Rule 497(c)
Registration No. 33-84842
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds and
Bear Stearns Investment Trust
CLASS A, B AND C SHARES
The Bear Stearns Funds and Bear Stearns Investment Trust are separate open-end
management investment companies, known as mutual funds (together the "Funds").
By this Prospectus, the Funds offer Class A, B and C shares of one non-
diversified portfolio, the Emerging Markets Debt Portfolio (the "Debt
Portfolio"), and two diversified portfolios, the Income Portfolio (formerly, the
Total Return Bond Portfolio) and the High Yield Total Return Portfolio (the
"High Yield Portfolio") (each a "Portfolio" and together the "Portfolios"). Each
Portfolio also offers another class of shares (Class Y shares) which has
different expenses that would affect performance. Investors desiring to obtain
information about this other class of shares should call 1-800-766-4111.
INCOME PORTFOLIO
Seeks high current income consistent with preservation of capital.
HIGH YIELD TOTAL RETURN PORTFOLIO
Seeks total return through high current income and capital appreciation.
EMERGING MARKETS DEBT PORTFOLIO
Seeks high current income by primarily investing in
debt obligations of issuers located in emerging countries, and seeks to
provide capital appreciation.
BEAR STEARNS ASSET MANAGEMENT INC. ("BSAM" or the "Adviser"), a wholly owned
subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's
investment adviser. Bear Stearns Funds Management Inc. ("BSFM"), a wholly owned
subsidiary of The Bear Stearns Companies Inc., is the Administrator of each
Portfolio. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSAM,
serves as each Portfolio's distributor. Bear Stearns is also referred to herein
as the "Distributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT EACH PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Part B (also known as the Statement of Additional Information), dated October
16, 1998, which may be revised from time to time, provides a further discussion
of certain areas in this Prospectus and other matters which may be of interest
to some investors. It has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. For a free copy, write to the address
or call one of the telephone numbers listed under "General Information" in this
prospectus. Additional information, including this Prospectus and the Statement
of Additional Information, may be obtained by accessing the Internet Web site
maintained by the Securities and Exchange Commission (http://www.sec.gov).
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank; are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency; and are subject to
investment risks, including possible loss of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
October 16, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 6
Alternative Purchase Methods............................................... 8
Description of the Portfolios.............................................. 8
Investment Objectives and Policies......................................... 9
Investment Techniques...................................................... 13
Risk Factors............................................................... 22
Management of the Portfolios............................................... 32
How to Buy Shares.......................................................... 36
Net Asset Value............................................................ 38
Shareholder Services....................................................... 41
How to Redeem Shares....................................................... 43
Dividends and Distributions................................................ 46
Taxes...................................................................... 47
Performance Information.................................................... 48
General Information........................................................ 49
Appendix................................................................... A-1
</TABLE>
<PAGE>
Fee Table
<TABLE>
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<CAPTION>
INCOME HIGH YIELD TOTAL RETURN
PORTFOLIO PORTFOLIO
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed on Purchases
(as a percentage of
maximum offering
price)................. 4.50%(1) -- -- 4.50%(1) -- --
Maximum Deferred Sales
Charge Imposed on
Redemptions (as a
percentage of the
amount subject to
charge)................ -- (2) 5.00% 1.00% -- (2) 5.00% 1.00%
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
Advisory Fees (after
fee waiver)............ 0.00%(3) 0.00%(3) 0.00%(3) 0.00%(4) 0.00%(4) 0.00%(4)
12b-1 Fees............. 0.35%(5) 0.75% 0.75% 0.10% 0.75% 0.75%
Other Expenses (after
expense reimbursement). 0.45%(3) 0.70%(3) 0.70%(3) 0.90%(4) 0.90%(4) 0.90%(4)
---- ---- ---- ---- ---- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement). 0.80%(3) 1.45%(3) 1.45%(3) 1.00%(4) 1.65%(4) 1.65%(4)
==== ==== ==== ==== ==== ====
</TABLE>
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See Notes on Page 5.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming a 5% annual return.
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class A Shares............... $ 53 $53 $ 69 $ 69
Class B Shares............... 66 15 79 46
Class C Shares............... 25 15 46 46
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class A Shares............... 55 -- 75 --
Class B Shares............... 68 17 85 52
Class C Shares............... 27 17 52 52
- ------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class A Shares............... $ 87 $87 $140 $140
Class B Shares............... 103 79 156 156
Class C Shares............... 79 79 174 174
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class A Shares............... 98 -- 162 --
Class B Shares............... 113 90 178 178
Class C Shares............... 90 90 195 195
</TABLE>
- ------
* Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight in the case of Class B shares.
3
<PAGE>
Fee Table (continued)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
EMERGING MARKETS DEBT
PORTFOLIO
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of maximum offering price)............... 4.50%(1) -- --
Maximum Deferred Sales Charge Imposed on Redemptions
(as a percentage of the amount subject to charge)... -- (2) 5.00% 1.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)(6)................. 0.28% 0.01% 0.28%
12b-1 Fees.......................................... 0.35%(5) 0.75% 0.75%
Other Expenses (after expense reimbursement)(7)..... 1.12% 1.64% 1.37%
---- ---- ----
Total Portfolio Operating Expenses (after fee waiver
and expense reimbursement)(6)....................... 1.75% 2.40% 2.40%
==== ==== ====
</TABLE>
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See Notes on Page 5.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming a 5% annual return.
<TABLE>
- -------------------------------------------------------------------------
<CAPTION>
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO
Class A Shares.......... $ 62 $ -- $ 98 $ --
Class B Shares.......... 75 24 107 75
Class C Shares.......... 34 24 75 75
- -------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS*
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO
Class A Shares.......... $136 $ -- $242 $ --
Class B Shares.......... 150 128 257 257
Class C Shares.......... 128 128 274 274
</TABLE>
- ------
* Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight in the case of Class B shares.
The amounts listed in the example should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the
Portfolios' actual performance will vary and may result in an actual return
greater or less than 5%.
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the Portfolios and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For
a description of the expense reimbursement or waiver arrangements in effect, see
"Management of the Portfolios."
4
<PAGE>
- ------
(1) The sales load may also be reduced or eliminated under certain
circumstances. See "How to Buy Shares."
(2) In certain situations, where no sales charge is assessed at the time of
purchase, a contingent deferred sales charge of up to 1.00% may be imposed
on redemptions within the first year of purchase. See "How to Buy Shares-
Class A Shares."
(3) With respect to Class B and C shares of the Income Portfolio, Other
Expenses include a shareholder servicing fee of 0.25%. With respect to
Class A, B and C shares, BSAM has undertaken to waive its investment
advisory fee and assume certain expenses of the Income Portfolio other than
brokerage commissions, extraordinary items, interest and taxes to the
extent Total Portfolio Operating Expenses exceed 0.80%, 1.45% and 1.45% for
Class A, B and C shares, respectively. Without such fee waiver and expense
reimbursement, Advisory Fees would have been 0.45% for the Income
Portfolio. Other Expenses would have been 1.86% for A shares, 0.73% for B
shares and 1.88% for C shares, and Total Portfolio Operating Expenses would
have been 2.66% for A Shares, 1.93% for B Shares and 3.08% for C Shares.
(4) With respect to Class A, B and C shares of the High Yield Portfolio, Other
Expenses include a shareholder servicing fee of 0.25%. BSAM has undertaken
to waive its investment advisory fee and assume certain expenses of the
High Yield Portfolio other than brokerage commissions, extraordinary items,
interest and taxes. Without such fee waiver and expense reimbursement,
Advisory Fees would have been 0.60% for the High Yield Portfolio. Other
Expenses would have been 1.97% for Class A shares, 1.98% for Class B shares
and 1.97% for Class C shares. Total Portfolio Operating Expenses would have
been 2.67% for Class A shares, 3.33% for Class B shares and 3.32% for Class
C shares.
(5) With respect to Class A shares of the Income and Debt Portfolios, 12b-1
fees include a shareholder servicing fee of 0.25% and a distribution fee of
0.10%. Bear Stearns will waive the distribution fee to the extent that the
Portfolio would otherwise exceed the National Association of Securities
Dealers, Inc. ("NASD") limitations on asset-based sales charges. Pursuant
to NASD rules, the aggregate deferred sales loads and annual distribution
fees may not exceed 6.25% of total gross sales, subject to certain
exclusions. The 6.25% limitation is imposed on the Portfolio rather than on
a per shareholder basis. Therefore, a long-term shareholder of the
Portfolio may pay more in distribution fees than the economic equivalent of
6.25% of such shareholder's investment in such shares. The maximum sales
charge rule is applied separately to each class.
(6) The expense figures have been restated from actual expenses paid during the
fiscal year ended March 31, 1998 to reflect current expense levels. BSAM
has undertaken to waive its compensation and assume its expenses (except
the brokerage fees, extraordinary items and taxes) provided in the
Investment Management Agreement to maintain total operating expenses at
1.75%, and 2.40% and 2.40% per annum of the average daily net assets of the
Class A shares, Class B shares and Class C shares, respectively. The waiver
of compensation will automatically expire at such time as the Debt
Portfolio has average net assets of $50 million or total operating expenses
of the Debt Portfolio are less than 1.75% per annum of the average daily
net assets, unless BSAM in its sole discretion determines to continue the
waiver of compensation. Without such waiver, the investment management fees
would be equal on an annual basis to 1.15%, of average net assets for Class
A shares, Class B shares and Class C shares. Without such waiver by BSAM,
total operating expenses are estimated to be equal to an annual basis to
2.76%, 4.65% and 3.45% of average net assets for Class A shares, Class B
shares and Class C shares, respectively. See "Management of the
Portfolios".
(7) With respect to the Class B and Class C shares of the Debt Portfolio, Other
Expenses include a distribution fee of 0.10% and a shareholder servicing
fee of 0.25% for personal service and maintenance of accounts. A service
fee is reallocated to NASD member firms for continuous personal service by
such members to investors in the Debt Portfolio, such as responding to
shareholder inquiries, quoting net asset values, providing current
marketing material and attending to other shareholder matters. Pursuant to
the rules of the NASD, the aggregate initial sales charges, any deferred
sales charges and asset based sales charges on shares of the Debt Portfolio
may not exceed 6.25% of total gross sales, subject to certain exclusions.
5
<PAGE>
Financial Highlights
The information in the table below covering each Portfolio's investment results
for the periods indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in each Portfolio's Annual Report for
the fiscal year ended March 31, 1998, which is incorporated by reference into
each Portfolio's Statement of Additional Information, which is available upon
request.
Contained below are per-share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class A, B
and C shares of each Portfolio for the periods indicated. This information has
been derived from information provided in each Portfolio's financial statements.
Further information about performance is contained in the Annual Report, which
may be obtained without charge by writing to the address or calling one of the
telephone numbers listed under "General Information."
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
DISTRI-
NET NET BUTIONS NET
ASSET REALIZED AND DIVIDENDS FROM NET ASSET
VALUE, NET UNREALIZED FROM NET REALIZED VALUE,
BEGINNING INVESTMENT GAIN/(LOSS) ON INVESTMENT CAPITAL END OF
OF PERIOD INCOME*(4) INVESTMENTS*(5) INCOME GAINS PERIOD
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EMERGING MARKETS DEBT
PORTFOLIO(1)
CLASS A
For the fiscal year
ended March 31, 1998.. $11.14 $0.91 $ 1.17 $(0.92) $(0.30) $12.00
For the fiscal year
ended March 31, 1997.. 9.02 0.85 2.10 (0.83) -- 11.14
For the fiscal year
ended March 31, 1996.. 6.90 0.91 2.13 (0.92) -- 9.02
For the fiscal year
ended March 31, 1995.. 8.98 0.79 (1.85) (0.77) (0.25) 6.90
For the period May 3,
1993 through March 31,
1994.................. 9.55 0.66 (0.55) (0.65) (0.03) 8.98
CLASS B
For the period January
12, 1998 through March
31, 1998.............. 11.33 0.21 0.61 (0.20) -- 11.95
CLASS C
For the fiscal year
ended March 31, 1998.. 11.14 0.97 1.04 (0.90) (0.30) 11.95
For the fiscal year
ended March 31, 1997.. 9.04 0.84 2.07 (0.81) -- 11.14
For the period July 26,
1995 through March 31,
1996.................. 7.81 0.59 1.32 (0.68) -- 9.04
INCOME
PORTFOLIO(2)
CLASS A
For the fiscal year
ended March 31, 1998.. 12.03 0.76 0.36 (0.76) (0.02) 12.37
For the fiscal year
ended March 31, 1997.. 12.26 0.73 (0.20) (0.73) (0.03) 12.03
For the period April 5,
1995 through March 31,
1996.................. 12.00 0.71 0.30 (0.71) (0.04) 12.26
CLASS B
For the period February
2, 1998 through March
31, 1998.............. 12.47 0.10 (0.10) (0.10) -- 12.37
CLASS C
For the fiscal year
ended March 31, 1998.. 12.03 0.70 0.36 (0.70) (0.02) 12.37
For the fiscal year
ended March 31, 1997.. 12.26 0.68 (0.20) (0.68) (0.03) 12.03
For the period April 5,
1995 through March 31,
1996.................. 12.00 0.67 0.30 (0.67) (0.04) 12.26
HIGH YIELD TOTAL RETURN
PORTFOLIO(3)
CLASS A
For the period January
2, 1998 through
March 31, 1998........ 12.00 0.26 0.73 (0.26) -- 12.73
CLASS B
For the period January
2, 1998 through March
31, 1998.............. 12.00 0.24 0.73 (0.24) -- 12.73
CLASS C
For the period January
2, 1998 through
March 31, 1998........ 12.00 0.24 0.73 (0.24) -- 12.73
</TABLE>
<PAGE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Commenced investment operations on May 3, 1993: Class B and C shares
commenced its initial public offering on January 12, 1998 and July 26,
1995, respectively.
(2) Commenced investment operations on April 5, 1995: Class B and C shares
commenced its initial public offering on February 2, 1998 and April 5,
1995, respectively.
(3) Commenced investment operations on January 2, 1998.
(4) Reflects waivers and related reimbursements.
6
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
INCREASE/(DECREASE)
NET RATIO OF NET REFLECTED IN
ASSETS, RATIO OF INVESTMENT EXPENSE RATIOS AND NET
TOTAL END OF EXPENSES TO INCOME INVESTMENT INCOME
INVESTMENT PERIOD AVERAGE TO AVERAGE DUE TO WAIVERS AND PORTFOLIO
RETURN(6) (000'S OMITTED) NET ASSETS(4) NET ASSETS(4) RELATED REIMBURSEMENTS TURNOVER RATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
19.31% $33,448 1.75% 7.70% 1.01% 128.91%
33.48 33,185 2.00 7.95 0.80 223.41
46.13 28,860 2.00 10.64 1.18 266.46
(13.07) 28,049 2.00 8.86 0.53 35.01
0.36 45,691 2.00(8) 7.24(8) 0.33(8) 100.85
7.29(7) 566 2.40(8) 7.13(7)(8) 2.25(7)(8) 128.91
18.66 4,317 2.40 7.31 1.05 128.91
32.97 2,583 2.40 7.59 0.64 223.41
25.45(7) 202 2.40(8) 8.72(7)(8) 3.42(7)(8) 266.46
9.43 2,926 0.80 6.13 1.86 244.78
4.40 3,367 0.80 5.99 1.73 262.95
8.54 4,467 0.85(8) 5.76(8) 2.87(8) 107.35
(0.04)(7) 18 1.45(8) 5.22(7)(8) 0.48(7)(8) 244.78
8.92 1,403 1.28 5.60 1.80 244.78
3.99 1,018 1.20 5.57 1.74 262.95
8.13 1,775 1.25(8) 5.38(8) 2.95(8) 107.35
8.30 18,301 1.00(8) 9.14(8) 1.67(8) 139.61
8.13 6,013 1.65(8) 8.46(8) 1.68(8) 139.61
8.13 11,298 1.65(8) 8.46(8) 1.67(8) 139.61
</TABLE>
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(5) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
investments during the respective periods because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
values during the respective periods. For the Debt Portfolio net realized
and unrealized gain/(loss) on investments include forward foreign currency
exchange contracts and translation of foreign currency related
transactions.
(6) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, if any. Total investment return is not annualized.
(7) Total investment return and ratios for a class of shares are not
necessarily comparable to those of any other outstanding class of shares,
due to timing differences in the commencement of the initial public
offerings.
(8) Annualized.
7
<PAGE>
Alternative Purchase Methods
By this Prospectus, each Portfolio offers investors three methods of purchasing
its shares; investors may choose the class of shares that best suits their
needs, given the amount of purchase, the length of time the investor expects to
hold the shares and any other relevant circumstances. Each Portfolio share
represents an identical pro rata interest in each Portfolio's investment
portfolio.
CLASS A SHARES
Class A shares of each Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 4.50% of the public offering price imposed at
the time of purchase. The initial sales charge may be reduced or waived for
certain purchases. See "How to Buy Shares--Class A Shares." The Class A shares
of the Debt Portfolio and the Income Portfolio are subject to an annual
distribution and shareholder servicing fee at the rate of 0.35 of 1% of the
value of the average daily net assets of Class A shares. Class A shares of High
Yield Portfolio are subject to an annual distribution fee at the rate of 0.10 of
1% of the average daily net assets of Class A shares. The Class A shares of the
High Yield Portfolio are subject to an annual shareholder servicing fee at the
rate of 0.25 of 1% of the value of the average daily net assets of Class A
shares for fees incurred in connection with the personal service and maintenance
of accounts holding Portfolio shares.
CLASS B SHARES
Class B shares of each Portfolio are sold without an initial sales charge, but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares--Class B Shares." Class B shares of each Portfolio are subject to an
annual distribution fee at the rate of 0.75 of 1% of the average daily net
assets of Class B shares. Class B shares of each Portfolio are subject to an
annual shareholder servicing fee at the rate of 0.25 of 1% of the value of the
average daily net assets of Class B shares for fees incurred in connection with
the personal service and maintenance of accounts holding Portfolio shares. Class
B shares of each Portfolio will convert to Class A shares, based on their
relative net asset values, eight years after the initial purchase. The
distribution and shareholder servicing fees will cause Class B shares to have a
higher expense ratio and to pay lower dividends than Class A shares.
CLASS C SHARES
Class C shares of each Portfolio are subject to a 1% CDSC which is assessed only
if Class C shares are redeemed within one year of purchase. See "How to Redeem
Shares--Class C Shares." Class C shares of each Portfolio are subject to an
annual distribution fee at the rate of 0.75 of 1% of the average daily net
assets of Class C. Class C shares of each Portfolio also are subject to an
annual shareholder servicing fee at the rate of 0.25 of 1% of the value of the
average daily net assets of Class C shares for fees incurred in connection with
the personal service and maintenance of accounts holding Portfolio shares. The
distribution and shareholder servicing fees will cause Class C shares to have a
higher expense ratio and to pay lower dividends than Class A shares.
The decision as to which class of shares is more beneficial to each investor
depends on the amount and the intended length of time of the investor's
investment. Each investor should consider whether, during the anticipated life
of the investor's investment in a Portfolio, the accumulated distribution and
shareholder servicing fees and CDSC, if any, on Class B or C shares would be
less than the initial sales charge on Class A shares purchased at the same time,
and to what extent, if any, such differential would be offset by the net return
of Class A. See "How to Buy Shares--Choosing a Class of Shares."
Description of the Portfolios
GENERAL
Each of the Bear Stearns Funds and Bear Stearns Investment Trust is known as a
"series fund," which is a mutual fund divided into separate portfolios. Each
portfolio is treated as a separate entity for certain purposes under the
Investment Company Act of 1940, as amended (the "1940 Act"), and for other
purposes. A shareholder of one portfolio is not deemed to be a shareholder of
any other portfolio. As described below, for certain matters the Funds'
shareholders vote together as a group; as to others they vote separately by
Portfolio. By this Prospectus, shares of the Debt Portfolio, the Income
Portfolio and the High Yield Portfolio are being offered. From time to time,
other portfolios may be established and sold pursuant to other offering
documents. See "General Information."
8
<PAGE>
NON-DIVERSIFIED STATUS
The Debt Portfolio is a non-diversified portfolio of Bear Stearns Investment
Trust. The Portfolio's classification as a "non-diversified" investment company
means that the proportion of its assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. However, the Portfolio
intends to conduct its operations so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"), which generally requires that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Portfolio's total
assets be invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Portfolio's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets be invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies). Since a relatively high percentage of the Portfolio's assets may be
invested in the securities of a limited number of issuers, some of which may be
within the same industry or economic sector, the Portfolio's portfolio
securities may be more susceptible to any single economic, political or
regulatory occurrence than the portfolio securities of a diversified investment
company.
Investment Objectives and Policies
The investment objectives and principal investment policies of each Portfolio
are described below. Each Portfolio's investment objective cannot be changed
without approval by the holders of a majority (as defined in the 1940 Act) of
such Portfolio's outstanding voting shares. There can be no assurance that a
Portfolio's investment objective will be achieved.
INCOME PORTFOLIO
The Income Portfolio's investment objective is to seek high current income
consistent with preservation of capital.
The Income Portfolio invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds (which it
defines as bonds, debentures and other fixed-income securities). The Portfolio
is permitted to invest in a broad range of investment grade, U.S. dollar
denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of domestic
and foreign issuers. These debt securities include bonds, debentures, notes,
money market instruments (including foreign bank obligations, such as time
deposits, certificates of deposit and bankers' acceptances, commercial paper and
other short-term corporate debt obligations, and repurchase agreements),
mortgage-related securities (including interest-only and principal-only stripped
mortgage-backed securities), asset-backed securities, municipal obligations and
convertible debt obligations. The issuers may include domestic and foreign
corporations, partnerships or trusts, and governments or their political
subdivisions, agencies or instrumentalities. Under normal market conditions, the
Portfolio seeks to provide performance results that equal or exceed the Salomon
Brothers BIG Bond Index, which is a market-capitalization weighted index that
includes U.S. Treasury, Government- sponsored, mortgage and investment grade
fixed-rate corporate fixed-income securities with a maturity of one year or
longer and a minimum of $50 million amount outstanding at the time of inclusion
in the Salomon Brothers BIG Bond Index. As of March 31, 1998, the weighted
average maturity of securities comprising the Salomon Brothers BIG Bond Index
was approximately eight and 1/2 years and their average duration was
approximately four and 1/2 years. Under normal market conditions, the Portfolio
invests in a portfolio of securities with a dollar-weighted average maturity
of approximately seven years.
As a measure of a fixed-income security's cash flow, duration is an alternative
to the concept of "term to maturity" in assessing the price volatility
associated with changes in interest rates. Generally, the longer the duration,
the more volatility an investor should expect. For example, the market price of
a bond with a duration of five years would be expected to decline 5% if interest
rates rose 1%. Conversely, the market price of the same bond would be expected
to increase 5% if interest rates fell 1%. The market price of a bond with a
duration of 10 years would be expected to increase or decline twice as much as
the market price of a bond with a five year duration. Duration measures a
security's maturity in terms of the average time required to receive the present
value of all interest
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and principal payments as opposed to its term to maturity. The maturity of a
security measures only the time until final payment is due; it does not take
account of the pattern of a security's cash flows over time, which would include
how cash flow is affected by prepayments and by changes in interest rates.
Incorporating a security's yield, coupon interest payments, final maturity and
option features into one measure, duration is computed by determining the
weighted average maturity of a bond's cash flows, where the present values of
the cash flows serve as weights. In computing the duration of the Portfolio,
BSAM will estimate the duration of obligations that are subject to prepayment or
redemption by the issuer, taking into account the influence of interest rates on
prepayments, coupon flows and other factors which may affect the maturity of the
security. This method of computing duration is known as effective duration.
BSAM anticipates actively managing the Portfolio's assets in response to changes
in the business cycle. BSAM seeks to identify and respond to phases in the
business cycle--simplistically, the expansion, topping out, recession and trough
phases--and to invest the Portfolio's assets by shifting among market sectors,
maturities and relative credit quality in a way which it believes will achieve
the Portfolio's objective in a relatively conservative manner taking into
account the volatility and risk associated with investing in a portfolio of
relatively longer-term fixed-income securities. While the Portfolio seeks, as
part of its investment objective, to preserve capital, investors should
recognize that the net asset value per share of the Portfolio should be expected
to be more volatile than the net asset value per share of a fund that invested
in portfolio securities with a shorter duration.
