio's class C shares and 1.00% of the
average daily net assets of the Portfolio's class Y shares. As necessary, this
limitation is effected by waivers by the Adviser of its advisory fees (Master
Series only) and reimbursements of expenses exceeding the advisory fee (Master
Series and Portfolio). For the period ended March 31, 1996, the Adviser
reimbursed $4,424 of the Portfolio's expenses in order to maintain the voluntary
expense limitation. The Portfolio will not pay the Adviser at a later time for
any amounts it may waive, nor will the Portfolio reimburse the Adviser for any
amounts it may assume.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc. and an affiliate of the Administrator, serves as custodian to the
Portfolio.
DISTRIBUTION PLAN
The Fund, on behalf of the Portfolio, has entered into a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan
in effect for the period ended March 31, 1996, the Portfolio paid Bear Stearns a
fee at an annual rate of 0.50% for class A shares and 1.00% for class C shares.
Such fees are based on the average daily net assets in each class of the
Portfolio and are paid monthly. The fees paid to Bear Stearns under the Plan are
payable without regard to actual expenses incurred. For the period April 5, 1995
(commencement of investment operations) through March 31, 1996, Bear Stearns
earned $329,425 in distribution fees. Bear Stearns uses these fees primarily to
pay dealers whose clients hold Portfolio shares and other distribution-related
activities.
In addition, as Distributor of the Portfolio, Bear Stearns collects the sales
charges imposed on sales of the Portfolio's class A shares, and reallows a
portion of such charges to dealers through which the sales are made. As a result
of an undertaking by the Distributor, it reallowed or will reallow all of the
sales charges to its dealers selling Portfolio shares for the period April 3,
1995 (commencement of operations) through September 26, 1995 and the period
February 15, 1996 through June 30, 1996. Furthermore, the Distributor has
increased the compensation paid to its dealers selling Portfolio shares on net
asset value transfers (purchases made by investors with
9
<PAGE>
the proceeds from a redemption of shares of an investment company sold with a
sales charge or commission and not distributed by Bear Stearns) from 0.50% to
1.00% for the period April 15, 1996 through June 30, 1996. In addition, Bear
Stearns pays 1.00% in sales commissions on the sale of class C shares to dealers
at the time of such sales.
For the period ended March 31, 1996, Bear Stearns has advised the Portfolio that
it received approximately $1,494,000 in front-end sales charges resulting from
sales of class A shares of the Portfolio. From these fees, Bear Stearns paid
such sales charges to dealers which in turn paid commissions to sales persons.
In addition Bear Stearns has advised the Portfolio that during the period, it
received approximately $25,500 in contingent deferred sales charges paid upon
certain redemptions by class C shareholders of the Portfolio.
INVESTMENT TRANSACTIONS
Additions and reductions to the Portfolio's investment in the Master Series
amounted to $86,898,982 and $15,568,630, respectively.
SHARES OF BENEFICIAL INTEREST
The Portfolio offers class A, C and Y shares. Class A shares are sold with a
front-end sales charge of up to 4.75%. Class C shares are sold with a contingent
deferred sales charge ("CDSC") of 1.00% during the first year. There is no sales
charge or CDSC on class Y shares, which are offered primarily to institutional
investors.
At March 31, 1996, there was an unlimited amount of $0.001 par value shares of
beneficial interest authorized of which Bear Stearns owned 5,209 class A shares
and 5,209 class C shares. Transactions in the classes of shares of beneficial
interest for the period April 5, 1995 (commencement of investment operations)
through March 31, 1996 were as follows:
<TABLE>
<CAPTION>
SALES REINVESTMENTS REPURCHASES
---------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Class A shares ....................... 3,601,121 $48,488,374 58,847 $ 850,924 640,092 $9,215,429
Class C shares........................ 2,211,148 29,952,540 34,906 503,689 356,975 5,104,093
Class Y shares*....................... 595,898 8,595,742 12,618 182,704 21,986 316,298
<FN>
- ---------
*Class Y shares commenced its initial public offering on August 7, 1995.