At least 65% of the value of the Portfolio's total assets must consist of
securities which, in the case of bonds and other debt instruments, are rated no
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB or higher by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P") or the equivalent by other rating agencies, or, if unrated, deemed to be
of comparable quality by BSAM. Up to 25% of the value of the Portfolio's total
assets may consist of securities which, in the case of bonds and other debt
instruments, are rated no lower than Ba or B by Moody's, BB or B by S&P or the
equivalent by other rating agencies or, if unrated, deemed to be of comparable
quality by BSAM. The Portfolio may invest in short-term fixed-income obligations
which are rated in the two highest rating categories by Moody's, S&P, Fitch or
Duff. See "Risk Factors--Fixed-Income Securities and High Yield Securities"
below, and "Appendix" in the Statement of Additional Information.
HIGH YIELD TOTAL RETURN PORTFOLIO ("HIGH YIELD PORTFOLIO")
The High Yield Portfolio's investment objective is total return through high
current income and capital appreciation.
The High Yield Portfolio will invest, under normal circumstances, at least 80%
of its total assets in high yield fixed-income securities (as defined below),
including domestic and foreign debt securities, convertible securities and
preferred stocks. The balance of the Portfolio's assets may be invested in any
other securities which BSAM believes are consistent with the Portfolio's
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. The Portfolio is designed for investors seeking to
diversify an all-equity portfolio with securities that offer greater income with
capital appreciation potential. The Portfolio is not a market-timing vehicle.
Securities offering the high current yield and capital appreciation potential
characteristics that the Portfolio seeks are generally found in rapidly growing
companies requiring debt to fund plant expansion plans or pay for acquisitions
and large, well-known companies with a high degree of leverage. These securities
are also generally rated in the medium to lower categories by recognized rating
services. The Portfolio expects to seek high current income by investing at
least 80% of its total assets in "high yield fixed-income securities," which for
this purpose constitute fixed income securities rated Ba or lower by Moody's
Investors Service (Moody's), or BB or lower by Standard & Poor's Ratings Group
(Standard & Poor's) or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO), or unrated securities determined by the
Adviser to be of comparable quality. Corporate bonds rated Ba or lower by
Moody's and BB or lower by Standard & Poor's are considered speculative. The
Portfolio may invest up to 10%, and will normally hold no more than 25% (as a
result of market movements or downgrades), of its assets in bonds rated below
Caa by Moody's or CCC by Standard & Poor's, including bonds in the lowest
ratings categories (C for Moody's and D for Standard and Poor's) and unrated
bonds of comparable quality. Such securities are highly speculative and may be
in default of principal and/or interest payments. A description of corporate
bond ratings is contained in the Appendix to this Prospectus.
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In selecting a security for investment by the Portfolio, BSAM will perform its
own investment analysis and will not rely principally on the ratings assigned by
the rating services, although such ratings will be considered by BSAM. BSAM will
consider, among other things, the financial history and condition, the prospects
and the management of an issuer in selecting securities for the Portfolio. BSAM
will be free to invest in high yield, high risk debt securities of any maturity
and duration, and the interest rates on such securities may be fixed or
floating.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than higher rated securities. Some of such
investments may be non-performing when purchased. See "Risk Factors."
In addition to providing the potential for high current income, high yield
securities may provide the potential for capital appreciation. The Portfolio
will seek capital appreciation by investing in securities which may be expected
by BSAM to appreciate in value as a result of declines in long-term interest
rates or favorable developments affecting the business or prospects of the
issuer, which may improve the issuer's financial condition and credit rating, or
a combination of both.
As stated above, normally at least 80% of the Portfolio's total assets will be
invested in high yield fixed-income securities, including medium- to lower-
rated high yield fixed-income securities and unrated securities of comparable
quality. The balance of the Portfolio's assets may be invested in any other
securities believed by BSAM to be consistent with the Portfolio's investment
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. When prevailing economic conditions cause a narrowing
of the spreads between the yields derived from medium to lower-rated or
comparable unrated securities and those derived from higher rated issues, the
Portfolio may invest in higher-rated fixed-income securities that provide
similar yields but have less risk. Generally, the Portfolio's average weighted
maturity will range from three to twelve years.
EMERGING MARKETS DEBT PORTFOLIO ("DEBT PORTFOLIO")
The Debt Portfolio's investment objective is to provide investors with high
current income by investing primarily in Debt Obligations of issuers located in
"Emerging Countries". The Portfolio's secondary objective is to provide
investors with capital appreciation.
The Debt Portfolio considers "Debt Obligations" to include fixed or floating
rate bonds, notes, debentures, commercial paper, loans, Brady bonds, convertible
securities, and other debt securities issued or guaranteed by governments,
agencies or instrumentalities, central banks, commercial banks or private
issuers, including repurchase agreements with respect to obligations of
governments or central banks. The Portfolio considers "Emerging Countries" to
include any country that is generally considered to be an emerging or developing
country by the World Bank, the International Finance Corporation or the United
Nations and its authorities. The countries that will not be considered Emerging
Countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, United Kingdom, and United States. The Portfolio primarily invests
in a combination of (a) high-yield dollar-denominated instruments and (b) local
currency instruments in Emerging Countries where the relationship between
interest rates and anticipated foreign exchange movements relative to the U.S.
dollar is expected to result in a high dollar rate of return. Although the
Portfolio's primary investment objective is current income, the Portfolio also
intends to take advantage of opportunities to realize capital appreciation from
its investments when such opportunities arise. Investing in local currency and
dollar-denominated medium and long term debt in Emerging Countries offers the
potential for capital appreciation due to interest rate and currency exchange
fluctuations and improving credit quality. No assurance can be given that the
Debt Portfolio's investment objective will be achieved.
The Portfolio may invest at least 80% of its total assets in Debt Obligations of
issuers in Emerging Countries. The Portfolio intends to focus its investments in
countries in Asia, Eastern Europe, Latin America and Africa. The Portfolio may
invest up to 20% of its total assets in Debt Obligations of issuers that are not
considered to be issuers in Emerging Countries.
The Portfolio may invest at least 30% of its total assets in Debt Obligations of
issuers in Latin America. The Portfolio considers "Latin America" to include the
following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama,
Paraguay, Peru, Uruguay and Venezuela.
At least 70% of the Portfolio's total assets is invested in U.S. dollar
denominated instruments. Up to 30% of the Portfolio's assets may be invested in
Debt Obligations denominated in local currencies
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provided that no more than 20% of the Portfolio's assets are expected to be
invested in Debt Obligations denominated in the currency of any one country. To
the extent the Portfolio invests in non-dollar denominated securities, the
Portfolio will be subject to risks relating to fluctuations in currency exchange
rates and the possible imposition of exchange control regulations (e.g.,
currency blockage) or other foreign or U.S. laws or restrictions applicable to
such investments. See "Risk Factors."
Under normal circumstances, the Portfolio invests at least 70% of its total
assets in Debt Obligations of issuers in at least three Emerging Countries. The
Debt Portfolio may not invest more than 40% of its assets in Debt Obligations of
issuers located in any one country. Investing the Portfolio's assets in
securities of issuers located in Emerging Countries will subject the Portfolio
to the risks of adverse social, political or economic events which may occur in
such foreign countries. See "Risk Factors." When BSAM believes unusual
circumstances warrant a defensive posture, the Portfolio temporarily may invest
up to all of its assets in cash (U.S. dollars) or U.S. Government securities.
The Portfolio considers an issuer to be located in an Emerging Country if (i)
the issuer derives 50% or more of its total revenues from either goods produced,
sales made or services performed in Emerging Countries, or (ii) the issuer is
organized under the laws of, and with a principal office in, an Emerging
Country.
BSAM may invest in Debt Obligations that it determines to be suitable
investments for the Portfolio notwithstanding any credit ratings that may be
assigned to such securities. At any one time substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. The Portfolio will purchase non-performing securities and some
of these securities may be comparable to securities rated as low as D by
Standard & Poor's or C by Moody's Investors Service, Inc. ("Moody's") (the
lowest credit ratings of such agencies). A substantial portion of the
Portfolio's holdings of Debt Obligations are expected to trade at substantial
discounts from face value. The ratings of Moody's and S&P represent their
respective opinions as to the quality of the obligations they undertake to rate.
Ratings, however, are general and are not absolute standards of quality. The
ratings do not necessarily reflect the current or future composition of the
Portfolio. A description of the ratings of the various securities in which the
Portfolio may invest appears in Appendix A to this Prospectus.
Debt Obligations in which the Portfolio may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed interest
rates. The average maturity of the Portfolio's investments will vary based upon
BSAM's assessment of economic and market conditions. Because the Portfolio
intends to hold fixed-rate instruments, some of which may have long maturities,
the value of the securities held by the Portfolio, and thus the net asset value
of its shares generally will vary inversely to changes in prevailing interest
rates. Thus, if interest rates have increased from the time a debt or other
fixed income security was purchased, such security, if sold, might be sold at a
price less than its cost. Conversely, if interest rates have declined from the
time such a security was purchased, such security, if sold, might be sold at a
price greater than its cost.
Debt markets in Emerging Countries presently consist of a wide variety of
instruments issued by developing countries, related institutions and companies.
The Portfolio intends to invest in two broad classes of securities: dollar
denominated instruments traded in secondary markets outside of the Emerging
Countries which have issued the securities, and non-dollar denominated
securities (as defined herein) which are traded in the country of issue and/or
in secondary markets.
A substantial portion of the dollar denominated Debt Obligations in which the
Debt Portfolio intends to invest had its origin in syndicated bank loans made
during the 1970s and early 1980s. As a consequence of the substantial volatility
in commodity prices, and the dramatic increase in interest rates in the early
1980s, many Emerging Countries defaulted on these loans. Much of the debt owed
by governments to commercial banks was subsequently restructured, involving the
exchange of outstanding bank indebtedness for Brady bonds (as described below).
Brady bonds, remaining outstanding bank loans and a relatively small but growing
number of newly issued government, agency and corporate bond issues make up the
large and growing debt market in Emerging Countries. The investment vehicles
which BSAM is expected to acquire or utilize on behalf of the Debt Portfolio are
described below.
The Debt Portfolio is designed to be actively managed. The Portfolio will
attempt to maximize returns by adjusting the portfolio in response to numerous
factors affecting Debt Obligations, including political and economic
developments, changing credit quality, interest rates, currency exchange rates,
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and other factors. Because the Portfolio can purchase floating rate securities
and securities with short to intermediate term maturities, BSAM can adjust the
Portfolio's holdings in an effort to maximize returns in almost any interest
rate environment. In addition, the Portfolio's ability to invest in securities
with any maturities of up to thirty years allows BSAM to adjust the Portfolio's
investments as interest rates change to take advantage of the most attractive
segments of the yield curve.
Investment Techniques
Each Portfolio may engage in various investment techniques as described below.
FIXED-INCOME SECURITIES (ALL PORTFOLIOS)
Each Portfolio invests primarily in fixed-income securities. Investors should be
aware that even though interest-bearing securities are investments which promise
a stable stream of income, the prices of such securities typically are inversely
affected by changes in interest rates and, therefore, are subject to the risk of
market price fluctuations. Thus, if interest rates have increased from the time
a security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its cost. In either instance, if the security was purchased at face value
and held to maturity, no gain or loss would be realized. Certain securities
purchased by a Portfolio, such as those with interest rates that fluctuate
directly or indirectly based on multiples of a stated index, are designed to be
highly sensitive to changes in interest rates and can subject the holders
thereof to extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, a Portfolio will
consider all circumstances deemed relevant in determining whether to continue to
hold the security. Holding such securities that have been downgraded below
investment grade can subject a Portfolio to additional risk. Certain securities
purchased by a Portfolio, such as those rated Baa by Moody's or BBB by S&P,
Fitch or Duff, may be subject to such risk with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. Debt securities which are rated Baa by Moody's are
considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
FOREIGN SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in securities of foreign issuers. When a Portfolio
invests in foreign securities, they may be denominated in foreign currencies.
Thus, a Portfolio's net asset value will be affected by changes in exchange
rates. (See "Risk Factors".) Under normal conditions, the High Yield Portfolio
will not invest more than 25% of its total assets in foreign securities.
CONVERTIBLE SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks or other securities that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique investment characteristics such as
(1) higher yields than common stocks, but lower yields than comparable
nonconvertible securities, (2) a lesser degree of fluctuation in value than the
underlying stock since they have fixed income characteristics, and (3) the
potential for capital appreciation if the market price of the underlying common
stock increases. Convertible debt securities have characteristics of both fixed
income and equity instruments.
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No Portfolio has the current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment upon
conversion, although it may do so for temporary purposes. A convertible security
might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by a Portfolio is called for redemption, the Portfolio may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party. Under normal conditions,
the High Yield Portfolio and the Debt Portfolio will not invest more than 10% of
their total assets, respectively, in convertible securities.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS (ALL
PORTFOLIOS)
Each Portfolio may invest in zero coupon securities and pay-in-kind bonds. These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. Each Portfolio also may purchase
pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of their interest in
the form of debt or equity securities. The Portfolios will only purchase
pay-in-kind bonds that pay all or a portion of their interest in the form of
debt securities. Zero coupon securities and pay- in-kind bonds may be issued by
a wide variety of corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Portfolios are required to accrue as income each year the
value of securities received in respect of pay-in-kind bonds and a portion of
the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Portfolios will elect similar treatment for any market discount with respect to
debt securities acquired at a discount. Accordingly, the Portfolios may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate current cash to satisfy certain distribution requirements. Under normal
conditions, the High Yield Portfolio will not invest more than 25% of its total
assets in zero coupon securities, pay-in-kind bonds or discount obligations.
NON-DOLLAR DENOMINATED SECURITIES (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and Debt Portfolios may invest in non-dollar denominated
securities. Investments in non-dollar denominated securities will include fixed
and/or floating rate instruments, including discount notes, commercial paper,
debentures and other debt securities issued by public or private sector
entities. Such investments may also include debt securities which are payable in
local currency in amounts calculated with reference to the U.S. dollar. A
Portfolio will invest in short term or floating rate non-dollar denominated
securities when BSAM believes that the relationship between local interest
rates, inflation and currency exchange rates will result in a high dollar
return.
The relative performance of various countries' fixed income markets historically
has reflected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in various markets from
time to time. In addition, the performance of non-dollar denominated securities
will depend on, among other things, the strength of the foreign currency against
the U.S. dollar. Appreciation in the value of the foreign currency generally can
be expected to increase, and declines in the value of foreign currencies
relative to the U.S. dollar will depress, the value of a Portfolio's non-dollar
denominated securities. Currently, because of high inflation and other factors,
the currencies of the countries in which the Debt Portfolio intends to invest
are generally expected to depreciate against the U.S. dollar. However, to the
extent that local interest rates in such countries exceed the rate of currency
devaluation, the potential for attractive returns in dollars exists. BSAM
evaluates currencies on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts, balance of payments
status and economic policies) as well as technical and
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political data, but will not generally be involved in active currency
forecasting. The Portfolios may or may not hedge or cross hedge its foreign
currency exposure. The High Yield Portfolio may invest up to 25% of its total
assets in non-dollar denominated securities. The Debt Portfolio may invest up to
30% of its total assets in non-dollar denominated securities provided that no
more than 20% of its assets are expected to be invested in Debt Obligations
denominated in the currency of any one country.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (ALL PORTFOLIOS)
Each Portfolio may purchase securities on a when-issued basis. When-issued
transactions arise when securities are purchased by a Portfolio with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Portfolio at the time of entering into
the transaction. Each Portfolio may also purchase securities on a forward
commitment basis. In a forward commitment transaction, the Portfolio contracts
to purchase securities for a fixed price at a future date beyond customary
settlement time. Each Portfolio may enter into offsetting contracts for the
forward sale of other securities that it owns. Although a Portfolio would
generally purchase securities on a when-issued forward commitment basis with the
intention of actually acquiring securities for its portfolio, the Portfolio may
dispose of a when-issued security or forward commitment prior to settlement if
BSAM deems it appropriate to do so.
The issuance of some of the securities in which the Debt Portfolio may invest
depends upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buyout or debt restructuring ("when, as and
if issued securities"). As a result, the period from the trade date to the
issuance date may be considerably longer than a typical when- issued trade. Each
when-issued transaction specifies a date upon which the commitment to enter into
the relevant transaction will terminate if the securities have not been issued
on or before such date. In some cases, however, the securities may be issued
prior to such termination date, but may not be deliverable until a period of
time thereafter. If the anticipated event does not occur and the securities are
not issued, the Debt Portfolio would be entitled to receive any funds committed
for the purchase, but the Portfolio may have foregone investment opportunities
during the term of the commitment.
The High Yield Portfolio may not invest more than 33 1/3% of its total assets in
when-issued securities and forward commitments. There is no overall limit on the
percentage of the Debt Portfolio's assets which may be committed to the purchase
of securities on a when-issued basis; however, the Debt Portfolio may only
invest a maximum of 15% of its assets in when, as and if issued securities. An
increase in the percentage of the Debt Portfolio's assets committed to such
purchase of securities on a when-issued basis may increase the volatility of its
net asset value.
Each Portfolio will hold and maintain in a segregated account until the
settlement date liquid assets in an amount sufficient to meet the purchase price
to the extent required by the 1940 Act. The purchase of securities on a
when-issued forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date.
BORROWING AND LEVERAGE (ALL PORTFOLIOS)
The Debt Portfolio may, solely for temporary or emergency purposes, borrow in an
amount up to 15% of its total assets (including the amount borrowed), less all
liabilities and indebtedness other than the borrowing. The Income Portfolio and
the High Yield Portfolio may borrow money to the extent permitted under the 1940
Act. However, the Income Portfolio currently intends to borrow money only for
temporary or emergency (net leveraging) purposes, in an amount up to 15% of the
value of its total assets. A Portfolio may not purchase securities when
borrowings exceed 5% of its total assets. If market fluctuations in the value of
the Debt Portfolio's portfolio holdings or other factors cause the ratio of the
Portfolio's total assets to outstanding borrowings to fall below 300%, within
three days of any such event the Debt Portfolio may be required to sell
portfolio securities to restore the 300% asset coverage, even though from an
investment standpoint such sales might be disadvantageous. Borrowings may be
utilized to meet share redemptions of the Debt Portfolio or to pay dividends and
distributions to Shareholders of the Portfolio, in instances where the Debt
Portfolio does not desire to liquidate its portfolio holdings. The Debt
Portfolio expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable subcustodian,
which may include the lender.
Borrowings create leverage, a speculative factor. To the extent the income
derived from the assets obtained with borrowed funds exceeds the interest and
other expenses that a Portfolio will have to pay, the Portfolio's net income
will be greater than if borrowing were not used. Conversely, if the
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income from the assets obtained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Portfolio will be less than if
borrowing were not used, and therefore the amount available for distribution to
Shareholders as dividends will be reduced.
RESTRICTED AND ILLIQUID SECURITIES (ALL PORTFOLIOS)
Each Portfolio may purchase securities that are not registered or are offered in
an exempt non-public offering ("restricted securities") under the Securities Act
of 1933, as amended (the "Securities Act"), including securities offered and
sold to "qualified institutional buyers" under Rule 144A under the Securities
Act. Each Portfolio will not invest more than 15% of its net assets in illiquid
investments, which include repurchase agreements maturing in more than seven
days, securities that are not readily marketable and restricted securities that
are not eligible for sale under Rule 144A. Restricted securities eligible for
sale under Rule 144A are also subject to this 15% limitation, unless the Board
of Trustees (or BSAM pursuant to a delegated authority) determines, based upon a
continuing review of the trading markets for the specific restricted securities
sold under Rule 144A, that such restricted securities are liquid. The Board of
Trustees has adopted guidelines and delegated to BSAM the function of
determining and monitoring the liquidity of Rule 144A securities, although the
Board of Trustees retains ultimate responsibility for any determination
regarding whether a liquid market exists for Rule 144A securities. The liquidity
of Rule 144A securities will be monitored by BSAM and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, the
respective Portfolio's holdings of illiquid securities will be reviewed to
determine what, if any, action is required to assure that the Portfolio does not
exceed its applicable percentage limitation for investments in illiquid
securities. In reaching liquidity decisions, BSAM may consider, inter alia, the
following factors: (1) the unregistered nature of the security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). Investing in Rule 144A securities could have the
effect of increasing the level of portfolio illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these securities.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
The Portfolios may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies currently include futures contracts and related
options (including interest rate futures contracts and options thereon), options
on securities, financial indices and currencies, and forward currency exchange
contracts. The Portfolios' ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Portfolio Securities"
in the Statement of Additional Information for The Bear Stearns Funds and
"Investment Practices" in the Statement of Additional Information for the Bear
Stearns Investment Trust. New financial products and risk management techniques
continue to be developed and the Portfolios may use these new investments and
techniques to the extent consistent with their investment objective and
policies.
No Portfolio will purchase or sell futures contracts or related options, or
options on stock indices, if immediately thereafter the sum of the amounts of
initial margin deposits on the Portfolio's existing futures and premiums paid
for options exceeds 5% of the Portfolio's total assets. This restriction does
not apply to the purchase and sale of futures contracts and related options made
for "bona fide hedging purposes."
OPTIONS ON SECURITIES, INDICES AND FOREIGN CURRENCIES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered put and call
options on securities, indices and foreign currencies. Each Portfolio may
purchase call options to gain market exposure in a particular sector while
limiting downside risk. Each Portfolio may purchase put options in order to
hedge against an anticipated loss in value of Portfolio securities. The
principal reason for writing covered call options (which are call options with
respect to which a Portfolio owns the underlying security or securities) is to
realize, through the receipt of premiums, a greater return than would be
realized on each Portfolio's securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. A Portfolio may not invest more than 5% of its assets, represented by
the premium paid, in the purchase of call and put options. A Portfolio
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may not write covered call or put option contracts in an amount exceeding 20% of
its net assets at the time such option contracts are written. (See "Risk
Factors" and the Statements of Additional Information for additional risk
factors).
FUTURES AND OPTIONS ON FUTURES (ALL PORTFOLIOS)
Each Portfolio may buy and sell futures contracts and related options on
securities indices and related interest rates for a number of purposes. It may
do so to try to manage its exposure to the possibility that the prices of its
portfolio securities and instruments may decline or to establish a position in
the futures or options market as a temporary substitute for purchasing
individual securities or instruments. It may do so in an attempt to enhance its
income or return by purchasing and selling call and put options on futures
contracts on financial indices or securities. It also may use interest rate
futures to try to manage its exposure to changing interest rates. Investments in
futures and options on futures involve certain risks. (See "Risk Factors" and
the Statement of Additional Information.)
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
Each Portfolio may, in seeking to increase its income, lend securities in its
portfolio to securities firms and financial institutions deemed creditworthy by
BSAM. Securities loans are made to broker-dealers or institutional investors
pursuant to agreements requiring that the loans continuously be secured by
collateral at least equal at all times to the value of the securities lent plus
any accrued interest "marked to market" on a daily basis. The collateral
received will consist of cash, U.S. short term Government securities, bank
letters of credit or such other collateral as may be permitted under a
Portfolio's investment program and by regulatory agencies and approved by the
Board of Trustees. While the securities loan is outstanding, a Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. Each Portfolio has a right to call each
loan and obtain the securities on five business days' notice. The risks in
lending securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. The creditworthiness of firms to which a Portfolio lends its
portfolio securities will be monitored on an ongoing basis by BSAM pursuant to
procedures adopted and reviewed on an ongoing basis by the Board of Trustees.
The Income Portfolio and the Debt Portfolio may each lend up to 33 1/3% of its
total assets. The High Yield Portfolio may lend up to 30% of its total assets.
The Income and High Yield Portfolios have appointed Custodial Trust Company
(CTC), an affiliate of BSAM, as securities lending agent. CTC receives a fee for
these services.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Each Portfolio may enter into repurchase agreements, which may be viewed as a
type of secured lending by the Portfolio, and which typically involves the
acquisition by the Portfolio of debt securities from a selling financial
institution, such as a bank, savings and loan association or broker-dealer. In a
repurchase agreement, the Portfolio purchases a debt security from a seller
which undertakes to repurchase the security at a specified resale price on an
agreed future date (ordinarily a week or less). The resale price generally
exceeds the purchase price by an amount which reflects an agreed-upon market
interest rate for the term of the repurchase agreement. The principal risk is
that, if the seller defaults, the Portfolio might suffer a loss to the extent
the proceeds from the sale of the underlying securities and other collateral
held by the Portfolio in connection with the related repurchase agreement are
less than the repurchase price. Repurchase agreements maturing in more than
seven days are considered by the Portfolios to be illiquid.
SHORT SALES (ALL PORTFOLIOS)
Each Portfolio may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales). To complete the transaction,
a Portfolio will borrow the security to make delivery to the buyer. A Portfolio
is then obligated to replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio. Until the
security is replaced, a Portfolio is required to pay to the lender any dividends
or interest which accrue during the period of the loan. To borrow the security,
a Portfolio may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the broker
to the extent necessary to meet margin requirements until the short position is
closed out. Until a Portfolio replaces the borrowed security, it will (a)
maintain in a segregated account cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, at such
a level that
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the amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and will not
be less than the market value of the security at the time it was sold short or
(b) otherwise cover its short position through a short sale "against- the-box,"
which is a short sale in which the Portfolio owns an equal amount of the
securities sold short or securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same issue as,
and equal in amount to, the securities sold short. There are certain tax
implications associated with this strategy. See "Dividends, Distributions and
Taxes."
A Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Portfolio replaces the borrowed security. A Portfolio will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale. Under
normal conditions, a Portfolio will not engage in short sales to the extent that
the Portfolio would be required to segregate with its Custodian, or deposit as
collateral to replace borrowed securities, more than 25% of its net assets. The
Debt Portfolio may not make short sales of securities, except short sales
against the box.
BRADY BONDS (DEBT PORTFOLIO)
"Brady bonds" are debt securities issued in an exchange of outstanding
commercial bank loans to public and private entities in Emerging Countries in
connection with sovereign debt restructurings, under a plan, introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady, known as the Brady
Plan. Agreements implemented under the Brady Plan are designed to reduce the
debt service burden of heavily indebted nations, in exchange for various forms
of credit enhancement coupled with economic policy reforms designed to improve
the debtor country's ability to service its external obligations. The Brady Plan
only sets forth the guiding principles for debt reduction and economic reform,
emphasizing that solutions must be negotiated on a case by case basis between
debtor nations and their creditors. As a result, the financial packages offered
by each country differ.
Debt reduction is generally carried out through the exchange of outstanding
commercial bank debt for various types of bonds, which may include (i) bonds
issued at 100% of face value of such debt, (ii) bonds issued at a discount to
face value of such debt, (iii) bonds offering fixed or floating rates of
interest, (iv) bonds bearing a below market rate of interest which increases
over time, and (v) bonds issued in exchange for the advancement of new money by
existing lenders. Credit enhancement may take the form of collateralizing the
principal with U.S. Treasury zero coupon bonds with a maturity equal to the
final maturity of such bonds. Collateral purchases are financed by the
International Monetary Fund ("IMF"), the World Bank and the debtor nation's
reserves. In addition, the first two or three interest payments on certain types
of Brady bonds may be collateralized by cash or securities agreed upon by
creditors.
As a pre-condition to issuing Brady bonds, debtor nations are generally required
to agree to the implementation of certain domestic monetary and fiscal reform
measures with the World Bank or the IMF. Such measures have included the
liberalization of trade and foreign investments, the privatization of
state-owned enterprises and the setting of targets for public spending and
borrowing. These policies and programs seek to improve the debtor's ability to
service its external obligations and promote its growth and development.
Brady bonds have been issued by a number of Emerging Countries, primarily in
Latin America. Several other Emerging Countries are currently negotiating or
have reached agreement with their creditors in sovereign debt restructuring that
will result in the issuance of Brady bonds. For purposes of applicable tax and
1940 Act rules and regulations, Brady bonds are not considered U.S. Government
securities.
The Debt Portfolio may invest in either collateralized or uncollateralized Brady
bonds. Brady bonds are issued in various currencies (primarily U.S. dollars) and
are actively traded in the over-the-counter ("OTC") secondary market for debt of
Emerging Country issuers. Because of the large size of most Brady bond issues,
Brady bonds are generally highly liquid instruments. Brady bonds may be
collateralized or uncollateralized, may carry floating or fixed rates of
interest, and may have maturities of up to 30 years. The most common are 30-year
collateralized fixed-rate "par bonds" and floating-rate "discount bonds," which
are collateralized as to principal by U.S. Treasury zero coupon bonds having the
same maturity as the Brady bonds, and carry at least one year's rolling
interest-rate guarantee in the form of cash or marketable securities.
Investors should recognize that Brady bonds have been issued only recently, and
accordingly they do not have a long payment history. There can be no assurance
that the Brady bonds in which the
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Portfolio may invest will not be subject to restructuring arrangements or to
requests for new credit which may cause the Portfolio to suffer a loss of
interest or principal on any of its holdings. For a discussion of the risks
involved in investing in Brady bonds, see "Risk Factors -- Sovereign Debt."
INDEXED SECURITIES (DEBT PORTFOLIO)
The Debt Portfolio may purchase securities whose prices are indexed to the
prices of other securities, securities indices, currencies, precious metals or
other commodities, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically, provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instruments to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
INVESTMENT IN OTHER FUNDS (INCOME AND DEBT PORTFOLIOS)
In accordance with the 1940 Act, the Income and Debt Portfolios may each invest
a maximum of up to 10% of the value of its total assets in securities of other
investment companies, and each Portfolio may own up to 3% of the total
outstanding voting stock of any one investment company. In addition, up to 5% of
each Portfolio's total assets may be invested in the securities of any one
investment company. The Debt Portfolio may invest in both investment companies
that are registered under the 1940 Act as well as those that are not required to
be so registered. Investment in other investment companies or vehicles may be
the sole or most practical means by which the Debt Portfolio can participate in
certain securities markets. Such investment may involve the payment of
substantial premiums above the value of such issuers' portfolio securities, and
is subject to limitations under the 1940 Act and market availability. There can
be no assurance that vehicles or funds for investing in certain Emerging
Countries will be available for investment, particularly in the early stages of
the Debt Portfolio's operations. In addition, special tax considerations may
apply. The Portfolios do not intend to invest in such vehicles or funds unless,
in the judgment of BSAM, the potential benefits of such investment justify the
payment of any applicable premium or sales charge. As an investor in an
investment company, each Portfolio would bear its ratable share of that
investment company's expenses, including its administrative and advisory fees.
At the same time, each Portfolio would continue to pay its own investment
management fees and other expenses; however, BSAM has agreed to waive its fees
to the extent necessary to comply with state securities laws. In addition, BSAM
has agreed to waive its fees to the extent necessary to retain its current
expense cap.
LOANS (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and the Debt Portfolios may each invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a foreign
entity and one or more financial institutions ("Lenders"). The majority of a
Portfolio's investments in Loans in emerging markets is expected to be in the
form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in a Portfolio having a contractual relationship only with
the Lender, not with the borrower government. A Portfolio will have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In connection with purchasing
Participations, a Portfolio generally will have no right to enforce compliance
by the borrower with the terms of the loan agreement relating to the loan ("Loan
Agreement"), nor any rights of set-off against the borrower, and the Portfolio
may not directly benefit
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from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Portfolio will assume the credit risk of both
the borrower and the Lender that is selling the Participation. In the event of
the insolvency of the Lender selling a Participation, a Portfolio may be treated
as a general creditor of the Lender and may not benefit from any set- off
between the Lender and the borrower. A Portfolio will acquire Participations
only if the Lender positioned between the Portfolio and the borrower is
determined by BSAM to be creditworthy. Creditworthiness will be judged based on
the same credit analysis performed by BSAM when purchasing marketable
securities. When a Portfolio purchases Assignments from Lenders, the Portfolio
will acquire direct rights against a borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by a
Portfolio as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.
A Portfolio may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Portfolios anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on a Portfolio's ability to dispose of particular
Assignments or Participations when necessary to meet the Portfolio's liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for a Portfolio
to assign a value to those securities for purposes of valuing the Portfolio and
calculating its net asset value. Under normal conditions, the High Yield
Portfolio will not invest more than 15% of its total assets in Loans and the
Debt Portfolio will not invest more than 20% of its total assets in Loans.
MORTGAGE-RELATED SECURITIES (HIGH YIELD AND INCOME PORTFOLIOS)
The High Yield and Income Portfolios may each invest in mortgage-related
securities, consistent with their investment objectives, that provide funds for
mortgage loans made to residential homeowners. These include securities which
represent interests in pools of mortgage loans made by lenders such as savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled for sale to investors by various governmental,
government-related and private organizations. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Prepayments are caused by repayments of principal resulting from the sale of the
underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect government
guarantees of payments in such pools. However, timely payment of interest and/or
principal of these pools is supported by various forms of insurance or
guarantees, including individual loan, title, pool or hazard insurance. There
can be no assurance that the private insurers can meet their obligations under
the policies. The Portfolios may buy mortgage-related securities without
insurance or guarantees if, through an examination of the loan experience and
practices of the poolers, BSAM determines that the securities meet the
Portfolios investment criteria. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. Under normal conditions, the High Yield Portfolio
will not invest more than 20% of its total assets in mortgage-related
securities.
EQUITY SECURITIES (HIGH YIELD PORTFOLIO)
In seeking to meet its objective, the High Yield Portfolio may invest in
"equity" securities, including distressed securities, as described below. These
securities include foreign and domestic common stocks or preferred stocks,
rights and warrants and debt securities or preferred stock which are convertible
or exchangeable for common stock or preferred stock. To the extent the Portfolio
invests in equity securities, there may be a diminution in the Portfolio's
overall yield. See "Distressed Securities" below. Under normal conditions, the
High Yield Portfolio will not invest more than 20% of its total assets in equity
securities.
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DISTRESSED SECURITIES (HIGH YIELD PORTFOLIO)
The High Yield Portfolio may invest in debt or equity securities of financially
troubled or bankrupt companies (financially troubled issuers) and in debt or
equity securities of companies, that in the view of the Adviser are currently
undervalued, out of favor or price depressed relative to their long- term
potential for growth and income (operationally troubled issuers) (collectively,
"distressed securities"). Investment in distressed securities involves certain
risks. See "Risk Factors." Under normal conditions, the Portfolio will not
invest more than 20% of its total assets in distressed securities.
ASSET-BACKED SECURITIES (INCOME AND HIGH YIELD PORTFOLIOS)
The Income and High Yield Portfolios may invest in asset-backed securities,
which are a form of derivative securities. The securitization techniques used
for asset-backed securities are similar to those used for mortgage-related
securities. These securities include debt securities and securities with debt-
like characteristics. The collateral for these securities has included home
equity loans, automobile and credit card receivables, boat loans, computer
leases, airplane leases, mobile home loans, recreational vehicle loans and
hospital account receivables.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
generally are unsecured and the debtors are entitled to the protection of a
number of state and Federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. The High Yield Portfolio currently intends to invest no more than 5%
of its assets in asset-backed securities.
MUNICIPAL OBLIGATIONS (INCOME AND HIGH YIELD PORTFOLIOS)
Municipal obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivision, agencies and instrumentalities, multistate agencies or
authorities. While, in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain issues of municipal obligations, both taxable and
non-taxable, offer yields comparable and, in some cases, greater than the yields
available on other permissible investments. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Dividends received by shareholders which are attributable to
interest income received by a Portfolio from municipal obligations generally
will be subject to federal income tax. Municipal obligations bear fixed,
floating or variable rates of interest, which are determined in some instances
by formulas under which the municipal obligation's interest rate will change
directly or inversely to changes in interest rates or an index, or multiples
thereof, in many cases subject to a maximum and minimum. The Income Portfolio
currently intends to invest no more than 25% of its assets in municipal
obligations. However, this percentage may be varied from time to time without
shareholder approval. The High Yield Portfolio currently intends to invest no
more than 5% of its assets in municipal obligations.
TEMPORARY STRATEGIES (ALL PORTFOLIOS)
Each Portfolio retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with a Portfolio's investment
objectives, BSAM may employ a temporary defensive investment strategy if it
determines such a strategy is warranted. Under such a defensive strategy, a
Portfolio temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality fixed-income securities or money market instruments of U.S. or foreign
issuers, and most or all of the Portfolio's investments may be made in the
United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of a Portfolio shares
or to meet ordinary daily cash needs, a Portfolio temporarily may hold cash
(U.S. dollars, foreign currencies or multinational currency units) and may
invest any portion of its assets in high quality foreign or domestic money
market instruments (See Appendix B).
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SIMULTANEOUS INVESTMENTS (ALL PORTFOLIOS)
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by BSAM. However, if such other
investment companies or accounts are prepared to invest in, or desire to dispose
of, securities of the type in which a Portfolio invests at the same time as the
Portfolio, available investments or opportunities for sales will be allocated
equitably to each. In some cases, this procedure may adversely affect the size
of the position obtained for or disposed of by a Portfolio or the price paid or
received by the Portfolio.
MISCELLANEOUS TECHNIQUES (ALL PORTFOLIOS)
In addition to the techniques and investments described above, the High Yield
Portfolio may invest in trade claims, depository receipts and depository shares,
and may engage in forward foreign currency exchange contracts, currency swaps,
mortgage swaps, index swaps and interest rate swaps, caps, floors and collars
and reverse repurchase agreements. The Debt Portfolio may engage in forward
foreign currency exchange contracts, interest rate swaps, proxy hedging, cross
hedging, settlement hedging, transaction hedging, position hedging and other
strategies. The Income Portfolio may engage in forward currency contracts,
currency swaps and cross currency hedging.
PORTFOLIO TURNOVER
The Portfolios will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because high yield markets can be
especially volatile, securities of emerging market countries may at times be
held only briefly. Under normal conditions, the portfolio turnover rates for the
Bond Portfolio, High Yield Portfolio and Income Portfolio generally will not
exceed 250%, 150% and 150%, respectively, in any one year. However, the
portfolio turnover rates may exceed this rate when BSAM believes the anticipated
benefits of short-term investments outweigh any increase in transaction costs or
increase in short-term gains. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions or transaction costs.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income.
CERTAIN FUNDAMENTAL POLICIES
Each Portfolio may: (i) borrow money to the extent permitted under the 1940 Act;
and (ii) invest up to 25% of the value of its total assets in the securities of
issuers in a single industry, provided that there is no such limitation on
investments in securities issued or guaranteed by the U.S. Government, its
agencies or sponsored enterprises. Each of the Income Portfolio and the High
Yield Portfolio may also (iii) invest up to 5% of the value of its total assets
in the obligations of any issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested, and securities issued or guaranteed by
the U.S. Government, its agencies or sponsored enterprises may be purchased,
without regard to any such limitation. This paragraph describes certain
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares.
See "Investment Objectives and Management Policies--Investment Restrictions" in
the relevant Portfolio's Statement of Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its
assets, but only to secure permitted borrowings; and (ii) invest up to 15% of
the value of its net assets in repurchase agreements providing for settlement in
more than seven days after notice and in other illiquid securities. In addition,
the Debt Portfolio may purchase securities of any company having less than three
years' continuous operation (including operations of any predecessors) if such
purchase does not cause the value of the Debt Portfolio's investments in all
such companies to exceed 10%, of the value of its total assets. See "Investment
Objectives and Management Policies-- Investment Restrictions" in The Bear
Stearns Funds' Statement of Additional Information and "Investment Objective and
Policies" in the Bear Stearns Investment Trust's Statements of Additional
Information.
Risk Factors
No investment is free from risk. Investing in a Portfolio will subject investors
to certain risks which should be considered. The following risks apply to each
Portfolio to the extent that it engages in the investment practices set forth
below.
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NET ASSET VALUE FLUCTUATIONS
No Portfolio's net asset value per share is fixed and should be expected to
fluctuate. Investors should purchase Portfolio shares only as a supplement to an
overall investment program and only if investors are willing to undertake the
risks involved.
FIXED-INCOME SECURITIES
Investors should be aware that even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities that may be purchased by the
Portfolios, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, the Portfolio
will consider all circumstances deemed relevant in determining whether to
continue to hold the security. Holding such securities that have been downgraded
below investment grade can subject a Portfolio to additional risk. Certain
securities purchased by a Portfolio, such as those rated Baa by Moody's or BBB
by S&P, Fitch or Duff, may be subject to such risk with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated fixed-income securities. Debt securities which are rated Baa by Moody's
are considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Funds' Board of Trustees. In accordance with
such guidelines, BSAM will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information.
FOREIGN SECURITIES
Foreign securities involve certain risks, which should be considered carefully
by an investor in the Portfolios. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company or government than about a domestic company or the U.S. Government.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment. In many instances, foreign debt
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These investments, however, may be less
liquid than the securities of U.S. corporations. In the event of default of any
such foreign debt obligations, it may be more difficult for a Portfolio to
obtain or enforce a judgement against the issuers of such securities.
23
<PAGE>
Investing in the securities markets of developing countries involves exposure to
economies that are generally less diverse and mature and to political systems
which can be expected to have less stability than those of developed countries.
Historical experience indicates that the markets of developing countries have
been more volatile than the markets of developed countries. The risks associated
with investments in foreign securities may be greater with respect to
investments in developing countries and are certainly greater with respect to
investments in the securities of financially and operationally troubled issuers.
Additional costs could be incurred in connection with a Portfolio's
international investment activities. Foreign brokerage commissions are generally
higher than United States brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversion between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of a Portfolio's securities
denominated in that currency. Such changes also will affect the Portfolio's
income and distributions to shareholders. In addition, although the Portfolio
will receive income in such currencies, the Portfolio will be required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency declines after the Portfolio's income has been
accrued and translated into U.S. dollars, the Portfolio could be required to
liquidate portfolio securities to make such distributions, particularly in
instances in which the amount of income the Portfolio is required to distribute
is not immediately reduced by the decline in such currency. Similarly, if an
exchange rate declines between the time the Portfolio incurs expenses in U.S.
dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater than the equivalent amount in any such currency of such
expenses at the time they were incurred.
Each Portfolio may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking-in the
U.S. dollar price of the purchase or sale of securities denominated in a foreign
currency; locking-in the U.S. dollar equivalent of dividends to be paid on such
securities which are held by the Portfolio; and protecting the U.S. dollar value
of such securities which are held by the Portfolio.
RISK OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the
Portfolios would not be subject absent the use of these strategies. The
Portfolios, and thus the investors, may lose money through any unsuccessful use
of these strategies. If BSAM's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options,
foreign currency and futures contracts and options on futures contracts include
(1) dependence on BSAM's ability to predict correctly movements in the direction
of interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to pursue these strategies are different
from those needed to select portfolio securities; (4) the possible absence of a
liquid secondary market for any particular instrument at any time; (5) the
possible need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of a Portfolio to purchase or sell
a portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Portfolio to maintain "cover" or
to segregate securities in connection with hedging transactions. See "Dividends,
Distributions and Taxes" in The Bear Stearns Funds' Statement of Additional
Information and "Taxation" in the Bear Stearns Investment Trust's Statement of
Additional Information.
The Portfolios will generally purchase options and futures on an exchange only
if there appears to be a liquid secondary market for such options or futures;
the Portfolios will generally purchase OTC options only if BSAM believes that
the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or
24
<PAGE>
that the other party will continue to make a market. Thus, it may not be
possible to close an options or futures transaction. The inability to close
options and futures positions also could have an adverse impact on a Portfolio's
ability to effectively hedge its portfolio. There is also the risk of loss by a
Portfolio of margin deposits or collateral in the event of bankruptcy of a
broker with whom the Portfolio has an open position in an option, a futures
contract or related option.
HIGH YIELD SECURITIES
GENERAL. The High Yield and Debt Portfolios may invest all or substantially all
of their assets in high yield, high risk debt securities, commonly referred to
as "junk bonds." The Income Portfolio may invest up to 25% of its assets in
securities rated below investment grade. Securities rated below investment grade
and comparable unrated securities offer yields that fluctuate over time, but
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks than
higher-rated securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Certain of the debt securities in which a
Portfolio may invest may have, or be considered comparable to securities having,
the lowest ratings for non-subordinated debt instruments assigned by Moody's,
S&P or D&P (i.e., rated C by Moody's or CCC or lower by S&P or D&P). Under
rating agency guidelines, these securities are considered to have extremely poor
prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default, to be unlikely to have the capacity to
pay interest and repay principal when due in the event of adverse business,
financial or economic conditions, and/or to be in default or not current in the
payment of interest or principal. Such securities are considered speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. Unrated securities deemed
comparable to these lower- and lowest- rated securities will have similar
characteristics. Accordingly, it is possible that these types of factors could,
in certain instances, reduce the value of securities held by a Portfolio with a
commensurate effect on the value of its respective shares. Therefore, an
investment in a Portfolio should not be considered as a complete investment
program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers, and participants in the market
are mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on a
Portfolio's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Portfolio is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Funds' Board of Trustees to value the Portfolio's
securities and the Funds' Trustees may have to use a greater degree of judgment
in making such valuations. Furthermore, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on fundamental
analysis, may tend to decrease the market value and liquidity of such
lower-rated securities. Less liquid secondary markets may also affect a
Portfolio's ability to sell securities at their fair value. In addition, each
Portfolio may invest up to 15% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield, high risk debt
securities contract due to adverse economic conditions or for other reasons,
certain previously liquid securities in a Portfolio may become illiquid and the
proportion of the Portfolio's assets invested in illiquid securities may
increase.
The ratings of fixed-income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated
25
<PAGE>
securities. In addition, such securities generally present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their Debt Obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default in payment of interest or principal by such issuers is significantly
greater than with investment grade securities because such securities generally
are unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
Many fixed-income securities, including certain U.S. corporate fixed-income
securities in which the Portfolios may invest, contain call or buy-back features
which permit the issuer of the security to call or repurchase it. Such
securities may present risks based on payment expectations. If an issuer
exercises such a "call option" and redeems the security, a Portfolio may have to
replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Portfolio.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose a
Portfolio to the direct or indirect consequences of political, social or
economic changes in the developing and emerging countries that issue the
securities. The ability and willingness of sovereign obligors in developing and
emerging countries or the governmental authorities that control repayment of
their external debt to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which a Portfolio may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
As a result, a governmental obligor may default on its obligations. If such a
default occurs, a Portfolio may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign sovereign debt
securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
sovereign Debt Obligations in the event of default under their commercial bank
loan agreements.
DISTRESSED SECURITIES
Distressed securities involve a high degree of credit and market risk and may be
subject to greater price volatility than other securities in which the Portfolio
invests.
Although a Portfolio will invest in select companies which in the view of BSAM
have the potential over the long term for capital growth, there can be no
assurance that such financially or operationally troubled companies can be
successfully transformed into profitable operating companies. There is a
possibility that the Portfolio may incur substantial or total losses on its
investments. During an economic downturn or recession, securities of financially
troubled issuers are more likely to go into default than securities of other
issuers. In addition, it may be difficult to obtain information about
financially and operationally troubled issuers.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The market
prices of such securities are subject to erratic and abrupt market movements and
the spread between bid and asked prices may be greater than normally expected.
In addition, it is anticipated that many of such portfolio investments may not
be widely traded and that the Portfolio's position in such securities may be
substantially relative to the market for such securities. As a result, the
Portfolio may experience delays and incur losses and other costs in connection
with the sale of its portfolio securities.
Distressed securities which a Portfolio may purchase may also include securities
of companies involved in bankruptcy proceedings, reorganizations and financial
restructurings. To the extent the Portfolio invests in such securities, it may
have a more active participation in the affairs of issuers than is generally
assumed by an investor. This may subject the Portfolio to litigation risks or
prevent the Portfolio from disposing of securities. In a bankruptcy or other
proceeding, the Portfolio as a creditor may be unable to enforce its rights in
any collateral or may have its security interest in any collateral challenged,
disallowed or subordinated to the claims of the creditors. See "Investment
Objective and
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<PAGE>
Management Policies--Portfolio Securities-- Bankruptcy and Other Proceedings--
Litigation Risks" in The Bear Stearns Funds' Statement of Additional Information
and "Risk Factors and Special Considerations-- Investing in Securities Markets
of Emerging Countries" in the Bear Stearns Investment Trust's Statement of
Additional Information.