</TABLE>
CREDIT AGREEMENT
The Fund, on behalf of the Portfolio, has entered into a credit agreement with
The First National Bank of Boston. S&P STARS Fund, Large Cap Value Portfolio,
Small Cap Value Portfolio, Total Return Bond Portfolio, The Insiders Select Fund
and Bear Stearns Investment Trust, which consists of the Emerging Markets Debt
Portfolio, are also parties to the credit agreement. The agreement provides that
each party to the credit agreement is permitted to borrow in an amount up to 15%
of the value of its total assets. Subject to Board approval and upon making
necessary disclosure in its prospectus, each Portfolio may, in accordance with
the provisions of the credit agreement, borrow up to 25% of the value of its
total assets, less all liabilities other than liabilities for borrowed money
outstanding at the time. However, at no time is the aggregate outstanding
principal amount of all loans to any of the portfolios to exceed $25,000,000.
The line of credit will bear interest at the greater of: (i) the annual rate of
interest announced from time to time from the bank at its head office as its
Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or, at the
borrower's option, the rate quoted by The First National Bank of Boston.
Each loan is payable on demand or upon termination of this credit agreement or,
for money market loans, on the last day of the interest period and, in any
event, not later than 14 days from the date the loan was advanced.
The Portfolio uses this facility to borrow money only for temporary or emergency
(not leveraging) purposes. The Portfolio had no amount outstanding under the
line of credit agreement at March 31, 1996.
10
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders,
S&P STARS Portfolio
(A series of The Bear Stearns Funds):
We have audited the accompanying statement of assets and liabilities of the S&P
STARS Portfolio (the "Portfolio"), as of March 31, 1996, and the related
statements of operations, changes in net assets and the financial highlights for
the period April 5, 1995 (commencement of investment operations) to March 31,
1996. These financial statements and financial highlights are the responsibility
of the Portfolio's management. Our responsibility is to express an opinion on
these financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of S&P STARS Portfolio
at March 31, 1996, the results of its operations, the changes in its net assets
and the financial highlights for the period presented in conformity with
generally accepted accounting principles.
Deloitte & Touche
Dublin, Ireland
May 9, 1996
11
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Portfolio
SHAREHOLDER TAX INFORMATION
(UNAUDITED)
The Portfolio is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise its shareholders within 60 days of the Portfolio's fiscal
year end (March 31, 1996) as to the U.S. federal tax status of distributions
received by the Portfolio's shareholders in respect of such fiscal year.
During the year ended March 31, 1996, the following ordinary income dividends
per share were paid by the Portfolio:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME SHORT-TERM CAPITAL GAINS
- ------------------------------- -------------------------------
CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
-- -- $ 0.0319 $ 0.3897 $ 0.3589 $ 0.3923
</TABLE>
The percentage of total net investment income dividends received from the S&P
STARS Portfolio qualifying for the corporate dividends received deduction is
32.05%.
The extent to which dividends were derived from various security types is
presented below. This information relates only to net investment income
referenced above.
<TABLE>
<S> <C>
Dividend Income................................................ 95.39%
Federal Home Loan Bank......................................... 3.72
Federal Home Loan Mortgage Corporation......................... 0.89
----------
100.00%
----------
----------
</TABLE>
This information is given to meet certain requirements of the Internal Revenue
Code of 1986, as amended.
Because the Portfolio's fiscal year is not the calendar year, another
notification will be sent with respect to calendar year 1996. The second
notification, which will reflect the amount to be used by calendar year
taxpayers on their U.S. federal income tax returns, will be made in conjunction
with Form 1099-DIV and will be mailed in January, 1997.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their dividend. They will generally not be entitled to a foreign tax
credit or deduction for the withholding taxes paid by the Portfolio.
In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs)
need not be reported as taxable income for U.S. federal income tax purposes.
However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may
need this information for their annual information reporting.
Shareholders are advised to consult their own tax advisers with respect to the
tax consequences of their investment in the Portfolio.