Of the Debt Portfolio's total net assets as of March 31, 1998, 94.85% consisted
of portfolio investments and 5.15% consisted of other assets in excess of
liabilities. The percentage of the Debt Portfolio's investments invested in
securities rated by S&P and Moody's as of March 31, 1998 are as follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BBB Baa 3.05%
BB B 16.31%
BB Ba 60.28%
B B 15.38%
NR NR 4.98%
</TABLE>
Based on the weighted average ratings of all investments held during the Debt
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1998),
the percentage of the Debt Portfolio's total investments in securities rated
by S&P or Moody's applicable rating category (AAA, A, BB, or B by S&P or Aaa,
A, Ba or B by Moody's) by monthly dollar-weighted average is set forth below.
It should be noted that this information reflects the average composition of
the Debt Portfolio's assets during the most recent period and is not
necessarily representative of the Debt Portfolio's assets as of the end of
such period, the current fiscal period or at any time in the future.
<TABLE>
- --------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB Baa 3.27%
BB B 29.50%
BB Ba 45.38%
B B 16.66%
NR NR 5.19%
</TABLE>
Of the High Yield Portfolio's total net assets as of March 31, 1998, 110.88%
consisted of portfolio investments and -10.88% consisted of liabilities in
excess of other assets. The percentage of the High Yield Portfolio's
investments invested in securities rated by S&P and Moody's as of March 31,
1998 are as follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 1.33%
BB Ba 0.64%
B Ba 0.64%
B B 67.55%
B Caa 11.25%
CCC B 3.63%
CCC Caa 2.55%
NR NR 12.41%
</TABLE>
27
<PAGE>
Based on the weighted average ratings of all investments held during the High
Yield Portfolio's most recent fiscal period (the fiscal year ended March 31,
1998), the percentage of the High Yield Portfolio's total investments in
securities rated by S&P or Moody's applicable rating category (AAA, A, BB, or B
by S&P or Aaa, A, Ba or B by Moody's) by monthly dollar-weighted average is set
forth below. It should be noted that this information reflects the average
composition of the High Yield Portfolio's assets during the most recent period
and is not necessarily representative of the High Yield Portfolio's assets as of
the end of such period, the current fiscal period or at any time in the future.
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 0.68%
BB Ba 0.97%
B Ba 1.31%
B B 63.27%
B Caa 12.45%
CCC B 3.67%
CCC Caa 4.31%
NR NR 13.34%
</TABLE>
- ------
* Equivalent Unrated-These categories represent the comparable quality of
unrated securities as determined by the Adviser. For foreign government
obligations not individually rated by an internationally recognized
statistical rating organization, the Debt Portfolio assigns a rating based
on the rating of the sovereign credit of the issuing government.
Debt Obligations in which the Portfolios may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed rates. Changes
in interest rates generally will cause the value of debt securities held by the
Portfolio to vary inversely to changes in prevailing interest rates. A
Portfolio's investments in fixed-rate debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
short-term obligations. Brady bonds and other Debt Obligations acquired at a
discount are subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities which are
not subject to a discount.
DISCOUNT OBLIGATIONS
The Portfolios expect to invest in both short-term and long-term Debt
Obligations purchased at a discount, for example, zero coupon securities. The
amount of original issue discount and/or market discount on obligations
purchased by a Portfolio may be significant, and accretion of market discount
together with original issue discount, will cause the Portfolio to realize
income prior to the receipt of cash payments with respect to these securities.
See "Taxation" in the Statement of Additional Information for a discussion of
original issue discount and market discount. In order to distribute income
realized by a Portfolio and thereby maintain its qualification as a "regulated
investment company" under the Code, a Portfolio may be required to liquidate
portfolio securities that it might otherwise have continued to hold, use its
cash assets or borrow funds on a temporary basis necessary to declare and pay a
distribution to shareholders. Under adverse market conditions, this may result
in shareholders receiving a portion of their original purchase price as a
taxable dividend and could further negatively impact net asset value.
POLITICAL AND ECONOMIC FACTORS
Investing in Debt Obligations of Emerging Countries involves risks relating to
political and economic developments abroad. The value of a Portfolio's
investments will be affected by commodity prices, inflation, interest rates,
taxation, social instability, and other political, economic or diplomatic
developments in or affecting the Emerging Countries in which the Portfolio has
invested. In many cases, governments of Emerging Countries continue to exercise
a significant degree of control over the economy, and government actions
concerning the economy may adversely effect issuers within that country.
Government actions relative to the economy, as well as economic developments
generally, may also affect a given country's international foreign currency
reserves. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus could
have a bearing on the capacity of Emerging Country issuers to make payments on
their Debt Obligations regardless of their financial condition. In addition,
there is a possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, or other similar
developments which could affect investments in those countries.
28
<PAGE>
While BSAM intends to manage the Portfolios in a manner that will minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause a Portfolio to suffer a loss of interest or principal on any of
its holdings. The Portfolios will treat investments that are subject to
repatriation restrictions of more than seven (7) days as illiquid securities.
FOREIGN EXCHANGE RISK
Many of the currencies of Emerging Countries have experienced significant
devaluations relative to the dollar, and major adjustments have been made in
certain of them at times. To the extent a Portfolio had invested in non-dollar
denominated securities, a decline in the value of such currency would reduce the
value of certain portfolio securities and the net asset value of the Portfolio.
The Debt Portfolio may invest up to 30% of its assets in Debt Obligations
denominated in local currencies. In addition, if the exchange rate for the
currency in which the Portfolio receives interest payments declines against the
U.S. dollar before such interest is paid as dividends to shareholders, the
Portfolio may have to sell portfolio securities to obtain sufficient cash to pay
such dividends.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention or failure to intervene by U.S. or foreign governments or central
banks or by currency controls or political developments in the U.S. or abroad.
To the extent that a substantial portion of a Portfolio's total assets, adjusted
to reflect the Portfolio's net position after giving effect to currency
transactions, is denominated in currencies of foreign countries, the Portfolio
will be more susceptible to the risk of adverse economic and political
developments within those countries.
SOVEREIGN DEBT
Investing in Debt Obligations of governmental issuers in Emerging Countries
involves economic and political risks. While BSAM intends to manage the
Portfolios in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse political changes will not cause a Portfolio to
suffer a loss of interest or principal on any of its holdings. The governmental
entity that controls the servicing of obligations of those issuers may not be
willing or able to repay the principal and/or interest when due in accordance
with the terms of the obligations. A governmental entity's willingness or
ability to repay principal and interest when due in a timely manner may be
affected by, among other factors, its cash flow situation, the market value of
the debt, the relative size of the debt service burden to the economy as a
whole, the governmental entity's dependence on expected disbursements from third
parties, the governmental entity's policy toward the IMF and the political
constraints to which the governmental entity may be subject. As a result,
governmental entities may default on their obligations. Holders of certain
Emerging Country Debt Obligations may be requested to participate in the
restructuring and rescheduling of these obligations and to extend further loans
to their issuers. The interests of holders of Emerging Country Debt Obligations
could be adversely affected in the course of restructuring arrangements or by
certain other factors referred to below.
Sovereign obligors in developing and Emerging Countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. The issuers of the sovereign
debt securities in which the Portfolio expects to invest have in the past
experienced substantial difficulties in servicing their external Debt
Obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady bonds and other
foreign sovereign debt securities in which the Portfolio may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Portfolio's holdings.
Sovereign debt issued by issuers in many Emerging Countries generally is deemed
to be the equivalent in terms of quality to securities rated below investment
grade by Moody's and S&P. Such securities are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve major risk
exposure to adverse conditions. Some of such sovereign debt may be comparable to
securities rated D by S&P or C by Moody's.
29
<PAGE>
INVESTING IN SECURITIES MARKETS OF EMERGING COUNTRIES
Most securities markets in Emerging Countries may have substantially less volume
and are subject to less government supervision than U.S. securities markets, and
securities of many issuers in Emerging Countries may be less liquid and more
volatile than securities of comparable domestic issuers. In addition, there is
generally less government regulation of securities exchanges, securities
dealers, and listed and unlisted companies in Emerging Countries than in the
United States.
Markets in Emerging Countries also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of a Portfolio is uninvested and
no return is earned thereon. The inability of a Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of securities due to
settlement problems could result either in losses to the Portfolio due to
subsequent declines in value of the security or, if the Portfolio has entered
into a contract to sell the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign securities are
generally higher than costs associated with transactions in U.S. securities.
Such transactions also involve additional costs for the purchase or sale of
foreign currency.
Foreign investment in certain Emerging Country Debt Obligations is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain Emerging Country Debt Obligations and
increase the costs and expenses of a Portfolio. Certain Emerging Countries
require prior governmental approval of investments by foreign persons, limit the
amount of investment by foreign persons in a particular company, limit the
investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain Emerging Countries may also restrict investment
opportunities in issuers in industries deemed important to national interests.
Certain Emerging Countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
Emerging Country's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Portfolio could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.
Throughout the last decade many Emerging Countries have experienced and continue
to experience high rates of inflation. In certain countries inflation has at
times accelerated rapidly to hyperinflationary levels, creating a negative
interest rate environment and sharply eroding the value of outstanding financial
assets in those countries. Increases in inflation could have an adverse affect
on a Portfolio's non-dollar denominated securities and on the issuers of debt
obligations generally.
In addition, with respect to certain Emerging Countries, there is a possibility
of expropriation or confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, limitations on the removal of funds or other
assets of a Portfolio, and political or social instability or diplomatic
developments which could affect investments in those countries. Individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position. The securities markets, values of securities, yields and risks
associated with securities markets in different countries may change
independently of each other. The risk also exists that an emergency situation
may arise in one or more emerging countries as a result of which trading of
securities may cease or may be substantially curtailed and prices for the
Portfolio's securities in such markets may not be readily available. The Funds
may suspend redemption of Portfolio shares for any period during which an
emergency exists, as determined by the Securities and Exchange Commission.
Accordingly, if a Portfolio believes that appropriate circumstances exist, it
will promptly apply to the Securities and Exchange Commission for a
determination that an emergency is present. During the period commencing from a
Portfolio's identification of such condition until the date of the Securities
and Exchange Commission action, the Portfolio's securities in the affected
markets will be valued at fair value determined in good faith by or under the
direction of the Board of Trustees.
REPORTING STANDARDS
The Debt Obligations of emerging markets countries will not be registered with
the Securities and Exchange Commission or subject to U.S. regulatory or
reporting requirements. Disclosure
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<PAGE>
requirements in Emerging Countries are generally not as stringent as in the U.S.
and there may be less publicly available information about issuers in Emerging
Countries than about domestic issuers. Emerging Country issuers are not
generally subject to accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers.
INVESTMENT PRACTICES
Certain of the investment practices in which the Portfolios may engage have
risks associated with them, including possible default by the other party to the
transaction, illiquidity and, to the extent BSAM's views as to certain market
movements are incorrect, the risk that the use of such strategies could result
in losses greater than if they had not been used. The risks associated with
illiquidity are particularly acute in situations in which a Portfolio's
operations require cash, such as when the Portfolio redeems for its shares of
beneficial interests or pays distributions, and may result in the Portfolio
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of such investments. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specified currency at a future
date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at the price set at the time of the contract. The use of
forward foreign currency exchange contracts entails certain risks. The cost to a
Portfolio of engaging in forward currency contracts varies with factors such as
the currency involved, the length of the contract period and the market
conditions then prevailing. Because forward currency contracts are usually
entered into on a principal basis, no fees or commissions are involved. When a
Portfolio enters into a forward currency contract, it relies on the counterparty
to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the counterparty to do so would result in the loss of any
expected benefit of the transaction. Secondary markets generally do not exist
for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the counterparty. Thus, there can be no assurance that the
Portfolio will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, the Portfolio might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Portfolio would
continue to be subject to market risk with respect to the position and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or securities in a segregated account.
Use of put and call options could result in losses to the Portfolios, force the
purchase or sale of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation a Portfolio
could realize on its investments or cause the Portfolio to hold a security it
might otherwise sell. The use of currency transactions could result in the
Portfolio's incurring losses as a result of the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. A Portfolio depends upon the reliability and creditworthiness of the
counterparty when it enters into OTC currency or securities options or other
agreements. Investments in indexed securities offer the potential for an
attractive rate of return, but also entail the risk of loss of principal. The
use of options and futures transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Portfolio could create the possibility that losses on the hedging instrument
will be greater than gains in the value of the Portfolio's position, thereby
reducing the Portfolio's net asset value. Proxy hedges may result in losses if
the currency used to hedge does not perform similarly to the currency in which
the hedged securities are denominated. With regards to the Portfolio's use of
proxy hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relating to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Portfolio's proxy hedges
and the movements in the exchange rates of the foreign currencies in which the
Portfolio assets that are the subject of such proxy-hedges are denominated.
YEAR 2000 RISK
Many of the world's computer systems currently record years in two-digit format.
Such computer systems will be unable to properly interpret dates beyond the year
1999, which could lead to business disruptions in the U.S. and internationally
(the "Year 2000 Issue").
To ensure that the Portfolios are not negatively impacted by the Year 2000
Issue, BSAM's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially
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<PAGE>
arise in internally developed computer systems and to either obtain
representations from, or make other inquiries of, those parties who provide
computer applications or services that are computer system dependent that BSAM
has determined are critical to the Portfolios.
At the present time, BSAM has been informed by its corporate parent that it
expects that most of its significant Year 2000 corrections should be tested in
production by the end of 1998. Full integration testing of these systems and
testing of interfaces with third party providers will continue through 1999.
However, there can be no assurance that such schedule will be met or the systems
of other companies on which BSAM and the Portfolios are dependent also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Portfolios.
Management of the Portfolios
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. Each Portfolio's Statement of Additional Information contains
the name and general business experience of each Trustee.
PORTFOLIO MANAGEMENT
BSAM uses a team approach to manage each Portfolio. Each team consists of
portfolio managers, assistant portfolio managers and analysts performing as a
dynamic unit to manage the assets of each Portfolio.
INVESTMENT ADVISER AND MANAGER
The Portfolios' investment adviser and manager is BSAM, a wholly owned
subsidiary of The Bear Stearns Companies Inc., which is located at 575 Lexington
Avenue, New York, New York 10022. The Bear Stearns Companies Inc. is a holding
company which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSAM is a registered investment adviser
and offers, either directly or through affiliates, investment advisory services
to open-end and closed-end investment funds and other managed pooled investment
vehicles with net assets at June 30, 1998, of $9.8 billion.
BSAM supervises and assists in the overall management of the Portfolios' affairs
under an Investment Advisory Agreement between BSAM and the Portfolios, subject
to the overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law.
BSAM uses a team approach to money management consisting of portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to manage
the assets of each Portfolio.
Under the terms of an Investment Advisory Agreement, BSAM is entitled to receive
from the Income Portfolio and High Yield Portfolio a monthly fee equal to an
annual rate of 0.45% and 0.60%, respectively, of each Portfolio's average daily
net assets. For the fiscal year ended March 31, 1998, investment advisory fees
accrued by the Income Portfolio and High Yield Portfolio amounted to $91,715 and
$28,723, respectively, all of which was waived.
Under the terms of the Investment Management Agreement, the Debt Portfolio pays
BSAM a fee computed daily and payable monthly, at an annual rate equal to 1.15%
of the Debt Portfolio's average daily net assets up to $50 million, 1.00% of the
Debt Portfolio's average daily net assets of more than $50 million but not in
excess of $100 million, and 0.70% of the Debt Portfolio's average daily net
assets above $100 million. For the fiscal year ended March 31, 1998, investment
management fees earned by the Debt Portfolio amounted to $435,752, of which
$328,977 was waived.
BSAM has agreed that if, in any fiscal year, the sum of the Debt Portfolio's
expenses exceeds the expense limitations applicable to the Debt Portfolio
imposed by state securities administrators, BSAM will reimburse the Debt
Portfolio its fees under the Investment Management Agreement or make other
arrangements to limit Debt Portfolio expenses to the extent required by such
expense limitations. From time to time, BSAM may waive receipt of its fees
and/or voluntarily assume certain of the Debt Portfolio's expenses, which would
have the effect of lowering the Debt Portfolio's expense ratio and increasing
yield to investors at the time such amounts are waived or assumed, as the case
may be. The Debt Portfolio will not pay BSAM at a later time for any amounts it
may waive, nor will the Debt Portfolio reimburse BSAM for any amounts it may
assume until such time as the average net assets of the Debt Portfolio exceed
$50 million or the total operating expenses of the Debt Portfolio are less than
1.75%, 2.40% and 2.40% of the Class A shares, Class B and Class C shares,
respectively, of the Debt Portfolio. The investment management fees paid by the
Debt Portfolio are greater than those paid by most funds, but are believed by
BSAM to be appropriate for fees paid by funds with a global investment strategy.
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<PAGE>
ADMINISTRATOR
Each Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York
10167. BSFM offers administrative services to open-end and closed-end investment
funds and other managed pooled investment vehicles with assets at June 30, 1998
of over $3.0 billion.
For providing administrative services to each Portfolio, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of 0.15 (before fee waiver) of 1% of
each Portfolio's average daily net assets.
Under the terms of an Administrative Services Agreement with the Funds, PFPC
Inc. provides certain administrative services to each Portfolio. For providing
these services, PFPC Inc. is entitled to receive from each Portfolio a monthly
fee equal to an annual rate of 0.10 of 1% of the Portfolio's average daily net
assets up to $200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of
the next $200 million and 0.03 of 1% of net assets above $600 million, subject
to a minimum annual fee of $150,000 for each portfolio.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
certain Portfolio expenses, which would have the effect of lowering a
Portfolio's expense ratio and increasing yield to investors at the time such
amounts are waived or assumed, as the case may be. No Portfolio will pay BSFM at
a later time for any amounts it may waive, nor will a Portfolio reimburse BSFM
for any amounts it may assume. From time to time PFPC Inc. may waive a portion
of its fee. PFPC Inc. reserves the right to revoke this voluntary fee waiver at
any time.
Brokerage commissions may be paid to Bear Stearns for executing transactions if
the use of Bear Stearns is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of each
Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional
Information.
Bear Stearns has agreed to permit the Funds to use the name "Bear Stearns" or
derivatives thereof as part of the Funds' name for as long as the Investment
Advisory and Management Agreements are in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
each Portfolio's principal underwriter and distributor of each Portfolio's
shares pursuant to an agreement which is renewable annually. Bear Stearns is
entitled to receive the sales load described under "How to Buy Shares" and
payments under each Portfolio's Distribution and Shareholder Servicing Plans
described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, acts as the custodian for the Bond Portfolio and the
High Yield Portfolio.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian for the Debt Portfolio's assets.
PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware
19809, acts as each Portfolio's administrator, transfer agent, dividend-paying
agent and registrar.
Rules adopted under the 1940 Act permit the Portfolios to maintain their
securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those rules, the Portfolios' portfolio of securities
and cash invested in securities of foreign countries are held by their
subcustodians, who are approved by the Trustees of the Portfolios in accordance
with the rules of the Securities and Exchange Commission.
DISTRIBUTION AND SHAREHOLDER SERVICING
This section summarizes the distribution and shareholder servicing plans
relating to each class of shares of each Portfolio.
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INCOME PORTFOLIO
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--CLASS A AND C SHARES
Under a plan adopted by the Board of Trustees of The Bear Stearns Funds pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"), the Income Portfolio pays Bear
Stearns for distributing Portfolio shares and for providing personal services
to, and/or maintaining accounts of, Portfolio shareholders.
The Income Portfolio will pay Bear Stearns an annual fee of 0.35% and 0.75% for
Class A and C shares, respectively, of the Portfolio's average daily net assets.
With respect to Class A shares of the Income Portfolio, Bear Stearns will waive
the distribution fee to the extent that the fee would otherwise exceed the NASD
limitations on asset-based sales charges. The 6.25% limitation is imposed on the
Income Portfolio rather than on a per-shareholder basis. Therefore, a long-term
shareholder of the Income Portfolio may pay more in distribution fees than the
economic equivalent of 6.25% of such shareholder's investment in such shares.
Under the Plan, Bear Stearns may pay third parties in respect of these services
such amount as it may determine. The fees paid to Bear Stearns under the Plan
are payable without regard to actual expenses incurred. With respect to Class A
shares of the Income Portfolio, up to 0.25% of the average daily net assets of
the class will compensate institutions for personal service and maintenance of
accounts holding the Income Portfolio's shares. The Fund understands that these
third parties also may charge fees to their clients who are beneficial owners of
Portfolio shares in connection with their client accounts. These fees would be
in addition to any amounts which may be received by them from Bear Stearns under
the Plan. Fees paid under the Plan may also include a service fee paid to
broker-dealers or others who provide services in connection with "no transaction
fee" or similar programs for the purchase of shares.
DISTRIBUTION PLAN--CLASS B SHARES
Under a Plan adopted by the Board of Trustees of The Bear Stearns Funds pursuant
to Rule 12b-1 under the 1940 Act (the "Distribution Plan") for Class B shares,
the Income Portfolio will pay Bear Stearns an annual fee of 0.75% of the average
daily net assets of Class B shares. Amounts paid under the Distribution Plan
compensates Bear Stearns for distributing Portfolio shares. Bear Stearns may pay
third parties that sell Portfolio shares such amount as it may determine.
The Income Portfolio understands that these third parties may also charge fees
for their clients who are beneficial owners of Portfolio shares in connection
with their client accounts. These fees would be in addition to any amounts which
may be received by them from Bear Stearns under the Distribution Plan.
SHAREHOLDER SERVICING PLAN-CLASS B AND C SHARES
The Bear Stearns Funds has adopted a shareholder servicing plan on behalf of the
Portfolio's Class B and C shares (the "Shareholder Servicing Plan"). In
accordance with the Shareholder Servicing Plan, the Portfolio may enter into
shareholder service agreements under which the Income Portfolio pays a fee of up
to 0.25% of the average daily net assets of Class B and C shares of the Income
Portfolio for fees incurred in connection with the personal service and
maintenance of accounts holding Portfolio shares for responding to inquiries of,
and furnishing assistance to, shareholders regarding ownership of the shares or
their accounts or similar services not otherwise provided on behalf of the
Portfolio. Fees paid under the Shareholder Servicing Plan may also include a
service fee paid to broker-dealers or others who provide services in connection
with "no transaction fee" or similar programs for the purchase of shares.
EXPENSE LIMITATION
BSAM has undertaken (until such time as it gives investors at least 60 days
notice to the contrary) that, if in any fiscal year, certain expenses, including
the investment advisory fee and fees paid under the Plan and the Distribution
Plan, exceed 0.80% of the average daily net assets of the Class A shares of the
Income Portfolio, 1.45% of the average daily net assets of the Class B shares of
the Income Portfolio and 1.45% of the average daily net assets of the Class C
shares of the Income Portfolio for the fiscal year, BSAM may waive a portion of
its investment advisory fee or bear other expenses to the extent of the excess
expenses.
HIGH YIELD PORTFOLIO
DISTRIBUTION PLAN-CLASS A, B AND C SHARES
Under a plan adopted by the Board of Trustees of The Bear Stearns Funds pursuant
to Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the High Yield
Portfolio will pay Bear Stearns an annual
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<PAGE>
fee of 0.10%, 0.75% and 0.75% of the average daily net assets of Class A, B and
C shares, respectively. Amounts paid under the Distribution Plan compensate Bear
Stearns for distributing Portfolio shares. Bear Stearns may pay third parties
that sell Portfolio shares such amount as it may determine.
The High Yield Portfolio understands that these third parties may also charge
fees for their clients who are beneficial owners of Portfolio shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from Bear Stearns under the Distribution
Plan.