12
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------
<C> <S> <C>
MARKET
SHARES+ VALUE
<CAPTION>
- -------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--93.48%
AEROSPACE - 2.83%
39,500 Rockwell International Corp...... $ 2,325,562
-----------
AIR TRANSPORT - 3.28%
35,000 Delta Air Lines Inc. ............ 2,690,625
-----------
AUTOMOTIVE EQUIPMENT - 4.97%
80,000 Goodyear Tire & Rubber Co. ...... 4,080,000
-----------
BANKS - 7.86%
25,000 Bank of New York Co., Inc. ...... 1,287,500
43,000 Citicorp......................... 3,440,000
50,000 Green Tree Financial Corp.++*.... 1,718,750
-----------
6,446,250
-----------
BROADCASTING - 1.06%
20,000 Infinity Broadcasting Co......... 867,500
-----------
CHEMICALS & FERTILIZERS - 5.45%
10,000 The Dow Chemical Co.............. 868,750
46,000 Grace (W.R.) & Co.+++ ........... 3,599,500
-----------
4,468,250
-----------
COAL - 0.53%
30,000 Zeigler Coal Holding Co.......... 435,000
-----------
COMPUTERS & OFFICE EQUIPMENT - 2.41%
45,000 Cheyenne Software Inc.++*........ 708,750
27,000 Oracle Systems Corp.............. 1,272,375
-----------
1,981,125
-----------
COMPUTER NETWORKS - 3.00%
80,000 Bay Networks Inc. ............... 2,460,000
-----------
COMPUTER SERVICES - 11.06%
31,000 Automatic Data Processing,
Inc.++ .......................... 1,220,625
51,500 Computer Associates.............. 3,688,688
59,000 Sterling Software, Inc.*......... 4,159,500
-----------
9,068,813
-----------
<CAPTION>
----------------------------------------------------------
MARKET
SHARES+ VALUE
- -------------------------------------------------------------
<C> <S> <C>
CREDIT & FINANCE - 4.12%
39,000 American Express Co.............. $ 1,925,625
45,500 Federal National Mortgage
Association...................... 1,450,312
-----------
3,375,937
-----------
DRUGS & HOSPITAL SUPPLIES - 9.95%
40,000 Amgen, Inc....................... 2,325,000
35,000 Bio-Technology General Corp.*.... 229,688
36,000 Foundation Health Corp.++*....... 1,372,500
35,000 Johnson & Johnson................ 3,228,750
15,000 Pfizer Inc. ..................... 1,005,000
-----------
8,160,938
-----------
ELECTRICAL EQUIPMENT - 6.65%
70,000 General Electric Co.............. 5,451,250
-----------
ELECTRONICS - 5.54%
55,000 Adaptec Inc.++*.................. 2,653,750
80,500 Dynatech Corp. .................. 1,891,750
-----------
4,545,500
-----------
ENTERTAINMENT & LEISURE - 1.29%
60,000 Comcast Corp. Class A............ 1,061,250
-----------
FOOD & BEVERAGES - 2.72%
27,000 The Coca-Cola Co. ............... 2,230,875
-----------
FOREST PRODUCTS & PAPER - 4.09%
45,000 Kimberly-Clark Corp.+++.......... 3,352,500
-----------
INSURANCE - 2.29%
20,000 Chubb Corp....................... 1,877,500
-----------
MISCELLANEOUS MANUFACTURING - 2.75%
96,000 Whittaker Corp.*................. 2,256,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------
MARKET
SHARES+ VALUE
- -------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
OIL & NATURAL GAS - 5.12%
25,000 Baker Hughes, Inc................ $ 731,250
20,000 Dresser Industries, Inc.......... 610,000
16,000 Mobil Corp. ..................... 1,854,000
20,000 Williams Cos., Inc. ............. 1,007,500
-----------
4,202,750
-----------
OIL-OFFSHORE DRILLING - 1.22%
100,000 Global Marine, Inc.*............. 1,000,000
-----------
RAILROADS - 1.74%
50,000 Illinois Central Corp.++......... 1,425,000
-----------
TELECOMMUNICATIONS - 3.55%
42,500 ECI Telecom Ltd.................. 950,938
65,000 MCI Communications Corp.++....... 1,966,250
-----------
2,917,188
-----------
Total Common Stocks
(cost - $70,673,439)............. 76,679,813
-----------
SHORT-TERM INVESTMENTS--7.18%
INVESTMENT COMPANY - 1.08%
886,080 The Milestone Funds Treasury
Obligations Portfolio,
Institutional Shares**........... 886,080
-----------
<CAPTION>
----------------------------------------------------------
PRINCIPAL
AMOUNT MARKET
(000'S) VALUE
- -------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATION - 6.10%
$5,000 Federal Home Loan Bank Discount
Note, 5.25%, 04/01/96............ $ 5,000,000
-----------
Total Short Term Investments
(cost - $5,886,080).............. 5,886,080
-----------
Total Investments
(cost $76,559,519) - 100.66%..... 82,565,893
Liabilities in excess of other
assets - (0.66)%................. (538,185)
-----------
Net Assets - 100.00%............. $82,027,708
-----------
-----------
</TABLE>
- ---------
+ Unless otherwise indicated all common stocks are ranked five stars.
++ Currently ranked four stars; ranked five stars when purchased.
+++ Currently ranked three stars; ranked five stars when purchased.
* Non-income producing security.
** Money market fund.
S&P STARS RANKINGS:
Five stars - Buy - Expected to be among the best performers over the next twelve
months and to rise in price.
Four stars - Accumulate - Expected to be an above-average performer.
Three stars - Hold - Expected to be an average performer.
Two stars - Avoid - Expected to be a below-average performer.
One star - Sell - Expected to be a well-below-average performer and to fall in
price.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost--$76,559,519)....... $ 82,565,893
Receivable for investments sold................. 2,444,131
Receivable for beneficial interests sold........ 1,023,063
Dividends and interest receivable............... 140,998
Receivable from investment adviser.............. 79,750
Prepaid insurance............................... 15,768
Deferred organization expenses.................. 80,156
--------------
Total assets.............................. 86,349,759
--------------
LIABILITIES
Payable for investments purchased............... 4,042,149
Payable for beneficial interests repurchased.... 241,862
Administration and accounting fee payable....... 5,901
Custodian fee payable........................... 2,800
Accrued expenses................................ 29,339
--------------
Total liabilities......................... 4,322,051
--------------
NET ASSETS
Net proceeds from capital contributions and
withdrawals.................................... 76,021,334
Net unrealized appreciation on investments...... 6,006,374
--------------
Net assets applicable to investors'
beneficial interests....................... $ 82,027,708
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends....................................... $ 667,421
Interest........................................ 127,898
-----------
795,319
-----------
EXPENSES
Advisory fees................................... 384,778
Administration and accounting fees.............. 61,620
Custodian fees and expenses..................... 37,542
Legal and auditing fees......................... 22,783
Amortization of organizational expenses......... 19,844
Insurance expenses.............................. 17,302
Trustees' fees and expenses..................... 16,870
Other........................................... 3,521
-----------
Total expenses before waivers and
reimbursements............................. 564,260
Less: waivers and reimbursements.......... (464,529)
-----------
Total expenses after waivers and
reimbursements............................. 99,731
-----------
Net investment income........................... 695,588
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS, SECURITES SOLD SHORT AND OPTION
TRANSACTIONS
Net realized gain/(loss) from:
Investments............................... 4,059,481
Option transactions....................... (65,149)
Securities sold short..................... (224,962)
Net change in unrealized appreciation on
investments.................................... 6,006,374
-----------
Net realized and unrealized gain on investments,
securities sold short and option
transactions................................... 9,775,744
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $10,471,332
-----------
-----------
</TABLE>
- --------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996
<TABLE>
<S> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS
Net investment income..................................... $ 695,588
Net realized gain from investments, securities sold short
and option transactions.................................. 3,769,370
Net change in unrealized appreciation on investments...... 6,006,374
---------------
Net increase in net assets resulting from operations...... 10,471,332
---------------
CAPITAL TRANSACTIONS
Contributions............................................. 86,999,990
Withdrawals............................................... (15,568,630)
---------------
Net increase in net assets derived from capital
transactions............................................. 71,431,360
---------------
Total increase in net assets.............................. 81,902,692
NET ASSETS
Beginning of period....................................... 125,016
---------------
End of period............................................. $82,027,708