SHAREHOLDER SERVICING PLAN-CLASS A, B AND C SHARES
The Bear Stearns Funds has adopted a shareholder servicing plan on behalf of the
High Yield Portfolio's Class A, B and C shares (the "Shareholder Servicing
Plan"). In accordance with the Shareholder Servicing Plan, the Fund may enter
into shareholder service agreements under which the Portfolio pays fees of up to
0.25% of the average daily net assets of Class A, B or C shares for fees
incurred in connection with the personal service and maintenance of accounts
holding Portfolio shares for responding to inquiries of, and furnishing
assistance to, shareholders regarding ownership of the shares or their accounts
or similar services not otherwise provided on behalf of the Portfolio.
EXPENSE LIMITATION
BSAM has undertaken until such time as it gives investors at least 60 days'
notice to the contrary that, if in any fiscal year, certain expenses of the High
Yield Portfolio, including the investment advisory fee, exceed 1.00% of Class
A's average daily net assets, 1.65% of Class B's average daily net assets and
1.65% of Class C's average daily net assets for the fiscal year, BSAM may waive
a portion of its investment advisory fee or bear other expenses to the extent of
the excess expense.
DEBT PORTFOLIO
DISTRIBUTION PLAN-CLASS A AND C SHARES
Under a plan adopted by the Board of Trustees of Bear Stearns Investment Trust
pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Portfolio pays Bear
Stearns for distributing Portfolio shares and for providing personal services
to, and/or maintaining accounts of, Portfolio shareholders.
The Debt Portfolio will pay Bear Stearns an annual fee of .35% and 0.75% of the
Portfolio's average daily net assets for Class A shares and Class C shares,
respectively.
With respect to Class A shares of the Debt Portfolio, Bear Stearns will waive
the distribution fee to the extent that the fees would otherwise exceed the NASD
limitations on asset-based sales charges. The 6.25% limitation is imposed on the
Portfolio rather than on a per shareholder basis. Therefore, a long- term
shareholder of the Portfolio may pay more in distribution fees than the economic
equivalent of 6.25% of such shareholder's investment in such shares.
Under the Plan, Bear Stearns may pay third parties in respect of these services
such amount as it may determine. The fees paid to Bear Stearns under the Plan
are payable without regard to actual expenses incurred. With respect to Class A
of the Portfolio, up to 0.25% of the average daily net assets of each class will
compensate institutions for personal service and maintenance of accounts holding
the Portfolio's shares. The Fund understands that these third parties also may
charge fees to their clients who are beneficial owners of Portfolio shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from Bear Stearns under the Plan. Fees
paid under the Plan may also include a service fee paid to broker-dealers or
others who provide services in connection with "no transaction fee" or similar
programs for the purchase of shares.
DISTRIBUTION PLAN-CLASS B SHARES
Under a plan adopted by the Board of Trustees of Bear Stearns Investment Trust
pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan") for Class B
shares, the Debt Portfolio will pay Bear Stearns an annual fee of 0.75% of the
average daily net assets of Class B shares. Amounts paid under the Distribution
Plan compensate Bear Stearns for distributing Portfolio shares. Bear Stearns may
pay third parties that sell Portfolio shares such amount as it may determine.
The Portfolio understands that these third parties may also charge fees for
their clients who are beneficial owners of Portfolio shares in connection with
their client accounts. These fees would be in addition to any amounts which may
be received by them from Bear Stearns under the Distribution Plan.
SHAREHOLDER SERVICING PLAN-CLASS B AND C SHARES
Bear Stearns Investment Trust has adopted a shareholder servicing plan on behalf
of the Debt Portfolio's Class B and Class C shares. In accordance with the
shareholder servicing plan, the Portfolio
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may enter into shareholder service agreements under which the Debt Portfolio
pays fees of up to 0.25% of the average daily net assets of Class B shares and
Class C shares for fees incurred in connection with the personal service and
maintenance of accounts holding Portfolio shares for responding to inquires of,
and furnishing assistance to shareholders regarding ownership of the shares or
their accounts or similar services not otherwise provided on behalf of the
Portfolio. Fees paid under the shareholder servicing plans may also include a
service fee paid to broker-dealers or others who provide services in connection
with "no transaction fee" or similar programs for the purchase of shares.
EXPENSE LIMITATION
All expenses incurred in the operation of the Debt Portfolio will be borne by
the Portfolio, except to the extent specifically assumed by BSAM. See
"Management of the Portfolio--Expenses" in the Statement of Additional
Information.
BSAM has undertaken that, if in any fiscal year, certain expenses, including the
investment management fee and fees under the distribution plan, exceed 1.75% of
Class A's average daily net assets, 2.40% of Class B's average daily net assets
and 2.40% of Class C's average daily net assets for the fiscal year, BSAM may
waive a portion of its investment management fee or bear other expenses to the
extent of the excess expense.
How to Buy Shares
GENERAL
The minimum initial investment is $1,000, or $500 if the investment is for Keogh
Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant. Subsequent
investments ordinarily must be at least $50, or $25 for retirement plans. Share
certificates are issued only upon written request. No certificates are issued
for fractional shares. The Funds reserve the right to reject any purchase order.
The Funds reserve the right to vary the initial and subsequent investment
minimum requirements at any time. Investments by employees of Bear Stearns and
its affiliates are not subject to minimum investment requirements.
Purchases of a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the NASD who have sales agreements with Bear Stearns (an "Authorized
Dealer"). Purchases of a Portfolio's shares also may be made directly through
the Transfer Agent. When purchasing Portfolio shares, investors must specify
which class is being purchased. If you do not specify in your instructions to
the Funds which class of shares you wish to purchase, the Funds will assume that
your instructions apply to Class A shares.
Purchases are effected at the net asset value next determined after a purchase
order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent
(the "trade date"). Payment for Portfolio shares generally is due to Bear
Stearns or the Authorized Dealer on the third business day (the "settlement
date") after the trade date. Investors who make payment before the settlement
date may permit the payment to be held in their brokerage accounts or may
designate a temporary investment for payment until the settlement date. If a
temporary investment is not designated, Bear Stearns or the Authorized Dealer
will benefit from the temporary use of the funds if payment is made before the
settlement date.
CHOOSING A CLASS OF SHARES
Once you decide to buy shares of a Portfolio, you must determine which class of
shares to buy. Each Portfolio offers Class A, Class B and Class C shares. Each
class has its own cost structure and features that will affect the results of
your investment over time in different ways. Your financial adviser or Account
Executive can help you choose the class of shares that best suits your
investment needs.
^ Class A shares have a front-end sales charge, which is added to the
offering price of your investment.
^ Class B shares and C shares do not have a front-end sales charge, which
means that your entire investment is available to work for you right
away. However, Class B shares and C shares have a contingent deferred
sales charge (CDSC) that you must pay if you redeem your shares within a
specified period of time. In addition, the annual expenses of Class B
shares and C shares are higher than the annual expenses of Class A
shares.
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In deciding which class is best, you may consider:
. how much you intend to invest
. the length of time you expect to hold your investment
. the features and services available for each class
. how well you expect the market to perform in the coming months.
For example, you may consider Class A shares if you have a long-term investment
horizon or if you plan to invest a large amount of money, because Class A shares
have a lower expense structure and the amount of the initial sales charge
decreases as you invest more money. You may find Class B shares more attractive,
because there is no front-end sales charge and the full amount of your
investment is put to work right away. If you plan to invest for a shorter time
period, you may consider Class C shares, because the CDSC is lower than that of
Class B shares and declines to 0 after one year. In any event, you should
consult your financial adviser or Account Executive before investing in a
Portfolio.
The following table summarizes the differences in the expense structures of the
three classes of shares:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Front-End Sales Charge Debt Portfolios--4.50% None None
- -------------------------------------------------------------------------------------------------------------------
Contingent Deferred None* 5% to 0%, declining the longer 1% if you sell shares
Sales Charge you hold your shares within one year of purchase
- -------------------------------------------------------------------------------------------------------------------
Annual Expenses Lower than Class B Higher than Class A shares Higher than Class A shares;
and C shares (Note: Class B shares convert to same as Class B shares
Class A shares 8 years after purchase)**
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* For purchases of $1 million or more, you will be charged a CDSC of 1% if
you sell shares within one year of purchase.
** The conversion of Class B shares to Class A shares will not occur at any
time the Portfolios are advised that such conversion may constitute a
taxable event for Federal tax purposes. If Class B shares are not converted
to Class A shares, they will continue to be subject to higher expenses than
Class A shares for an indefinite period of time.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling shares
of one class of shares than for selling another class. The purpose of both the
CDSC and the asset-based sales charge is to compensate Bear Stearns and the
brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds-[Name of
Portfolio]" or "Bear Stearns Investment Trust--Emerging Markets Debt Portfolio"
if purchased directly from the Portfolio, and should be directed to the Transfer
Agent: PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio] or Bear
Stearns Investment Trust--Emerging Markets Debt Portfolio, P.O. Box 8960,
Wilmington, Delaware 19899-8960. Direct overnight deliveries to PFPC, Inc., 400
Bellevue Parkway, Suite 108, Wilmington, Delaware 19809. Payment by check or
Federal Reserve draft must be received within three business days of receipt of
the purchase order by Bear Stearns or an Authorized Dealer. Shareholders may not
purchase shares of the Portfolio with a check issued by a third party and
endorsed over to the Portfolio. Orders placed directly with the Transfer Agent
must be accompanied by payment. Bear Stearns (or an investor's Authorized
Dealer) is responsible for forwarding payment promptly to the Funds. The Funds
will charge $7.50 for each wire redemption. The payment proceeds of a redemption
of shares recently purchased by check may be delayed as described under "How to
Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares through
the Transfer Agent. To make an initial investment in a Portfolio, an investor
must establish an account with the Portfolio by furnishing necessary information
to the Funds. An account with a Portfolio may be established by completing and
signing the Account Information Form indicating which class of shares is being
37
<PAGE>
purchased, a copy of which is attached to this Prospectus, and mailing it,
together with a check to cover the purchase, to PFPC Inc., Attention: The Bear
Stearns Funds-[Name of Portfolio] or Bear Stearns Investment Trust--Emerging
Markets Debt Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to The Bear
Stearns Funds or Bear Stearns Investment Trust and directed to the address set
forth in the preceding paragraph. The Portfolio account number should appear on
the check.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the relevant Portfolio
calculates its net asset value are priced according to the net asset value
determined on that date. Purchase orders received after the close of trading on
the New York Stock Exchange are priced as of the time the net asset value is
next determined.
Net Asset Value
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. Each Portfolio's investments are valued based on
market value or, where market quotations are not readily available, based on
fair value as determined in good faith by, or in accordance with procedures
established by, the Funds' Board of Trustees. For further information regarding
the methods employed in valuing each Portfolio's investments, see "Determination
of Net Asset Value" in the Bear Stearns Funds' Statement of Additional
Information and "Net Asset Value" in Bear Stearns Investment Trust's Statement
of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Funds could subject the investor to backup withholding and a $50 penalty imposed
by the Internal Revenue Service.
CLASS A SHARES
The sales charge may vary depending on the dollar amount invested in each
Portfolio. The public offering price for Class A shares of each Portfolio is the
net asset value per share of that class plus a sales load, which is imposed in
accordance with the following schedule:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 4.50% 4.71% 4.25%
At least $50,000 but less
than $100,000............... 4.25 4.44 4.00
At least $100,000 but less
than $250,000............... 3.25 3.36 3.00
At least $250,000 but less
than $500,000............... 2.50 2.56 2.25
At least $500,000 but less
than $1,000,000............. 2.00 2.04 1.75
At least $1,000,000 and
above....................... 0.00* 0.00 1.25
</TABLE>
- ------
* There is no initial sales charge on purchases of $1,000,000 or more of
Class A shares. However, if an investor purchases Class A shares without an
initial sales charge as part of an investment of at least $1,000,000 and
redeems those shares within one year after purchase, a CDSC of 1.00% will
be imposed at the time of redemption. Letter of Intent and Right of
Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the same
for all dealers. From time to time, Bear Stearns may make or allow additional
payments or promotional incentives to dealers that sell Class A shares. In some
instances, these incentives may be offered only to certain dealers who have sold
or may sell significant amounts of Class A shares. Dealers may receive a larger
percentage of the sales load from Bear Stearns than they receive for selling
most other funds.
Class A shares may be sold at net asset value to (a) Bear Stearns, its
affiliates or their respective officers, directors or employees (including
retired employees), any partnership of which Bear Stearns is a general partner,
any Trustee or officer of the Funds and designated family members of any of the
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<PAGE>
above individuals; (b) qualified retirement plans of Bear Stearns; (c) any
employee or registered representative of any Authorized Dealer or their
respective spouses and minor children; (d) trustees or directors of investment
companies for which Bear Stearns or an affiliate acts as sponsor; (e) any state,
county or city, or any instrumentality, department, authority or agency thereof,
which is prohibited by applicable investment laws from paying a sales load or
commission in connection with the purchase of Portfolio shares; (f) any
institutional investment clients including corporate sponsored pension and
profit-sharing plans, other benefit plans and insurance companies; and (g) any
pension funds, state and municipal governments or funds, Taft-Hartley plans and
qualified non-profit organizations, foundations and endowments; (h) trust
institutions (including bank trust departments) investing on their own behalf or
on behalf of their clients; and (i) accounts as to which an Authorized Dealer
charges an asset management fee. To take advantage of these exemptions, a
purchaser must indicate its eligibility for an exemption to Bear Stearns along
with its Account Information Form. Such purchaser agrees to notify Bear Stearns
if, at any time of any additional purchases, it is no longer eligible for an
exemption. Bear Stearns reserves the right to request certification or
additional information from a purchaser in order to verify that such purchaser
is eligible for an exemption.
Bear Stearns reserves the right to limit the participation of its employees in
Class A shares of each Portfolio. Dividends and distributions reinvested in
Class A shares of a Portfolio will be made at the net asset value per share on
the reinvestment date.
Class A shares of each Portfolio also may be purchased at net asset value with
the proceeds from the redemption of shares of an investment company sold with a
sales charge or commission and not distributed by Bear Stearns. This includes
shares of a mutual fund which were subject to a contingent deferred sales charge
upon redemption. The purchase must be made within 60 days of the redemption, and
Bear Stearns must be notified by the investor in writing, or by the investor's
investment professional, at the time the purchase is made. However, if such
investor redeems those shares within one year after purchase, a CDSC of 1.00%
will be imposed at the time of redemption. Bear Stearns will offer to pay
Authorized Dealers an amount up to 1.25% of the net asset value of shares
purchased by the dealers' clients or customers in this manner.
In addition, Class A Shares of each Portfolio may be purchased at net asset
value by the following customers of a broker that operates a master account for
purchasing and redeeming, and otherwise providing shareholder services in
respect of Fund shares pursuant to agreements with the Funds or Bear Stearns:
(i) investment advisers and financial planners who place trades for their own
accounts or for the accounts of their clients and who charge a management,
consulting or other fee, (ii) clients of such investment advisers and financial
planners if such clients place trades through accounts linked to master accounts
of such investment advisers or financial planners on the books and records of
such broker, and (iii) retirement and deferred compensation plans, and trusts
used to fund such plans, including, but not limited to, plans or trusts defined
in sections 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as
amended (the "Code"), and "rabbi trusts," provided, in each case, the purchase
transaction is effected through such broker. The broker may charge a fee for
transactions in Portfolio shares.
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<PAGE>
CLASS B SHARES
The public offering price for Class B shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time of
purchase. A CDSC is imposed, however, on redemptions of Class B shares made
within six years of purchase. See "How to Redeem Shares." The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of that month. In processing redemptions of Class B shares, the Portfolios will
first redeem shares not subject to any CDSC, and then shares held longest during
the eight-year period, resulting in the shareholder paying the lowest possible
CDSC. The amount of the CDSC charged upon redemption is as follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
YEAR SINCE CDSC AS A PERCENTAGE OF DOLLAR
PURCHASE AMOUNT SUBJECT TO CDSC
- --------------------------------------------------------------------------------
<S> <C>
First............................................ 5%
Second........................................... 4%
Third............................................ 3%
Fourth........................................... 3%
Fifth............................................ 2%
Sixth............................................ 1%
Seventh.......................................... 0%
Eighth*.......................................... 0%
</TABLE>
- ------
* As discussed below, Class B shares automatically convert to Class A shares
after the eighth year following purchase.
Class B shares of a Portfolio will automatically convert into Class A shares of
the same Portfolio at the end of the calendar quarter that is eight years after
the initial purchase of the Class B shares. Class B shares acquired by exchange
from Class B shares of another portfolio will convert into Class A shares of
such Portfolio based on the date of the initial purchase. Class B shares
acquired through reinvestment of distributions will convert into Class A shares
based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolios are advised that such conversions may
constitute taxable events for federal tax purposes, which the Portfolios believe
is unlikely. If conversions do not occur as a result of possible taxability,
Class B shares would continue to be subject to higher expenses than Class A
shares for an indeterminate period.
The purpose of the conversion feature is to allow the holders of Class B shares
the ability to not bear the burden of distribution-related expenses when the
shares have been outstanding for a duration sufficient for Bear Stearns to have
obtained compensation for distribution-related expenses incurred in connection
with Class B shares.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time of
purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
RIGHT OF ACCUMULATION--CLASS A SHARES
Pursuant to the Right of Accumulation, certain investors are permitted to
purchase Class A shares of any Portfolio at the sales charge applicable to the
total of (a) the dollar amount then being purchased plus (b) the current public
offering price of all Class A shares of the Portfolios, shares of the Funds'
other portfolios and shares of certain other funds sponsored or advised by Bear
Stearns, including the Debt Portfolio of Bear Stearns Investment Trust, then
held by the investor. The following purchases of Class A shares may be
aggregated for the purposes of determining the amount of purchase and the
corresponding sales load: (a) individual purchases on behalf of a single
purchaser, the purchaser's spouse and their children under the age of 21 years
including shares purchased in connection with a retirement account exclusively
for the benefit of such individual(s), such as an IRA, and purchases made by a
company controlled by such individual(s); (b) individual purchases by a trustee
or other fiduciary account, including an employee benefit plan (such as
employer-sponsored pension, profit-sharing and stock bonus plans, including
plans under section 401(k) of the Code, and medical, life and disability
insurance trusts); or (c) individual purchases by a trustee or other fiduciary
purchasing shares concurrently for two or more employee benefit plans of a
single employer or of employers
40
<PAGE>
affiliated with each other. Subsequent purchases made under the conditions set
forth above will be subject to the minimum subsequent investment of $50 and will
be entitled to the Right of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load
applicable to the total number of Class A shares of each Portfolio, Class A
shares of the Fund's other portfolios and shares of certain other funds
sponsored or advised by Bear Stearns, including The Bear Stearns Funds or the
Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, as applicable,
purchased in a 13-month period pursuant to the terms and under the conditions
set forth herein. A minimum initial purchase of $1,000 is required. The Transfer
Agent will hold in escrow 5% of the amount indicated in the Account Information
Form for payment of a higher sales load if the investor does not purchase the
full amount indicated in the Account Information Form. The escrow will be
released when the investor fulfills the terms of the Letter of Intent by
purchasing the specified amount. If an investor's purchases qualify for a
further sales load reduction, the sales load will be adjusted to reflect the
total purchase at the end of 13 months. If total purchases are less than the
amount specified, the investor will be requested to remit an amount equal to the
difference between the sales load actually paid and the sales load applicable to
the aggregate purchases actually made. If such remittance is not received within
20 business days, the Transfer Agent, as attorney-in-fact, will redeem an
appropriate number of shares held in escrow to realize the difference. Checking
a box in the Letter of Intent section of the Account Information Form does not
bind an investor to purchase, or a Portfolio to sell, the full amount indicated
at the sales load in effect at the time of signing, but the investor must
complete the intended purchase to obtain the reduced sales load. At the time an
investor purchases shares of any of the above-listed funds, the investor must
indicate its intention to do so under the Letter of Intent section of the
Account Information Form.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan permits investors to purchase shares of a
Portfolio (minimum initial investment of $250 and minimum subsequent investments
of $50 per transaction) at regular intervals selected by the investor. Provided
the investor's bank or other financial institution allows automatic withdrawals,
Portfolio shares may be purchased by transferring funds from the account
designated by the investor. At the investor's option, the account designated
will be debited in the specified amount, and Portfolio shares will be purchased
once a month, on or about the twentieth day. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be so designated. Investors desiring to participate in the Systematic Investment
Plan should call the Transfer Agent at 1-800-447- 1139 to obtain the appropriate
forms. The Systematic Investment Plan does not assure a profit and does not
protect against loss in declining markets. Since the Systematic Investment Plan
involves the continuous investment in a Portfolio regardless of fluctuating
price levels of the Portfolio's shares, investors should consider their
financial ability to continue to purchase through periods of low price levels.
The Fund may modify or terminate the Systematic Investment Plan at any time or
charge a service fee. No such fee currently is contemplated.
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a class of a Portfolio, shares of the same class of the Funds' other
portfolios or shares of certain other funds sponsored or advised by Bear
Stearns, including The Bear Stearns Funds, or the Emerging Markets Debt
Portfolio of Bear Stearns Investment Trust, as applicable, and the Money Market
Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale
in the investor's state of residence. These funds have different investment
objectives which may be of interest to investors. To use this privilege,
investors should consult their account executive at Bear Stearns, their account
executive at an Authorized Dealer or the Transfer Agent to determine if it is
available and whether any conditions are imposed on its use.
To use this privilege, exchange instructions must be given to the Transfer Agent
in writing or by telephone. A shareholder wishing to make an exchange may do so
by sending a written request to the Transfer Agent at the address given above in
"How to Buy Shares-General." Shareholders are
41
<PAGE>
automatically provided with telephone exchange privileges when opening an
account, unless they indicate on the account application that they do not wish
to use this privilege. Shareholders holding share certificates are not eligible
to exchange shares of a Portfolio by phone because share certificates must
accompany all exchange requests. To add this feature to an existing account that
previously did not provide for this option, a Telephone Exchange Authorization
Form must be filed with the Transfer Agent. This form is available from the
Transfer Agent. Once this election has been made, the shareholder may contact
the Transfer Agent by telephone at 1-800-447-1139 to request the exchange.
During periods of substantial economic or market change, telephone exchanges may
be difficult to complete and shareholders may have to submit exchange requests
to the Transfer Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for losses
or expenses arising out of telephone instructions reasonably believed to be
genuine.
If the exchanging shareholder does not currently own shares of the portfolio or
fund whose shares are being acquired, a new account will be established with the
same registration, dividend and capital gain options and Authorized Dealer of
record as the account from which shares are exchanged, unless otherwise
specified in writing by the shareholder with all signatures guaranteed by an
eligible guarantor institution as described below. To participate in the
Systematic Investment Plan or establish automatic withdrawal for the new
account, however, an exchanging shareholder must file a specific written
request. The Exchange Privilege may be modified or terminated at any time, or
from time to time, by the Funds on 60 business days' notice to the affected
portfolio or fund shareholders. The Funds, BSAM and Bear Stearns will not be
liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Funds will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number, recent transactions in the
account, and the account holder's Social Security number, address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the shares
being exchanged must have a value of at least the minimum initial investment
required for the portfolio or fund into which the exchange is being made; if
making an exchange to an existing account, the dollar value must equal or exceed
the applicable minimum for subsequent investments. If any amount remains in the
investment portfolio from which the exchange is being made, such amount must not
be below the minimum account value required by the portfolio or fund.
Shares will be exchanged at the next determined net asset value. No CDSC will be
imposed on Class B or C shares at the time of an exchange. The CDSC applicable
on redemption of Class B or C shares will be calculated from the date of the
initial purchase of the Class B or C shares exchanged. If an investor is
exchanging Class A shares into a portfolio or fund that charges a sales load,
the investor may qualify for share prices which do not include the sales load or
which reflect a reduced sales load, if the shares of the portfolio or fund from
which the investor is exchanging were: (a) purchased with a sales load; (b)
acquired by a previous exchange from shares purchased with a sales load; or (c)
acquired through reinvestment of dividends or distributions paid with respect to
the foregoing categories of shares. To qualify, at the time of the exchange the
investor must notify Bear Stearns, the Authorized Dealer or the Transfer Agent.
Any such qualification is subject to confirmation of the investor's holdings
through a check of appropriate records. No fees currently are charged
shareholders directly in connection with exchanges, although the Funds reserve
the right, upon not less than 60 business days' written notice, to charge
shareholders a $5.00 fee in accordance with rules promulgated by the Securities
and Exchange Commission. The Funds reserve the right to reject any exchange
request in whole or in part. The Exchange Privilege may be modified or
terminated at any time upon notice to shareholders.
The exchange of shares of one portfolio or fund for shares of another is treated
for federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may recognize a taxable
gain or loss.
42
<PAGE>
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest automatically
dividends and/or capital gain distributions, if any, paid by a Portfolio in
shares of the same class of another portfolio of the Funds or a fund advised or
sponsored by Bear Stearns of which the shareholder is an investor, or the Money
Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund
will be purchased at the current net asset value. If an investor is investing in
a class that charges a CDSC, the shares purchased will be subject upon
redemption to the CDSC, if applicable, to the purchased shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Funds may
modify or terminate this privilege at any time or charge a service fee. No such
fee currently is contemplated.
How to Redeem Shares
GENERAL
The redemption price will be based on the net asset value next computed after
receipt of a redemption request; in certain instances a CDSC will be charged.
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one class, any
request for redemption must specify the class of shares being redeemed. If the
investor fails to specify the class of shares to be redeemed or if the investor
owns fewer shares of the class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
from the investor, the investor's Bear Stearns account executive or the
investor's Authorized Dealer. The Funds impose no charges (other than any
applicable CDSC) when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within three
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if an investor has purchased Portfolio shares by check and subsequently
submits a redemption request by mail, the redemption proceeds will not be
transmitted until the check used for investment has cleared, which may take up
to 15 business days. The Funds will reject requests to redeem shares by
telephone or wire for a period of 15 business days after receipt by the Transfer
Agent of the purchase check against which such redemption is requested. This
procedure does not apply to shares purchased by wire payment.
The Funds reserve the right to redeem investor accounts at its option upon not
less than 60 business days written notice if the account's net asset value is
$750 or less, for reasons other than market conditions, and remains so during
the notice period. Shareholders who have redeemed Class A shares may reinstate
their Portfolio account without a sales charge up to the dollar amount redeemed
by purchasing Class A shares of the same Portfolio or of any other Bear Stearns
Funds within 60 business days of the redemption. Shareholders should obtain and
read the applicable prospectuses of such other funds and consider their
objectives, policies and applicable fees before investing in any of such funds.
To take advantage of this reinstatement privilege, shareholders must notify
their Bear Stearns account executive, Authorized Dealer or the Transfer Agent at
the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE-CLASS A SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class A
shares within one year of the date of purchase by any investor that purchased
Class A shares as part of an investment of at least $1,000,000. A CDSC of 1% is
also imposed on any redemption of Class A shares within one year of the date of
purchase by any investor that purchased the shares with the proceeds from the
redemption of shares of an investment company sold with a sales charge or
commission and not distributed by Bear Stearns. No CDSC will be imposed to the
extent that the net asset value of the Class A shares redeemed does not exceed
(i) the current net asset value of Class A shares acquired through reinvestment
of dividends or capital gain distributions, plus (ii) increases in the net asset
value of an investor's Class A shares above the dollar amount of all such
investor's payments for the purchase of Class A shares held by the investor at
the time of redemption. See the Statement of Additional Information for more
information.
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<PAGE>
CONTINGENT DEFERRED SALES CHARGE-CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of Class
B shares within six years of the date of purchase. No CDSC will be imposed to
the extent that the net asset value of the Class B shares redeemed does not
exceed (i) the current net asset value of Class B shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases in
the net asset value of an investor's Class B shares above the dollar amount of
all such investor's payments for the purchase of Class B shares held by the
investor at the time of redemption.
If the aggregate value of Class B shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class B shares above the
total amount of payments for the purchase of Class B shares made during the
preceding year; then of amounts representing shares purchased more than one year
prior to the redemption; and, finally, of amounts representing the cost of
shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of a Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5 additional
shares through dividend reinvestment. During the first year after the purchase
the investor decided to redeem $500 of his or her investment. Assuming at the
time of the redemption the net asset value had appreciated to $12 per share, the
value of the investor's shares would be $1,260 (105 shares at $12 per share).
The CDSC would not be applied to the value of the reinvested dividend shares and
the amount which represents appreciation ($260). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged at a rate of 5% for a
total CDSC of $12.00.
CONTINGENT DEFERRED SALES CHARGE-CLASS C SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through reinvestment
of dividends or capital gain distributions, plus (ii) increases in the net asset
value of an investor's Class C shares above the dollar amount of all such
investor's payments for the purchase of Class C shares held by the investor at
the time of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above the
total amount of payments for the purchase of Class C shares made during the
preceding year; then of amounts representing shares purchased more than one year
prior to the redemption; and, finally, of amounts representing the cost of
shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of a Portfolio at $10 per
share for a cost of $1,000. Subsequently, the shareholder acquired 5 additional
shares through dividend reinvestment. During the first year after the purchase
the investor decided to redeem $500 of his or her investment. Assuming at the
time of the redemption the net asset value had appreciated to $12 per share, the
value of the investor's shares would be $1,260 (105 shares at $12 per share).
The CDSC would not be applied to the value of the reinvested dividend shares and
the amount which represents appreciation ($260). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged at a rate of 1% for a
total CDSC of $2.40.
WAIVER OF CDSC-CLASS A, B AND C SHARES
The CDSC applicable to Class A, B and C shares will be waived in connection with
(a) redemptions made within one year after the death or disability, as defined
in section 72(m)(7) of the Code, of the shareholder, (b) redemptions by
employees participating in eligible benefit plans, (c) redemptions as
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a result of a combination of any investment company with a Portfolio by merger,
acquisition of assets or otherwise, (d) a distribution following retirement
under a tax-deferred retirement plan or upon attaining age 70 1/2 in the case of
an IRA or Keogh plan or custodial account pursuant to section 403(b) of the
Code, and (e) to the extent that shares redeemed have been withdrawn from the
Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the automatic
withdrawal is established. If the Funds' Trustees determine to discontinue the
waiver of the CDSC, the disclosure in the Portfolios' prospectus will be revised
appropriately. Any Portfolio shares subject to a CDSC which were purchased prior
to the termination of such waiver will have the CDSC waived as provided in the
Portfolio's prospectus at the time of the purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor must
notify the Transfer Agent or the investor's Bear Stearns account executive or
the investor's Authorized Dealer must notify Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their account
executives or Authorized Dealers in person or by telephone, mail or wire. As the
Funds' agent, Bear Stearns or Authorized Dealers may honor a redemption request
by repurchasing Fund shares from a redeeming shareholder at the shares' net
asset value next computed after receipt of the request by Bear Stearns or the
Authorized Dealer. Under normal circumstances, within three days, redemption
proceeds will be paid by check or credited to the shareholder's brokerage
account at the election of the shareholder. Bear Stearns account executives or
Authorized Dealers are responsible for promptly forwarding redemption requests
to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably believed
by the Transfer Agent to be genuine. The Funds will require the Transfer Agent
to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Funds may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Funds nor the
Transfer Agent will be liable for following telephone instructions reasonably
believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares through the Transfer Agent. Mail
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds-[Name of Portfolio] or Bear Stearns Investment
Trust--Emerging Markets Debt Portfolio, P.O. Box 8960, Wilmington, Delaware
19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
If share certificates have been issued, written redemption instructions,
indicating the Portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. A signature guarantee is designed to protect the shareholders and
the Portfolio against fraudulent transactions by unauthorized persons. A
signature guarantee may be obtained from a domestic bank or trust company,
recognized broker, dealer, clearing agency or savings association who are
participants in a medallion program by the Securities Transfer Association. The
three recognized medallion programs are Securities Transfer Agent Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock
Exchange, Inc. Medallion Signature Program (MSP). Signature guarantees which are
not a part of these programs will not be accepted. Please note that a notary
public stamp or seal is not acceptable.
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The Fund reserves the right to amend or discontinue its signature guarantee
policy at any time and, with regard to a particular redemption transaction, to
require a signature guarantee at its discretion. Any questions with respect to
signature guarantees should be directed to the Transfer Agent by calling 1-
800-447-1139.
During times of drastic economic or market conditions, investors may experience
difficulty in contacting Bear Stearns or Authorized Dealers by telephone to
request a redemption of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the redemption request being processed
at a later time than it would have been if telephone redemption had been used.
During the delay, each Portfolio's net asset value may fluctuate.
AUTOMATIC WITHDRAWAL
Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for Automatic Withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Funds or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through
Automatic Withdrawal. Purchases of additional shares concurrent with withdrawals
generally are undesirable.
Dividends and Distributions
INCOME PORTFOLIO AND HIGH YIELD PORTFOLIO
All expenses are accrued daily and deducted before declaration of dividends to
investors. Dividends paid by each class of a Portfolio will be calculated at the
same time and in the same manner and will be of the same amount, except that the
expenses attributable solely to a particular class will be borne exclusively by
such class. Class B and C shares will receive lower per share dividends than
Class A shares because of the higher expenses borne by Class B and C shares. See
"Fee Table."
Dividends will be automatically reinvested in additional shares of each
Portfolio at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution Option.
Each Portfolio ordinarily pays dividends from its net investment income monthly
and distributes net realized securities gains, if any, once a year, but it may
make distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the 1940 Act. Neither Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired.
DEBT PORTFOLIO
The Portfolio declares and pays as dividends quarterly to shareholders
substantially all of its net investment income (i.e., its income, including both
original issue discount and market discount accretions, other than its net
realized long and short-term capital gains and net realized foreign exchange
gains). Substantially all of the Portfolio's net realized capital gains (net
realized long-term capital gains in excess of net realized short- term capital
losses, including any capital loss carryovers), net realized short-term capital
gains and net realized foreign exchange gains, if any, are expected to be
distributed each year by the Portfolio.
Each dividend and distribution, if any, declared by the Portfolio on its
outstanding shares will, at the election of each shareholder, be paid in cash or
in additional shares of the Portfolio or redirected into another fund pursuant
to the Redirected Distribution Option. This election should initially be made on
a Shareholder's Account Information Form and may be changed upon written notice
to either Bear Stearns, an Authorized Dealer or the Transfer Agent at any time
prior to the record date for a particular dividend or distribution. If no
election is made, all dividends and distributions will be reinvested in the
Portfolio. The Portfolio distributes net realized securities gains, if any, once
a year, but it may make distributions on a more frequent basis to comply with
the distribution requirements of the Code, in all events in a manner consistent
with the provisions of the Investment Company Act. The Portfolio will not make
distributions from net realized securities gains unless capital loss carryovers,
if any, have been utilized or have expired. Dividends are automatically
reinvested in additional shares of the Portfolio at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
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All income dividends and capital gains distributions are automatically paid in
full and fractional shares of the Portfolio, unless the shareholder requests
that they be paid in cash. Each purchase of shares of the Portfolio is made upon
the condition that the Transfer Agent is thereby automatically appointed as
agent of the investor to receive all dividends and capital gains distributions
on shares owned by the investor. Such dividends and distributions will be paid,
at the net asset value per share, in shares of the Portfolio (or in cash if the
shareholder so requests) as of the close of business on the record date. At any
time an investor may request the Transfer Agent, in writing, to have subsequent
dividends and/or capital gains distributions paid to him or her in cash rather
than shares. In order to provide sufficient time to process the change, such
request should be received by the Transfer Agent at least five (5) business days
prior to the record date of the dividend or distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to Bear Stearns or the
Authorized Dealer which will be forwarded to the shareholder, upon the receipt
of proper instructions.
At the time of an investor's purchase of shares of the Portfolio, a portion of
the price per share may be represented by undistributed income of the Portfolio
or unrealized appreciation of the Portfolio's securities. Therefore, subsequent
distributions (or portions thereof) attributable to such items, may be taxable
to the investor even if the distributions (or portions thereof) in reality
represent a return of a portion of the purchase price.
Taxes
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid by
a Portfolio will be taxable to U.S. shareholders as ordinary income, whether
received in cash or reinvested in additional shares of such Portfolio or
redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of a Portfolio will be taxable to U.S. shareholders
as long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio shares and whether such
distributions are received in cash or reinvested in, or redirected into, other
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28% and certain
capital gains of individuals may be subject to a lower tax rate. Dividends and
distributions may be subject to state and local taxes.
Each Portfolio may enter into short sales "against the box." See "Description of
the Portfolio-Investment Instruments and Strategies." Any gains realized by a
Portfolio on such sales will be recognized at the time the Portfolio enters into
the short sales.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of market discount bonds, paid by a Portfolio to a foreign investor
generally are subject to U.S. nonresident withholding taxes at the rate of 30%,
unless the foreign investor claims the benefit of a lower rate specified in a
tax treaty. Distributions from net realized long-term securities gains paid by a
Portfolio to a foreign investor as well as the proceeds of any redemptions from
a foreign investor's account, regardless of the extent to which gain or loss may
be realized, generally will not be subject to U.S. nonresident withholding tax.
However, such distributions may be subject to backup withholding, as described
below, unless the foreign investor certifies his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of their
accounts which will include information as to dividends and distributions from
securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for shares
of another fund or portfolio advised or sponsored by BSAM or its affiliates
within 91 days of purchase and such other fund reduces or eliminates its
otherwise applicable sales load for the purpose of the exchange. In this case,
the amount of the sales load charged the investor for such shares, up to the
amount of the reduction of the sales load charge on the exchange, is not
included in the basis of such shares for purposes of computing gain or loss on
the exchange, and instead is added to the basis of the fund shares received on
the exchange.
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Federal regulations generally require the Portfolios to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on a
federal income tax return. Furthermore, the IRS may notify the Portfolios to
institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a federal income tax return.
A TIN is either the Social Security number or employer identification number of
the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's federal income
tax return.
While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state or local taxes in respect of their
investment in Portfolio shares.
Management of the Portfolios intends to have each Portfolio qualify as a
"regulated investment company" under the Code and, thereafter, to continue to so
qualify if such qualification is in the best interests of its shareholders. Such
qualification relieves a Portfolio of any liability for federal income tax to
the extent its earnings are distributed in accordance with applicable provisions
of the Code. In addition, a Portfolio is subject to a non- deductible 4% excise
tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
If, for any reason, a Portfolio fails to qualify as a regulated investment
company, the Portfolio would be subject to federal income tax on its net income
at regular corporate rates (without a deduction for distributions to
shareholders). When distributed, such income would then be taxable to
shareholders as ordinary income to the extent of the Portfolio's earnings and
profits. Although management intends to have each Portfolio qualify as a
regulated investment company, there can be no assurance that it will achieve
this goal.
For a detailed discussion of certain federal, state and local tax consequences
of investing in shares of the Portfolio, see "Taxation" in the Statement of
Additional Information of Bear Stearns Investment Trust and the Bear Stearns
Funds. Shareholders are urged to consult their own tax advisors regarding
specific questions as to Federal, state and local taxes as well as to any
foreign taxes.
Performance Information
For purposes of advertising, performance for Class A, B and C shares of each
Portfolio may be calculated on the basis of average annual total return and/or
total return. These total return figures reflect changes in the price of the
shares and assume that any income dividends and/or capital gains distributions
made by a Portfolio during the measuring period were reinvested in shares of the
same class. These figures also take into account any applicable distribution and
shareholder servicing fees. As a result, at any given time, the performance of
Class B and C shares should be expected to be lower than that of Class A shares.
Performance for each class will be calculated separately.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in each Portfolio was purchased with an initial
payment of $1,000 and that the investment was redeemed at the end of a stated
period of time, after giving effect to the reinvestment of dividends and
distributions, if any, during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result in
the redeemable value of the investment at the end of the period. Advertisements
of the Portfolio's performance will include the Portfolio's average annual total
return for one, five and ten year periods, or for shorter periods depending upon
the length of time during which the Portfolio has operated. Computations of
average annual total return for periods of less than one year represent an
annualization of each Portfolio's actual total return for the applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions, if any. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value (or maximum
public offering price in the case of Class A shares) per share at the beginning
of the period. Class B total return will reflect the deduction of the CDSC.
Advertisements may include
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the percentage rate of total return or may include the value of a hypothetical
investment at the end of the period which assumes the application of the
percentage rate of total return. Total return for each Portfolio also may be
calculated by using the net asset value per share at the beginning of the period
instead of the maximum offering price per share at the beginning of the period
for Class A shares or without giving effect to any applicable CDSC at the end of
the period for Class B or C.
Calculations based on the net asset value per share do not reflect the deduction
of the sales load on each Portfolio's Class A shares, which, if reflected, would
reduce the performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance is
a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance
information, such as that described above, may not provide a basis for
comparison with other investments or other investment companies using a
different method of calculating performance.
Comparative performance information may be used from time to time in advertising
or marketing the High Yield Total Return Portfolio's shares, including data from
Lipper Analytical Services, Inc., Lehman Brothers High Yield Bond Index, Credit
Suisse First Boston High Yield Bond Index and other industry sources.
Performance information that may be used in advertising or marketing the Income
Portfolio's shares may include data from Lipper Analytical Services, Inc.,
Morningstar, Inc., Bond Buyer's 20-Bond Index, Moody's Bond Survey Bond Index,
Lehman Brothers Aggregate Bond Index, Salomon Brothers Broad Investment-Grade
Index and components thereof, Mutual Fund Values, Mutual Fund Forecaster, Mutual
Fund Investing and other industry publications. Comparative performance
information may be used from time to time in advertising or marketing the
Emerging Markets Debt Portfolio's shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Moody's Bond Survey Index and components
thereof, Mutual Fund Values, Mutual Fund Forecaster, Mutual Fund Investing and
other industry publications.
DEBT PORTFOLIO
Quotations of distribution rates are calculated by analyzing the most recent
distribution of net investment income for a monthly, quarterly or other relevant
period and dividing this amount by the average net asset value during the period
for which the distribution rates are being calculated.
The Debt Portfolio may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
the Portfolio may from time to time advertise its performance relative to
certain performance rankings and indices.
The investment results of the Debt Portfolio will fluctuate over time, and any
presentation of investment results for any prior period should not be considered
a representation of what an investment in the Debt Portfolio may earn or what
the Debt Portfolio's performance may be in any future period.
In addition to information provided in shareholder reports, the Debt Portfolio
may from time to time, in its discretion, make a list of the Debt Portfolio's
holdings available to investors upon request. A discussion of the Debt
Portfolio's performance will be included in the Portfolio's annual report to
shareholders which will be made available to shareholders upon request and
without charge.
General Information
The Bear Stearns Funds was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
(the "Trust Agreement") dated September 29, 1994, and commenced operations on or
about April 3, 1995.
The Bear Stearns Investment Trust was organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992, as a Massachusetts business
trust pursuant to a Trust Agreement and commenced investment operations on May
3, 1993.
The Funds are authorized to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Each Portfolio's shares are classified
into four classes--Class A, B, C and Y. Each share has one vote and shareholders
will vote in the aggregate and not by class, except as otherwise required by
law.
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Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Funds or a Trustee. The Trust Agreement provides for
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Portfolios" in the Portfolios' Statement of
Additional Information, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of 10 portfolios of
shares. All consideration received by the Funds for shares of one of the
portfolios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Funds) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Funds
have the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Funds, will not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
portfolio affected by such matter. Rule 18f-2 further provides that a portfolio
shall not be deemed to be affected by a matter unless it is clear that the
interests of such portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, Rule 18f-2 exempts the
selection of independent accountants and the election of Trustees from the
separate voting requirements of Rule 18f-2.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account. Shareholder inquiries may be made by
writing to the Funds at PFPC Inc., Attention: The Bear Stearns Funds, P.O. Box
8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling
Bear Stearns at 1-800-766-4111.
ADDITIONAL INFORMATION
The term "majority of the outstanding shares" of each Portfolio means the vote
of the lesser of (i) 67% or more of the shares of the Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
As used in this Prospectus, the term "Business Day" refers to those days when
the NYSE is open for business. Currently, the NYSE is closed on New Year's Day,
President's Day, Good Friday, Martin Luther King Day, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in each
Portfolio's official sales literature in connection with the offer of a
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any state in which,
or to any person to whom, such offering may not lawfully be made.
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Appendix A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of each Fund's Portfolios may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or
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changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
A-2
<PAGE>
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
----------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Funds, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Funds. Neither event
will require a sale of such security by the Funds. However, BSAM will consider
such event in its determination of whether the Funds should continue to hold the
security. To the extent that the ratings given by Moody's, S&P or D&P may change
as a result of changes in such organizations or their rating systems, the Funds
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-3
<PAGE>
Appendix B
MONEY MARKET INSTRUMENTS
Each Portfolio may invest, for temporary defensive purposes, in the following
types of money market instruments, each of which of purchase must have or be
deemed to have under rules of the Securities and Exchange Commission remaining
maturities of 13 months or less.
U.S. TREASURY SECURITIES
U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury
Bonds that differ in their interest rates, maturities and times of issuance.
Treasury Bills have initial maturities of one year or less; Treasury Notes have
initial maturities of one to ten years; and Treasury Bonds generally have
initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES
In addition to U.S. Treasury securities, U.S. Government securities include
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
BANK OBLIGATIONS
Each Portfolio may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Portfolio may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. No Portfolio will invest more than 15% of
the value of its net assets in time deposits maturing in more than seven days
and in other securities that are illiquid.
Banker's acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
B-1
<PAGE>
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS (ALL PORTFOLIOS)
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by each
Portfolio will consist only of direct obligations which, at the time of their
purchase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1 by
Fitch or Duff-1 by Duff, (b) issued by companies having an outstanding unsecured
debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or
Duff, or (c) if unrated, determined by BSAM to be of comparable quality to those
rated obligations which may be purchased by a Portfolio. Each Portfolio may
purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time or at specified
intervals.
B-2
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Custodian
Emerging Markets Debt Portfolio
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Counsel Emerging Markets Debt Porfolio
Mayer Brown & Platt
1675 Broadway
New York, NY 10019
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN
THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOS' SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-016-01
<PAGE>
Rule 497(c)
Registration No. 33-84842
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds and
Bear Stearns Investment Trust
CLASS Y SHARES
The Bear Stearns Funds and Bear Stearns Investment Trust are separate open-end
management investment companies, known as mutual funds (together the "Funds").
By this Prospectus, the Funds offer Class Y shares of one non-diversified
portfolio, the Emerging Markets Debt Portfolio (the "Debt Portfolio") and two
diversified portfolios, the Income Portfolio (formerly, the Total Return Bond
Portfolio) and the High Yield Total Return Portfolio (the "High Yield
Portfolio"), (each a "Portfolio" and together the "Portfolios").
Class Y shares are sold at net asset value without a sales charge to investors
whose minimum investment is $2.5 million. Each Portfolio also issues three other
classes of shares (Class A, B and C shares), which have different expenses that
would affect performance. Investors desiring to obtain information about these
other classes of shares should call 1-800-766-4111.
INCOME PORTFOLIO
Seeks high current income consistent with preservation of capital.
HIGH YIELD TOTAL RETURN PORTFOLIO
Seeks total return through high current income and capital appreciation.
EMERGING MARKETS DEBT PORTFOLIO
Seeks high current income by primarily investing in
debt obligations of issuers located in emerging countries and seeks to provide
capital appreciation.
BEAR STEARNS ASSET MANAGEMENT INC. ("BSAM" or the "Adviser"), a wholly-owned
subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's
investment adviser. Bear Stearns Funds Management Inc. ("BSFM"), a wholly- owned
subsidiary of The Bear Stearns Companies Inc., is the Administrator of each
Portfolio. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSAM,
serves as each Portfolio's distributor. Bear Stearns is also referred to herein
as the "Distributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT EACH PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Part B (also known as the Statement of Additional Information), dated October
16, 1998, which may be revised from time to time, provides a further discussion
of certain areas in this Prospectus and other matters which may be of interest
to some investors. It has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. For a free copy, write to the address
or call one of the telephone numbers listed under "General Information" in this
prospectus. Additional information, including this Prospectus and the Statement
of Additional Information, may be obtained by accessing the Internet Web site
maintained by the Securities and Exchange Commission (http://www.sec.gov).