---------------
---------------
</TABLE>
- --------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
FINANCIAL HIGHLIGHTS
FOR THE PERIOD APRIL 5, 1995* THROUGH MARCH 31, 1996
- --------------------------------------------------------------------------------
Contained below are ratios to average net assets and other supplemental data for
the period. This information has been derived from information provided in the
financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted)........................ $82,028
Ratio of expenses to average net
assets (1)(2)................... 0.19%
Ratio of net investment income to
average net assets (1)(2)....... 1.36%
Decrease reflected in above
expense ratios and net
investment income due to waivers
and reimbursements (2).......... 0.91%
Portfolio turnover rate (3)...... 295.97%
Average commission rate per
share........................... $ 0.06
</TABLE>
- -------
* Commencement of investment operations.
(1) Reflects waivers and reimbursements.
(2) Annualized.
(3) Not annualized.
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Fund
S&P STARS Master Series
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
S&P STARS Fund (the "Master Fund") was organized as a Delaware business trust on
October 5, 1994 and is registered with the Securities and Exchange Commission
(the "Commission") under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), as an open-end management investment company. The
Master Fund is a "series fund" which is a mutual fund divided into separate
portfolios. Each portfolio is treated as a separate entity for certain matters
under the Investment Company Act, and for other purposes, and a shareholder of
one portfolio is not deemed to be a shareholder of any other portfolio. The
Master Fund currently has one portfolio in operation, S&P STARS Master Series
(the "Master Series"), a non-diversified portfolio.
ORGANIZATIONAL MATTERS--Prior to commencing investment operations on April 5,
1995, the Master Fund had not had any transactions other than those relating to
organizational matters and the sale of 10,418 shares of beneficial interest of
the Master Series to S&P STARS Portfolio (the "Portfolio") of The Bear Stearns
Funds. Costs of $100,000 incurred by the Master Fund in connection with the
organization and its registration with the Commission have been deferred and are
being amortized, using the straight-line method over the period of benefit not
exceeding sixty months, beginning with the commencement of investment operations
of the Master Series. The Master Series commenced investment operations on April
5, 1995. In the event that the Portfolio or any transferee of the Portfolio
redeems any of its original shares prior to the end of the sixty month period,
the proceeds of the redemption payable in respect of such shares shall be
reduced by the pro rata share (based on the proportionate share of the original
shares redeemed to the total number of original shares outstanding at the time
of the redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Master Series is liquidated prior
to the end of the sixty month period, the Portfolio or the transferee of the
Portfolio shall bear the unamortized deferred organization expenses.
PORTFOLIO VALUATION--Securities, including covered call options written by the
Master Series, are valued at the last sale price on the securities exchange or
national securities market on which such securities primarily are traded.
Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
most recent bid and asked prices, except in the case of open short positions
where the asked price is used for valuation purposes. Bid price is used when no
asked price is available. Securities which mature in 60 days or less are valued
at amortized cost which approximates market value, unless this method does not
represent fair value. Expenses and fees, including the investment advisory and
administration fees, are accrued daily and taken into account for the purposes
of determining the net asset value of the Master Series shares.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Master Series' investment
transactions are recorded on the trade date (the date on which the order to buy
or sell is executed). Realized gains and losses from securities are calculated
on the identified cost basis. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on an accrual basis.