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank; are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency; and are subject to
investment risks, including possible loss of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
October 16, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 5
Description of the Portfolios.............................................. 6
Investment Objectives and Policies......................................... 6
Investment Techniques...................................................... 10
Risk Factors............................................................... 21
Management of the Portfolios............................................... 30
How to Buy Shares.......................................................... 32
Net Asset Value............................................................ 33
Shareholder Services....................................................... 33
How to Redeem Shares....................................................... 34
Dividends and Distributions................................................ 36
Taxes...................................................................... 37
Performance Information.................................................... 38
General Information........................................................ 39
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
INCOME HIGH YIELD TOTAL RETURN EMERGING MARKETS DEBT
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS Y CLASS Y CLASS Y
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed On Purchases
(as a Percentage of
offering price)........ None None None
Maximum Deferred Sales
charge Imposed on
Redemptions (as a
percentage of the
amount subject to
charge)................ None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
Advisory Fees (after
fee waiver)............ 0.00%(1) 0.00%(2) 0.28%(3)
12b-1 Fees............. 0.00% 0.00% 0.00%
Other Expenses (after
expense reimbursement). 0.45%(1) 0.65%(2) 1.12%(3)
---- ---- ----
Total Portfolio
Operating Expenses
(after fee waiver and
expense reimbursement). 0.45%(1) 0.65%(2) 1.40%(3)
==== ==== ====
</TABLE>
- ------
See Notes on page 4.
EXAMPLE:
You would pay the following expenses on a hypothetical $1,000 investment,
assuming 5% annual return.
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
1 YEAR 3 YEARS
WITH WITHOUT WITH WITHOUT
FUND REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class Y Shares............... $ 5 $ 5 $ 14 $ 14
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class Y Shares............... 7 7 20 20
EMERGING MARKETS DEBT
PORTFOLIO
Class Y Shares............... 14 14 44 44
- ------------------------------------------------------------------------------
<CAPTION>
5 YEARS 10 YEARS
WITH WITHOUT WITH WITHOUT
REDEMPTIONS REDEMPTIONS REDEMPTIONS REDEMPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME PORTFOLIO
Class Y Shares............... $25 $25 $ 57 $ 57
HIGH YIELD TOTAL RETURN
PORTFOLIO
Class Y Shares............... 35 35 77 77
EMERGING MARKETS DEBT
PORTFOLIO
Class Y Shares............... 76 76 166 166
</TABLE>
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the Portfolios and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For
a description of the expense reimbursement or waiver arrangements in effect, see
"Management of The Portfolios."
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH
PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
3
<PAGE>
(1) With respect to the Income Portfolio, BSAM has undertaken to waive its
investment advisory fee and assume certain expenses of the Income Portfolio
other than brokerage commissions, extraordinary items, interest and taxes
to the extent Total Portfolio Operating Expenses exceed 0.45% for Class Y
shares. Without such fee waiver and expense reimbursement, Advisory Fees
stated above would have been 0.45%, Other Expenses would have been 1.78%
and Total Portfolio Operating Expenses would have been 2.23%.
(2) With respect to the High Yield Portfolio, Other Expenses are based on
estimated amounts for the current fiscal year. BSAM has undertaken to waive
its investment advisory fee and assume certain expenses of the High Yield
Portfolio other than brokerage commission, extraordinary items, interest
and taxes to the extent Total Portfolio Operating Expenses exceed 0.65% for
Class Y shares. Without such waiver and expense reimbursement, (which may
be discontinued at any time upon notice to shareholders), Advisory Fees
would have been 0.60%, Other Expenses are estimated to be 1.72%, and Total
Portfolio Operating Expenses are estimated to be 2.32%.
(3) With respect to the Debt Portfolio, Other Expenses are based on estimated
amounts for the current fiscal year. BSAM has undertaken to waive its
investment management fee and assume certain expenses of the Debt Portfolio
other than brokerage commissions, extraordinary items, interest and taxes
to the extent Total Portfolio Operating Expenses exceed 1.40% for Class Y
shares. Without such waiver and expense reimbursement, (which may be
discontinued at any time upon notice to shareholders), Management Fees
would have been 1.15%, Other Expenses are estimated to be 1.26%, and Total
Portfolio Operating Expenses are estimated to be 2.41%.
4
<PAGE>
Financial Highlights
The information in the table below covering each Portfolio's investment results
for the periods indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in the Portfolio's Annual Report for the
fiscal year ended March 31, 1998 which is incorporated by reference into each
Portfolio's Statement of Additional Information which is available upon request.
Contained below are per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class Y
shares of the Income Portfolio for the periods indicated. The High Yield
Portfolio and the Debt Portfolio have yet to commence their initial public
offerings of Class Y shares. This information has been derived from information
provided in each Portfolio's financial statements.
Further information about performance is contained in the Annual Report, which
may be obtained without charge by writing to the address or calling one of the
telephone numbers listed under "General Information."
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL FOR THE FISCAL SEPTEMBER 8, 1995
YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
-------------- -------------- --------------
CLASS Y CLASS Y CLASS Y
-------------- -------------- --------------
<S> <C> <C> <C>
INCOME PORTFOLIO(1)
PER SHARE OPERATING PERFORMANCE*
Net asset value, beginning of
period......................... $ 12.03 $ 12.26 $ 12.35
------- ------- -------
Net investment income(2)........ 0.80 0.77 0.41
Net realized and unrealized
gain/(loss) on investments(3).. 0.36 (0.20) (0.05)
------- ------- -------
Dividends and distributions to
shareholders from
Net investment income........... (0.80) (0.77) (0.41)
Net realized capital gains...... (0.02) (0.03) (0.04)
------- ------- -------
(0.82) (0.80) (0.45)
------- ------- -------
Net asset value, end of period.. $ 12.37 $ 12.03 $ 12.26
======= ======= =======
Total investment return(4)...... 9.81% 4.77% 2.92%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted)....................... $ 4,339 $13,486 $12,199
Ratio of expenses to average net
assets(2)...................... 0.45% 0.45% 0.45%(5)
Ratio of net investment income
to average net assets(2)....... 6.39% 6.34% 5.93%(5)
Increase/(Decrease) reflected in
above expense ratios and net
investment income due to
waivers and related reimbursements.. 1.78% 1.73% 2.89%(5)
Portfolio turnover rate......... 244.78% 262.95% 107.35%
</TABLE>
- -----
* Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the dates of distributions.
(1) Class Y shares commenced its initial public offering on September 8, 1995.
(2) Reflects waivers and related reimbursements.
(3) The amounts shown for a share outstanding throughout the respective periods
are not in accord with the changes in the aggregate gains and losses on
investments during the respective periods because of the timing of sales
and repurchases of Portfolio shares in relation to fluctuating net asset
values during the respective periods.
(4) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends and
distributions, If any. Total investment return is not annualized.
(5) Annualized.
5
<PAGE>
Description of the Portfolios
GENERAL
Each of The Bear Stearns Funds and Bear Stearns Investment Trust is known as a
"series fund," which is a mutual fund divided into separate portfolios. Each
portfolio is treated as a separate entity for certain purposes under the
Investment Company Act of 1940, as amended (the "1940 Act"), and for other
purposes. A shareholder of one portfolio is not deemed to be a shareholder of
any other portfolio. As described below, for certain matters the Funds
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, shares of the Debt Portfolio, the Income
Portfolio and the High Yield Portfolio are being offered. From time to time,
other portfolios may be established and sold pursuant to other offering
documents. See "General Information."
NON-DIVERSIFIED STATUS
The Debt Portfolio is a non-diversified portfolio of Bear Stearns Investment
Trust. The Portfolio's classification as a "non-diversified" investment company
means that the proportion of its assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. However, the Portfolio
intends to conduct its operations so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"), which generally requires that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Portfolio's total
assets be invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Portfolio's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets be invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies). Since a relatively high percentage of the Portfolio's assets may be
invested in the securities of a limited number of issuers, some of which may be
within the same industry or economic sector, the Portfolio's portfolio
securities may be more susceptible to any single economic, political or
regulatory occurrence than the portfolio securities of a diversified investment
company.
Investment Objectives and Policies
The investment objectives and principal investment policies of each Portfolio
are described below. Each Portfolio's investment objective cannot be changed
without approval by the holders of a majority (as defined in the 1940 Act) of
such Portfolio's outstanding voting shares. There can be no assurance that a
Portfolio's investment objective will be achieved.
INCOME PORTFOLIO
The Income Portfolio's investment objective is to seek high current income
consistent with preservation of capital.
The Income Portfolio invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds (which it
defines as bonds, debentures and other fixed-income securities). The Portfolio
is permitted to invest in a broad range of investment grade, U.S. dollar
denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of domestic
and foreign issuers. These debt securities include bonds, debentures, notes,
money market instruments (including foreign bank obligations, such as time
deposits, certificates of deposit and bankers' acceptances, commercial paper and
other short-term corporate debt obligations, and repurchase agreements),
mortgage-related securities (including interest-only and principal-only stripped
mortgage-backed securities), asset-backed securities, municipal obligations and
convertible debt obligations. The issuers may include domestic and foreign
corporations, partnerships or trusts, and governments or their political
subdivisions, agencies or instrumentalities. Under normal market conditions, the
Portfolio seeks to provide performance results that equal or exceed the Salomon
Brothers BIG Bond Index, which is a market-capitalization weighted index that
includes U.S. Treasury, Government- sponsored, mortgage and investment grade
fixed-rate corporate fixed-income securities with a maturity of one year or
longer and a minimum of $50 million amount outstanding at the time of inclusion
in the Salomon Brothers BIG Bond Index. As of March 31, 1998, the weighted
average maturity of securities comprising the Salomon Brothers BIG Bond
6
<PAGE>
Index was approximately eight and 1/2 years and their average duration was
approximately four and 1/2 years. Under normal market conditions, the Portfolio
invests in a portfolio of securities with a dollar-weighted average maturity of
approximately seven years.
As a measure of a fixed-income security's cash flow, duration is an alternative
to the concept of "term to maturity" in assessing the price volatility
associated with changes in interest rates. Generally, the longer the duration,
the more volatility an investor should expect. For example, the market price of
a bond with a duration of five years would be expected to decline 5% if interest
rates rose 1%. Conversely, the market price of the same bond would be expected
to increase 5% if interest rates fell 1%. The market price of a bond with a
duration of 10 years would be expected to increase or decline twice as much as
the market price of a bond with a five year duration. Duration measures a
security's maturity in terms of the average time required to receive the present
value of all interest and principal payments as opposed to its term to maturity.
The maturity of a security measures only the time until final payment is due; it
does not take account of the pattern of a security's cash flows over time, which
would include how cash flow is affected by prepayments and by changes in
interest rates. Incorporating a security's yield, coupon interest payments,
final maturity and option features into one measure, duration is computed by
determining the weighted average maturity of a bond's cash flows, where the
present values of the cash flows serve as weights. In computing the duration of
the Portfolio, BSAM will estimate the duration of obligations that are subject
to prepayment or redemption by the issuer, taking into account the influence of
interest rates on prepayments, coupon flows and other factors which may affect
the maturity of the security. This method of computing duration is known as
effective duration.
BSAM anticipates actively managing the Portfolio's assets in response to changes
in the business cycle. BSAM seeks to identify and respond to phases in the
business cycle--simplistically, the expansion, topping out, recession and trough
phases--and to invest the Portfolio's assets by shifting among market sectors,
maturities and relative credit quality in a way which it believes will achieve
the Portfolio's objective in a relatively conservative manner taking into
account the volatility and risk associated with investing in a portfolio of
relatively longer-term fixed-income securities. While the Portfolio seeks, as
part of its investment objective, to preserve capital, investors should
recognize that the net asset value per share of the Portfolio should be expected
to be more volatile than the net asset value per share of a fund that invested
in portfolio securities with a shorter duration.
At least 65% of the value of the Portfolio's total assets must consist of
securities which, in the case of bonds and other debt instruments, are rated no
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB or higher by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P") or the equivalent by other rating agencies or, if unrated, deemed to be
of comparable quality by BSAM. Up to 25% of the value of the Portfolio's total
assets may consist of securities which, in the case of bonds and other debt
instruments, are rated no lower than Ba or B by Moody's, BB or B by S&P, or the
equivalent by other rating agencies or, if unrated, deemed to be of comparable
quality by BSAM. The Portfolio may invest in short-term fixed-income obligations
which are rated in the two highest rating categories by Moody's, S&P, Fitch or
Duff. See "Risk Factors--Fixed-Income Securities and High Yield Securities"
below, and "Appendix" in the Statement of Additional Information.
HIGH YIELD TOTAL RETURN PORTFOLIO ("HIGH YIELD PORTFOLIO")
The High Yield Portfolio's investment objective is total return through high
current income and capital appreciation.
The High Yield Portfolio will invest, under normal circumstances, at least 80%
of its total assets in high yield fixed-income securities (as defined below),
including domestic and foreign debt securities, convertible securities and
preferred stocks. The balance of the Portfolio's assets may be invested in any
other securities which BSAM believes are consistent with the Portfolio's
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. The Portfolio is designed for investors seeking to
diversify an all-equity portfolio with securities that offer greater income with
capital appreciation potential. The Portfolio is not a market-timing vehicle.
Securities offering the high current yield and capital appreciation potential
characteristics that the Portfolio seeks are generally found in rapidly growing
companies requiring debt to fund plant expansion plans or pay for acquisitions
and large, well-known companies with a high degree of leverage. These securities
are also generally rated in the medium to lower categories by recognized rating
services. The Portfolio expects to seek high current income by investing at
least 80% of its total
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assets in "high yield fixed-income securities," which for this purpose
constitute fixed income securities rated Ba or lower by Moody's Investors
Service (Moody's), or BB or lower by Standard & Poor's Ratings Group (Standard &
Poor's) or comparably rated by any other Nationally Recognized Statistical
Rating Organization (NRSRO), or unrated securities determined by the Adviser to
be of comparable quality. Corporate bonds rated Ba or lower by Moody's and BB or
lower by Standard & Poor's are considered speculative. The Portfolio may invest
up to 10%, and will normally hold no more than 25% (as a result of market
movements or downgrades), of its assets in bonds rated below Caa by Moody's or
CCC by Standard & Poor's, including bonds in the lowest ratings categories (C
for Moody's and D for Standard and Poor's) and unrated bonds of comparable
quality. Such securities are highly speculative and may be in default of
principal and/or interest payments. A description of corporate bond ratings is
contained in the Appendix to this Prospectus.
In selecting a security for investment by the Portfolio, BSAM will perform its
own investment analysis and will not rely principally on the ratings assigned by
the rating services, although such ratings will be considered by BSAM. BSAM will
consider, among other things, the financial history and condition, the prospects
and the management of an issuer in selecting securities for the Portfolio. BSAM
will be free to invest in high yield, high risk debt securities of any maturity
and duration, and the interest rates on such securities may be fixed or
floating.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than higher rated securities. Some of such
investments may be non-performing when purchased. See "Risk Factors."
In addition to providing the potential for high current income, high yield
securities may provide the potential for capital appreciation. The Portfolio
will seek capital appreciation by investing in securities which may be expected
by BSAM to appreciate in value as a result of declines in long-term interest
rates or favorable developments affecting the business or prospects of the
issuer, which may improve the issuer's financial condition and credit rating, or
a combination of both.
As stated above, normally at least 80% of the Portfolio's total assets will be
invested in high yield fixed-income securities, including medium- to lower-
rated high yield fixed-income securities and unrated securities of comparable
quality. The balance of the Portfolio's assets may be invested in any other
securities believed by BSAM to be consistent with the Portfolio's investment
objective, including higher-rated fixed-income securities, common stocks and
other equity securities. When prevailing economic conditions cause a narrowing
of the spreads between the yields derived from medium to lower-rated or
comparable unrated securities and those derived from higher rated issues, the
Portfolio may invest in higher-rated fixed-income securities that provide
similar yields but have less risk. Generally, the Portfolio's average weighted
maturity will range from three to twelve years.
EMERGING MARKETS DEBT PORTFOLIO ("DEBT PORTFOLIO")
The Debt Portfolio's investment objective is to provide investors with high
current income by investing primarily in Debt Obligations of issuers located in
"Emerging Countries". The Portfolio's secondary objective is to provide
investors with capital appreciation.
The Debt Portfolio considers "Debt Obligations" to include fixed or floating
rate bonds, notes, debentures, commercial paper, loans, Brady bonds, convertible
securities, and other debt securities issued or guaranteed by governments,
agencies or instrumentalities, central banks, commercial banks or private
issuers, including repurchase agreements with respect to obligations of
governments or central banks. The Portfolio considers "Emerging Countries" to
include any country that is generally considered to be an emerging or developing
country by the World Bank, the International Finance Corporation or the United
Nations and its authorities. The countries that will not be considered Emerging
Countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, United Kingdom, and United States. The Portfolio primarily invests
in a combination of (a) high-yield dollar-denominated instruments and (b) local
currency instruments in Emerging Countries where the relationship between
interest rates and anticipated foreign exchange movements relative to the U.S.
dollar is expected to result in a high dollar rate of return. Although the
Portfolio's primary investment objective is current income, the Portfolio also
intends to take advantage of opportunities to realize capital appreciation from
its investments when such opportunities arise. Investing in local currency and
dollar-denominated medium and long term debt in Emerging Countries offers the
potential for capital appreciation due to interest rate and currency exchange
fluctuations and improving credit quality. No assurance can be given that the
Debt Portfolio's investment objective will be achieved.
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The Portfolio may invest at least 80% of its total assets in Debt Obligations of
issuers in Emerging Countries. The Portfolio intends to focus its investments in
countries in Asia, Eastern Europe, Latin America and Africa. The Portfolio may
invest up to 20% of its total assets in Debt Obligations of issuers that are not
considered to be issuers in Emerging Countries.
The Portfolio may invest at least 30% of its total assets in Debt Obligations of
issuers in Latin America. The Portfolio considers "Latin America" to include the
following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama,
Paraguay, Peru, Uruguay and Venezuela.
At least 70% of the Portfolio's total assets is invested in U.S. dollar
denominated instruments. Up to 30% of the Portfolio's assets may be invested in
Debt Obligations denominated in local currencies provided that no more than 20%
of the Portfolio's assets are expected to be invested in Debt Obligations
denominated in the currency of any one country. To the extent the Portfolio
invests in non-dollar denominated securities, the Portfolio will be subject to
risks relating to fluctuations in currency exchange rates and the possible
imposition of exchange control regulations (e.g., currency blockage) or other
foreign or U.S. laws or restrictions applicable to such investments. See "Risk
Factors."
Under normal circumstances, the Portfolio invests at least 70% of its total
assets in Debt Obligations of issuers in at least three Emerging Countries. The
Debt Portfolio may not invest more than 40% of its assets in Debt Obligations of
issuers located in any one country. Investing the Portfolio's assets in
securities of issuers located in Emerging Countries will subject the Portfolio
to the risks of adverse social, political or economic events which may occur in
such foreign countries. See "Risk Factors." When BSAM believes unusual
circumstances warrant a defensive posture, the Portfolio temporarily may invest
up to all of its assets in cash (U.S. dollars) or U.S. Government securities.
The Portfolio considers an issuer to be located in an Emerging Country if (i)
the issuer derives 50% or more of its total revenues from either goods produced,
sales made or services performed in Emerging Countries, or (ii) the issuer is
organized under the laws of, and with a principal office in, an Emerging
Country.
BSAM may invest in Debt Obligations that it determines to be suitable
investments for the Portfolio notwithstanding any credit ratings that may be
assigned to such securities. At any one time substantially all of the
Portfolio's assets may be invested in Debt Obligations that are unrated or below
investment grade. The Portfolio will purchase non-performing securities and some
of these securities may be comparable to securities rated as low as D by
Standard & Poor's or C by Moody's Investors Service, Inc. ("Moody's") (the
lowest credit ratings of such agencies). A substantial portion of the
Portfolio's holdings of Debt Obligations are expected to trade at substantial
discounts from face value. The ratings of Moody's and S&P represent their
respective opinions as to the quality of the obligations they undertake to rate.
Ratings, however, are general and are not absolute standards of quality. The
ratings do not necessarily reflect the current or future composition of the
Portfolio. A description of the ratings of the various securities in which the
Portfolio may invest appears in Appendix A to this Prospectus.
Debt Obligations in which the Portfolio may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed interest
rates. The average maturity of the Portfolio's investments will vary based upon
BSAM's assessment of economic and market conditions. Because the Portfolio
intends to hold fixed-rate instruments, some of which may have long maturities,
the value of the securities held by the Portfolio, and thus the net asset value
of its shares generally will vary inversely to changes in prevailing interest
rates. Thus, if interest rates have increased from the time a debt or other
fixed income security was purchased, such security, if sold, might be sold at a
price less than its cost. Conversely, if interest rates have declined from the
time such a security was purchased, such security, if sold, might be sold at a
price greater than its cost.
Debt markets in Emerging Countries presently consist of a wide variety of
instruments issued by developing countries, related institutions and companies.
The Portfolio intends to invest in two broad classes of securities: dollar
denominated instruments traded in secondary markets outside of the Emerging
Countries which have issued the securities, and non-dollar denominated
securities (as defined herein) which are traded in the country of issue and/or
in secondary markets.
A substantial portion of the dollar denominated Debt Obligations in which the
Debt Portfolio intends to invest had its origin in syndicated bank loans made
during the 1970s and early 1980s. As a consequence of the substantial volatility
in commodity prices, and the dramatic increase in interest
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rates in the early 1980s, many Emerging Countries defaulted on these loans. Much
of the debt owed by governments to commercial banks was subsequently
restructured, involving the exchange of outstanding bank indebtedness for Brady
bonds (as described below). Brady bonds, remaining outstanding bank loans and a
relatively small but growing number of newly issued government, agency and
corporate bond issues make up the large and growing debt market in Emerging
Countries. The investment vehicles which BSAM is expected to acquire or utilize
on behalf of the Debt Portfolio are described below.
The Debt Portfolio is designed to be actively managed. The Portfolio will
attempt to maximize returns by adjusting the portfolio in response to numerous
factors affecting Debt Obligations, including political and economic
developments, changing credit quality, interest rates, currency exchange rates,
and other factors. Because the Portfolio can purchase floating rate securities
and securities with short to intermediate term maturities, BSAM can adjust the
Portfolio's holdings in an effort to maximize returns in almost any interest
rate environment. In addition, the Portfolio's ability to invest in securities
with any maturities of up to thirty years allows BSAM to adjust the Portfolio's
investments as interest rates change to take advantage of the most attractive
segments of the yield curve.
Investment Techniques
Each Portfolio may engage in various investment techniques as described below.
FIXED-INCOME SECURITIES (ALL PORTFOLIOS)
Each Portfolio invests primarily in fixed-income securities. Investors should be
aware that even though interest-bearing securities are investments which promise
a stable stream of income, the prices of such securities typically are inversely
affected by changes in interest rates and, therefore, are subject to the risk of
market price fluctuations. Thus, if interest rates have increased from the time
a security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its cost. In either instance, if the security was purchased at face value
and held to maturity, no gain or loss would be realized. Certain securities
purchased by a Portfolio, such as those with interest rates that fluctuate
directly or indirectly based on multiples of a stated index, are designed to be
highly sensitive to changes in interest rates and can subject the holders
thereof to extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, a Portfolio will
consider all circumstances deemed relevant in determining whether to continue to
hold the security. Holding such securities that have been downgraded below
investment grade can subject a Portfolio to additional risk. Certain securities
purchased by a Portfolio, such as those rated Baa by Moody's or BBB by S&P,
Fitch or Duff, may be subject to such risk with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. Debt securities which are rated Baa by Moody's are
considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
FOREIGN SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in securities of foreign issuers. When a Portfolio
invests in foreign securities, they may be denominated in foreign currencies.
Thus, a Portfolio's net asset value will be affected by changes in exchange
rates. (See "Risk Factors".) Under normal conditions, the High Yield Portfolio
will not invest more than 25% of its total assets in foreign securities.