OPTIONS WRITING--When the Master Series writes an option, an amount equal to the
premium received by the Master Series is recorded as a liability and is
subsequently adjusted to the current market value of the option written.
Premiums received from writing options which expire unexercised are recorded by
the Master Series on the expiration date as realized gains from option
transactions. The difference between the premium and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
also treated as a realized gain, or if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
securities in determining whether the Master Series has a realized gain or loss.
If a put option is exercised, the premium reduces the cost basis of the
securities
19
<PAGE>
purchased by the Master Series. The Master Series' use of written options
involves, to varying degrees, elements of market risk in excess of the amount
recognized in the statement of assets and liabilities. The contract or notional
amounts reflect the extent of the Master Series' involvement in these financial
instruments. In writing an option, the Master Series bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Exercise of an option written by the Master Series could result in the Master
Series selling or buying a security at a price different from the current market
value. The Master Series' activities in written options are conducted through
regulated exchanges which do not result in counterparty credit risks.
Option activity for the period ended March 31, 1996 was as follows:
<TABLE>
<CAPTION>
CALL OPTIONS
----------------------------
CONTRACTS PREMIUMS
------------- -------------
<S> <C> <C>
Outstanding at beginning of period.............................................................. -- --
Options written................................................................................. 88,665 $ 4,008,132
Options closed or expired....................................................................... (88,665) (4,008,132)
------------- -------------
Outstanding at end of period.................................................................... -- --
------------- -------------
<CAPTION>
PUT OPTIONS
--------------------------
CONTRACTS PREMIUMS
------------- -----------
<S> <C> <C>
Outstanding at beginning of period.............................................................. -- --
Options written................................................................................. 75 $ 18,975
Options closed or expired....................................................................... (75) (18,975)
------------- -----------
Outstanding at end of period.................................................................... -- --
------------- -----------
</TABLE>
SHORT SELLING--When the Master Series makes a short sale, an amount equal to the
proceeds received by the Master Series is recorded as a liability and is
subsequently adjusted to the current market value of the short sale. Short sales
represent obligations of the Master Series to make future delivery of specific
securities and, correspondingly, create an obligation to purchase the security
at market prices prevailing at the later delivery date (or to deliver the
security if already owned by the Master Series). Upon the termination of a short
sale, the Master Series will recognize a gain, limited to the price at which the
Master Series sold the security short, if the market price is less than the
proceeds originally received. The Master Series will recognize a loss, unlimited
in magnitude, if the market price at termination is greater than the proceeds
originally received. As a result, short sales create the risk that the Master
Series' ultimate obligation to satisfy the delivery requirements may exceed the
amount of the proceeds initially received or the liability recorded in the
financial statements.
U.S. FEDERAL TAX STATUS--The Master Series is treated as a partnership for U.S.
federal tax purposes. No provision is made by the Master Series for U.S. federal
taxes; each investor in the Master Series is ultimately responsible for the
payment of any taxes. Since one of the Master Series' investors is a regulated
investment company that invest all of its assets in the Master Series (S&P STARS
Portfolio or the "Portfolio"), the Master Series normally must satisfy the
applicable source of income and diversification requirements (under the Internal
Revenue Code) in order for the Portfolio to satisfy them. The Master Series
intends to comply with the requirements of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
During the period ended March 31, 1996, Bear Stearns Funds Management Inc.
("BSFM" or the "Adviser"), a wholly-owned subsidiary of The Bear Stearns
Companies Inc., served as the investment adviser of the Master Series pursuant
to an Investment Advisory Agreement. The Adviser is entitled to receive from the
Master Series a monthly fee equal to an annual rate of 0.75% of the Master
Series' average daily net assets.
Under the terms of an Administrative Services Agreement with the Portfolio, PFPC
International Ltd. provides certain administrative services to the Master
Series. For providing these services, PFPC International Ltd. is entitled to
receive from the Master Series a monthly fee equal to an annual rate of 0.12% of
the Master Series' net assets up to $200 million, 0.09% of the next $200
million, 0.075% of the next $200 million, and 0.05% of net assets above $600
million, subject to a minimum fee of $8,500 for the Master Series, payable
monthly. During the period ended March 31, 1996, PFPC International Ltd. has
voluntarily waived a portion of its fee.
During the period ended March 31, 1996, the Adviser has voluntarily undertaken
to limit the Portfolio's total operating expenses (other than brokerage
commissions, interest, taxes and extraordinary items) to the extent that total
Portfolio operating expenses exceeded 1.50% of the average daily net assets of
the Portfolio's class A shares, 2.00% of the average daily net assets of the
Portfolio's class C shares and 1.00% of the average daily net assets of the
Portfolio's class Y shares. As necessary, this limitation is effected by waivers
by the Adviser of its advisory fees and reimbursements of expenses exceeding the
advisory fee. For the period ended March 31, 1996, the
20
<PAGE>
Adviser waived $384,779 of its advisory fee and reimbursed $79,750 of the Master
Series expenses in order to maintain the voluntary expense limitation. The
Master Series will not pay the Adviser at a later time for any amounts it may
waive, nor will the Master Series reimburse the Adviser for any amounts it may
assume.
For the period ended March 31, 1996, Bear, Stearns & Co. Inc., an affiliate of
the Adviser, earned $378,353 in brokerage commissions from portfolio
transactions executed on behalf of the Master Series.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc. and an affiliate of the Adviser, serves as custodian to the Master Series.
INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at March 31,
1996 was $76,887,585. Accordingly, the net unrealized appreciation of
investments of $5,678,308 was composed of gross appreciation of $6,807,564 for
those investments having an excess of value over cost, and gross depreciation of
$1,129,256 for those investments having an excess of cost over value.
For the period April 5, 1995 (commencement of investment operations) through
March 31, 1996, aggregate purchases and sales of investment securities
(excluding short-term securities) were $209,191,856 and $142,577,898,
respectively.
CREDIT AGREEMENT
The S&P STARS Fund, on behalf of the Master Series, has entered into a credit
agreement with The First National Bank of Boston. Bear Stearns Investment Trust,
which consists of the Emerging Markets Debt Portfolio and The Bear Stearns Funds
consisting of S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value
Portfolio, Total Return Bond Portfolio and The Insiders Select Fund are also
parties to the credit agreement. The agreement provides that each fund as a
party to the credit agreement is permitted to borrow in an amount up to 15% of
the value of its total assets. Subject to Board approval and upon making
necessary disclosure in its prospectus, each fund may, in accordance with the
provisions of the credit agreement, borrow up to 25% of the value of its total
assets, less all liabilities other than liabilities for borrowed money
outstanding at the time. However, at no time is the aggregate outstanding
principal amount of all loans to any of the funds to exceed $25,000,000. The
line of credit will bear interest at the greater of: (i) the annual rate of
interest announced from time to time from the bank at its head office as its
Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or, at the
borrower's option, the rate quoted by The First National Bank of Boston.
Each loan is payable on demand or upon termination of this credit agreement or,
for money market loans, on the last day of the interest period and, in any
event, not later than 14 days from the date the loan was advanced.
The Master Series uses this facility to borrow money only for temporary or
emergency (not leveraging) purposes. The Master Series had no amount outstanding
under the line of credit agreement at March 31, 1996.
21
<PAGE>
THE BEAR STEARNS FUNDS
S&P STARS Master Series
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Investors,
S&P STARS Master Series
(A series of the S&P STARS Fund):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of S&P STARS Master Series (the "Master Series"),
as of March 31, 1996, and the related statements of operations, changes in net
assets and the financial highlights for the period April 5, 1995 (commencement
of investment operations) to March 31, 1996. These financial statements and
financial highlights are the responsibility of the Master Series' management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of S&P STARS Master
Series at March 31, 1996, the results of its operations, the changes in its net
assets and the financial highlights for the period presented in conformity with
generally accepted accounting principles.
Deloitte & Touche
Dublin, Ireland
May 9, 1996
22