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CONVERTIBLE SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks or other securities that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique investment characteristics such as
(1) higher yields than common stocks, but lower yields than comparable
nonconvertible securities, (2) a lesser degree of fluctuation in value than the
underlying stock since they have fixed income characteristics, and (3) the
potential for capital appreciation if the market price of the underlying common
stock increases. Convertible debt securities have characteristics of both fixed
income and equity instruments.
No Portfolio has the current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment upon
conversion, although it may do so for temporary purposes. A convertible security
might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by a Portfolio is called for redemption, the Portfolio may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party. Under normal conditions,
the High Yield Portfolio and the Debt Portfolio will not invest more than 10% of
their total assets, respectively, in convertible securities.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS (ALL
PORTFOLIOS)
Each Portfolio may invest in zero coupon securities and pay-in-kind bonds. These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. Each Portfolio also may purchase
pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of their interest in
the form of debt or equity securities. The Portfolios will only purchase
pay-in-kind bonds that pay all or a portion of their interest in the form of
debt securities. Zero coupon securities and pay- in-kind bonds may be issued by
a wide variety of corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Portfolios are required to accrue as income each year the
value of securities received in respect of pay-in-kind bonds and a portion of
the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Portfolios will elect similar treatment for any market discount with respect to
debt securities acquired at a discount. Accordingly, the Portfolios may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate current cash to satisfy certain distribution requirements. Under normal
conditions, the High Yield Portfolio will not invest more than 25% of its total
assets in zero coupon securities, pay-in-kind bonds or discount obligations.
NON-DOLLAR DENOMINATED SECURITIES (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and Debt Portfolios may invest in non-dollar denominated
securities. Investments in non-dollar denominated securities will include fixed
and/or floating rate instruments, including discount notes, commercial paper,
debentures and other debt securities issued by public or private sector
entities. Such investments may also include debt securities which are payable in
local currency in amounts calculated with reference to the U.S. dollar. A
Portfolio will invest in short term or floating rate non-dollar denominated
securities when BSAM believes that the relationship between local interest
rates, inflation and currency exchange rates will result in a high dollar
return.
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The relative performance of various countries' fixed income markets historically
has reflected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in various markets from
time to time. In addition, the performance of non-dollar denominated securities
will depend on, among other things, the strength of the foreign currency against
the U.S. dollar. Appreciation in the value of the foreign currency generally can
be expected to increase, and declines in the value of foreign currencies
relative to the U.S. dollar will depress, the value of a Portfolio's non-dollar
denominated securities. Currently, because of high inflation and other factors,
the currencies of the countries in which the Debt Portfolio intends to invest
are generally expected to depreciate against the U.S. dollar. However, to the
extent that local interest rates in such countries exceed the rate of currency
devaluation, the potential for attractive returns in dollars exists. BSAM
evaluates currencies on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts, balance of payments
status and economic policies) as well as technical and political data, but will
not generally be involved in active currency forecasting. The Portfolios may or
may not hedge or cross hedge its foreign currency exposure. The High Yield
Portfolio may invest up to 25% of its total assets in non-dollar denominated
securities. The Debt Portfolio may invest up to 30% of its total assets in
non-dollar denominated securities provided that no more than 20% of its assets
are expected to be invested in Debt Obligations denominated in the currency of
any one country.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (ALL PORTFOLIOS)
Each Portfolio may purchase securities on a when-issued basis. When-issued
transactions arise when securities are purchased by a Portfolio with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Portfolio at the time of entering into
the transaction. Each Portfolio may also purchase securities on a forward
commitment basis. In a forward commitment transaction, the Portfolio contracts
to purchase securities for a fixed price at a future date beyond customary
settlement time. Each Portfolio may enter into offsetting contracts for the
forward sale of other securities that it owns. Although a Portfolio would
generally purchase securities on a when-issued forward commitment basis with the
intention of actually acquiring securities for its portfolio, the Portfolio may
dispose of a when-issued security or forward commitment prior to settlement if
BSAM deems it appropriate to do so.
The issuance of some of the securities in which the Debt Portfolio may invest
depends upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buyout or debt restructuring ("when, as and
if issued securities"). As a result, the period from the trade date to the
issuance date may be considerably longer than a typical when- issued trade. Each
when-issued transaction specifies a date upon which the commitment to enter into
the relevant transaction will terminate if the securities have not been issued
on or before such date. In some cases, however, the securities may be issued
prior to such termination date, but may not be deliverable until a period of
time thereafter. If the anticipated event does not occur and the securities are
not issued, the Debt Portfolio would be entitled to receive any funds committed
for the purchase, but the Portfolio may have foregone investment opportunities
during the term of the commitment.
The High Yield Portfolio may not invest more than 33 1/3% of its total assets in
when-issued securities and forward commitments. There is no overall limit on the
percentage of the Debt Portfolio's assets which may be committed to the purchase
of securities on a when-issued basis; however, the Debt Portfolio may only
invest a maximum of 15% of its assets in when, as and if issued securities. An
increase in the percentage of the Debt Portfolio's assets committed to such
purchase of securities on a when-issued basis may increase the volatility of its
net asset value.
Each Portfolio will hold and maintain in a segregated account until the
settlement date liquid assets in an amount sufficient to meet the purchase price
to the extent required by the 1940 Act. The purchase of securities on a
when-issued forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date.
BORROWING AND LEVERAGE (ALL PORTFOLIOS)
The Debt Portfolio may, solely for temporary or emergency purposes, borrow in an
amount up to 15% of its total assets (including the amount borrowed), less all
liabilities and indebtedness other than the borrowing. The Income Portfolio and
the High Yield Portfolio may borrow money to the extent permitted under the 1940
Act. However, the Income Portfolio currently intends to borrow money only for
temporary or emergency purposes, in an amount up to 15% of the value of its
total assets. A Portfolio may not purchase securities when borrowings exceed 5%
of its total assets. If market fluctuations in the value of the Debt Portfolio's
portfolio holdings or other factors cause the ratio of
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the Portfolio's total assets to outstanding borrowings to fall below 300%,
within three days of any such event the Debt Portfolio may be required to sell
portfolio securities to restore the 300% asset coverage, even though from an
investment standpoint such sales might be disadvantageous. Borrowings may be
utilized to meet share redemptions of the Debt Portfolio or to pay dividends and
distributions to Shareholders of the Portfolio, in instances where the Debt
Portfolio does not desire to liquidate its portfolio holdings. The Debt
Portfolio expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable subcustodian,
which may include the lender.
Borrowings create leverage, a speculative factor. To the extent the income
derived from the assets obtained with borrowed funds exceeds the interest and
other expenses that a Portfolio will have to pay, the Portfolio's net income
will be greater than if borrowing were not used. Conversely, if the income from
the assets obtained with borrowed funds is not sufficient to cover the cost of
borrowing, the net income of the Portfolio will be less than if borrowing were
not used, and therefore the amount available for distribution to Shareholders as
dividends will be reduced.
RESTRICTED AND ILLIQUID SECURITIES (ALL PORTFOLIOS)
Each Portfolio may purchase securities that are not registered or are offered in
an exempt non-public offering ("restricted securities") under the Securities Act
of 1933, as amended (the "Securities Act"), including securities offered and
sold to "qualified institutional buyers" under Rule 144A under the Securities
Act. Each Portfolio will not invest more than 15% of its net assets in illiquid
investments, which include repurchase agreements maturing in more than seven
days, securities that are not readily marketable and restricted securities that
are not eligible for sale under Rule 144A. Restricted securities eligible for
sale under Rule 144A are also subject to this 15% limitation, unless the Board
of Trustees (or BSAM pursuant to a delegated authority) determines, based upon a
continuing review of the trading markets for the specific restricted securities
sold under Rule 144A, that such restricted securities are liquid. The Board of
Trustees has adopted guidelines and delegated to BSAM the function of
determining and monitoring the liquidity of Rule 144A securities, although the
Board of Trustees retains ultimate responsibility for any determination
regarding whether a liquid market exists for Rule 144A securities. The liquidity
of Rule 144A securities will be monitored by BSAM and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, the
respective Portfolio's holdings of illiquid securities will be reviewed to
determine what, if any, action is required to assure that the Portfolio does not
exceed its applicable percentage limitation for investments in illiquid
securities. In reaching liquidity decisions, BSAM may consider, inter alia, the
following factors: (1) the unregistered nature of the security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). Investing in Rule 144A securities could have the
effect of increasing the level of portfolio illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these securities.
HEDGING AND RETURN ENHANCEMENT STRATEGIES (ALL PORTFOLIOS)
The Portfolios may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies currently include futures contracts and related
options (including interest rate futures contracts and options thereon), options
on securities, financial indices and currencies, and forward currency exchange
contracts. The Portfolios' ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Portfolio Securities"
in the Statement of Additional Information for The Bear Stearns Funds and
"Investment Practices" in the Statement of Additional Information for the Bear
Stearns Investment Trust. New financial products and risk management techniques
continue to be developed and the Portfolios may use these new investments and
techniques to the extent consistent with their investment objective and
policies.
No Portfolio will purchase or sell futures contracts or related options, or
options on stock indices, if immediately thereafter the sum of the amounts of
initial margin deposits on the Portfolio's existing futures and premiums paid
for options exceeds 5% of the Portfolio's total assets. This restriction does
not apply to the purchase and sale of futures contracts and related options made
for "bona fide hedging purposes."
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OPTIONS ON SECURITIES, INDICES AND FOREIGN CURRENCIES (ALL PORTFOLIOS)
In certain circumstances, each Portfolio may engage in options transactions,
such as purchasing put or call options or writing (selling) covered put and call
options on securities, indices and foreign currencies. Each Portfolio may
purchase call options to gain market exposure in a particular sector while
limiting downside risk. Each Portfolio may purchase put options in order to
hedge against an anticipated loss in value of Portfolio securities. The
principal reason for writing covered call options (which are call options with
respect to which a Portfolio owns the underlying security or securities) is to
realize, through the receipt of premiums, a greater return than would be
realized on each Portfolio's securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. A Portfolio may not invest more than 5% of its assets, represented by
the premium paid, in the purchase of call and put options. A Portfolio may not
write covered call or put option contracts in an amount exceeding 20% of its net
assets at the time such option contracts are written. (See "Risk Factors" and
the Statements of Additional Information for additional risk factors).
FUTURES AND OPTIONS ON FUTURES (ALL PORTFOLIOS)
Each Portfolio may buy and sell futures contracts and related options on
securities indices and related interest rates for a number of purposes. It may
do so to try to manage its exposure to the possibility that the prices of its
portfolio securities and instruments may decline or to establish a position in
the futures or options market as a temporary substitute for purchasing
individual securities or instruments. It may do so in an attempt to enhance its
income or return by purchasing and selling call and put options on futures
contracts on financial indices or securities. It also may use interest rate
futures to try to manage its exposure to changing interest rates. Investments in
futures and options on futures involve certain risks. (See "Risk Factors" and
the Statement of Additional Information.)
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
Each Portfolio may, in seeking to increase its income, lend securities in its
portfolio to securities firms and financial institutions deemed creditworthy by
BSAM. Securities loans are made to broker-dealers or institutional investors
pursuant to agreements requiring that the loans continuously be secured by
collateral at least equal at all times to the value of the securities lent plus
any accrued interest "marked to market" on a daily basis. The collateral
received will consist of cash, U.S. short term Government securities, bank
letters of credit or such other collateral as may be permitted under a
Portfolio's investment program and by regulatory agencies and approved by the
Board of Trustees. While the securities loan is outstanding, a Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. Each Portfolio has a right to call each
loan and obtain the securities on five business days' notice. The risks in
lending securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. The creditworthiness of firms to which a Portfolio lends its
portfolio securities will be monitored on an ongoing basis by BSAM pursuant to
procedures adopted and reviewed on an ongoing basis by the Board of Trustees.
The Income Portfolio and the Debt Portfolio may each lend up to 33 1/3% of its
total assets. The High Yield Portfolio may lend up to 30% of its total assets.
The Income and High Yield Portfolios have appointed Custodial Trust Company
(CTC), an affiliate of BSAM, as securities lending agent. CTC receives a fee for
these services.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Each Portfolio may enter into repurchase agreements, which may be viewed as a
type of secured lending by the Portfolio, and which typically involves the
acquisition by the Portfolio of debt securities from a selling financial
institution, such as a bank, savings and loan association or broker-dealer. In a
repurchase agreement, the Portfolio purchases a debt security from a seller
which undertakes to repurchase the security at a specified resale price on an
agreed future date (ordinarily a week or less). The resale price generally
exceeds the purchase price by an amount which reflects an agreed-upon market
interest rate for the term of the repurchase agreement. The principal risk is
that, if the seller defaults, the Portfolio might suffer a loss to the extent
the proceeds from the sale of the underlying securities and other collateral
held by the Portfolio in connection with the related repurchase agreement are
less than the repurchase price. Repurchase agreements maturing in more than
seven days are considered by the Portfolios to be illiquid.
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SHORT SALES (ALL PORTFOLIOS)
Each Portfolio may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales). To complete the transaction,
a Portfolio will borrow the security to make delivery to the buyer. A Portfolio
is then obligated to replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio. Until the
security is replaced, a Portfolio is required to pay to the lender any dividends
or interest which accrue during the period of the loan. To borrow the security,
a Portfolio may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the broker
to the extent necessary to meet margin requirements until the short position is
closed out. Until a Portfolio replaces the borrowed security, it will (a)
maintain in a segregated account cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, at such
a level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current value of the security sold short
and will not be less than the market value of the security at the time it was
sold short or (b) otherwise cover its short position through a short sale
"against- the-box," which is a short sale in which the Portfolio owns an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short. There are
certain tax implications associated with this strategy. See "Dividends,
Distributions and Taxes."
A Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Portfolio replaces the borrowed security. A Portfolio will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale. Under
normal conditions, a Portfolio will not engage in short sales to the extent that
the Portfolio would be required to segregate with its Custodian, or deposit as
collateral to replace borrowed securities, more than 25% of its net assets. The
Debt Portfolio may not make short sales of securities, except short sales
against the box.
BRADY BONDS (DEBT PORTFOLIO)
"Brady bonds" are debt securities issued in an exchange of outstanding
commercial bank loans to public and private entities in Emerging Countries in
connection with sovereign debt restructurings, under a plan, introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady, known as the Brady
Plan. Agreements implemented under the Brady Plan are designed to reduce the
debt service burden of heavily indebted nations, in exchange for various forms
of credit enhancement coupled with economic policy reforms designed to improve
the debtor country's ability to service its external obligations. The Brady Plan
only sets forth the guiding principles for debt reduction and economic reform,
emphasizing that solutions must be negotiated on a case by case basis between
debtor nations and their creditors. As a result, the financial packages offered
by each country differ.
Debt reduction is generally carried out through the exchange of outstanding
commercial bank debt for various types of bonds, which may include (i) bonds
issued at 100% of face value of such debt, (ii) bonds issued at a discount to
face value of such debt, (iii) bonds offering fixed or floating rates of
interest, (iv) bonds bearing a below market rate of interest which increases
over time, and (v) bonds issued in exchange for the advancement of new money by
existing lenders. Credit enhancement may take the form of collateralizing the
principal with U.S. Treasury zero coupon bonds with a maturity equal to the
final maturity of such bonds. Collateral purchases are financed by the
International Monetary Fund ("IMF"), the World Bank and the debtor nation's
reserves. In addition, the first two or three interest payments on certain types
of Brady bonds may be collateralized by cash or securities agreed upon by
creditors.
As a pre-condition to issuing Brady bonds, debtor nations are generally required
to agree to the implementation of certain domestic monetary and fiscal reform
measures with the World Bank or the IMF. Such measures have included the
liberalization of trade and foreign investments, the privatization of
state-owned enterprises and the setting of targets for public spending and
borrowing. These policies and programs seek to improve the debtor's ability to
service its external obligations and promote its growth and development.
Brady bonds have been issued by a number of Emerging Countries, primarily in
Latin America. Several other Emerging Countries are currently negotiating or
have reached agreement with their creditors in sovereign debt restructuring that
will result in the issuance of Brady bonds. For purposes of applicable tax and
1940 Act rules and regulations, Brady bonds are not considered U.S. Government
securities.
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The Debt Portfolio may invest in either collateralized or uncollateralized Brady
bonds. Brady bonds are issued in various currencies (primarily U.S. dollars) and
are actively traded in the over-the-counter ("OTC") secondary market for debt of
Emerging Country issuers. Because of the large size of most Brady bond issues,
Brady bonds are generally highly liquid instruments. Brady bonds may be
collateralized or uncollateralized, may carry floating or fixed rates of
interest, and may have maturities of up to 30 years. The most common are 30-year
collateralized fixed-rate "par bonds" and floating-rate "discount bonds," which
are collateralized as to principal by U.S. Treasury zero coupon bonds having the
same maturity as the Brady bonds, and carry at least one year's rolling
interest-rate guarantee in the form of cash or marketable securities.
Investors should recognize that Brady bonds have been issued only recently, and
accordingly they do not have a long payment history. There can be no assurance
that the Brady bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings. For
a discussion of the risks involved in investing in Brady bonds, see "Risk
Factors--Sovereign Debt."
INDEXED SECURITIES (DEBT PORTFOLIO)
The Debt Portfolio may purchase securities whose prices are indexed to the
prices of other securities, securities indices, currencies, precious metals or
other commodities, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically, provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instruments to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
INVESTMENT IN OTHER FUNDS (INCOME AND DEBT PORTFOLIOS)
In accordance with the 1940 Act, the Income and Debt Portfolios may each invest
a maximum of up to 10% of the value of its total assets in securities of other
investment companies, and each Portfolio may own up to 3% of the total
outstanding voting stock of any one investment company. In addition, up to 5% of
each Portfolio's total assets may be invested in the securities of any one
investment company. The Debt Portfolio may invest in both investment companies
that are registered under the 1940 Act as well as those that are not required to
be so registered. Investment in other investment companies or vehicles may be
the sole or most practical means by which the Debt Portfolio can participate in
certain securities markets. Such investment may involve the payment of
substantial premiums above the value of such issuers' portfolio securities, and
is subject to limitations under the 1940 Act and market availability. There can
be no assurance that vehicles or funds for investing in certain Emerging
Countries will be available for investment, particularly in the early stages of
the Debt Portfolio's operations. In addition, special tax considerations may
apply. The Portfolios do not intend to invest in such vehicles or funds unless,
in the judgment of BSAM, the potential benefits of such investment justify the
payment of any applicable premium or sales charge. As an investor in an
investment company, each Portfolio would bear its ratable share of that
investment company's expenses, including its administrative and advisory fees.
At the same time, each Portfolio would continue to pay its own investment
management fees and other expenses; however, BSAM has agreed to waive its fees
to the extent necessary to comply with state securities laws. In addition, BSAM
has agreed to waive its fees to the extent necessary to retain its current
expense cap.
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LOANS (HIGH YIELD AND DEBT PORTFOLIOS)
The High Yield and the Debt Portfolios may each invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a foreign
entity and one or more financial institutions ("Lenders"). The majority of a
Portfolio's investments in Loans in emerging markets is expected to be in the
form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in a Portfolio having a contractual relationship only with
the Lender, not with the borrower government. A Portfolio will have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In connection with purchasing
Participations, a Portfolio generally will have no right to enforce compliance
by the borrower with the terms of the loan agreement relating to the loan ("Loan
Agreement"), nor any rights of set-off against the borrower, and the Portfolio
may not directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Portfolio will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, a Portfolio
may be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. A Portfolio will acquire
Participations only if the Lender positioned between the Portfolio and the
borrower is determined by BSAM to be creditworthy. Creditworthiness will be
judged based on the same credit analysis performed by BSAM when purchasing
marketable securities. When a Portfolio purchases Assignments from Lenders, the
Portfolio will acquire direct rights against a borrower on the Loan. However,
since Assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by a
Portfolio as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.
A Portfolio may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Portfolios anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on a Portfolio's ability to dispose of particular
Assignments or Participations when necessary to meet the Portfolio's liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for a Portfolio
to assign a value to those securities for purposes of valuing the Portfolio and
calculating its net asset value. Under normal conditions, the High Yield
Portfolio will not invest more than 15% of its total assets in Loans and the
Debt Portfolio will not invest more than 20% of its total assets in Loans.
MORTGAGE-RELATED SECURITIES (HIGH YIELD AND INCOME PORTFOLIOS)
The High Yield and Income Portfolios may each invest in mortgage-related
securities, consistent with their investment objectives, that provide funds for
mortgage loans made to residential homeowners. These include securities which
represent interests in pools of mortgage loans made by lenders such as savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled for sale to investors by various governmental,
government-related and private organizations. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Prepayments are caused by repayments of principal resulting from the sale of the
underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect government
guarantees of payments in such pools. However, timely payment of interest and/or
principal of these pools is supported by various forms of insurance or
guarantees, including individual loan, title, pool or hazard insurance. There
can be no assurance that the private insurers can meet their obligations under
the policies. The Portfolios may buy
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mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the poolers, BSAM determines
that the securities meet the Portfolios investment criteria. Although the market
for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. Under normal
conditions, the High Yield Portfolio will not invest more than 20% of its total
assets in mortgage-related securities.
EQUITY SECURITIES (HIGH YIELD PORTFOLIO)
In seeking to meet its objective, the High Yield Portfolio may invest in
"equity" securities, including distressed securities, as described below. These
securities include foreign and domestic common stocks or preferred stocks,
rights and warrants and debt securities or preferred stock which are convertible
or exchangeable for common stock or preferred stock. To the extent the Portfolio
invests in equity securities, there may be a diminution in the Portfolio's
overall yield. See "Distressed Securities" below. Under normal conditions, the
High Yield Portfolio will not invest more than 20% of its total assets in equity
securities.
DISTRESSED SECURITIES (HIGH YIELD PORTFOLIO)
The High Yield Portfolio may invest in debt or equity securities of financially
troubled or bankrupt companies (financially troubled issuers) and in debt or
equity securities of companies, that in the view of the Adviser are currently
undervalued, out of favor or price depressed relative to their long- term
potential for growth and income (operationally troubled issuers) (collectively,
"distressed securities"). Investment in distressed securities involves certain
risks. See "Risk Factors." Under normal conditions, the Portfolio will not
invest more than 20% of its total assets in distressed securities.
ASSET-BACKED SECURITIES (INCOME AND HIGH YIELD PORTFOLIOS)
The Income and High Yield Portfolios may invest in asset-backed securities,
which are a form of derivative securities. The securitization techniques used
for asset-backed securities are similar to those used for mortgage-related
securities. These securities include debt securities and securities with debt-
like characteristics. The collateral for these securities has included home
equity loans, automobile and credit card receivables, boat loans, computer
leases, airplane leases, mobile home loans, recreational vehicle loans and
hospital account receivables.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
generally are unsecured and the debtors are entitled to the protection of a
number of state and Federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. The High Yield Portfolio currently intends to invest no more than 5%
of its assets in asset-backed securities.
MUNICIPAL OBLIGATIONS (INCOME AND HIGH YIELD PORTFOLIOS)
Municipal obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivision, agencies and instrumentalities, multistate agencies or
authorities. While, in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality certain issues of municipal obligations, both taxable and
non-taxable, offer yields comparable and, in some cases, greater than the yields
available on other permissible investments. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Dividends received by shareholders which are attributable to
interest income received by a Portfolio from municipal obligations generally
will be subject to federal income tax. Municipal obligations bear fixed,
floating or variable rates of interest, which are determined in some instances
by formulas under which the municipal obligation's interest rate will change
directly or inversely to changes in interest rates or an
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index, or multiples thereof, in many cases subject to a maximum and minimum. The
Income Portfolio currently intends to invest no more than 25% of its assets in
municipal obligations. However, this percentage may be varied from time to time
without shareholder approval. The High Yield Portfolio currently intends to
invest no more than 5% of its assets in municipal obligations.
TEMPORARY STRATEGIES (ALL PORTFOLIOS)
Each Portfolio retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with a Portfolio's investment
objectives, BSAM may employ a temporary defensive investment strategy if it
determines such a strategy is warranted. Under such a defensive strategy, a
Portfolio temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality fixed-income securities or money market instruments of U.S. or foreign
issuers, and most or all of the Portfolio's investments may be made in the
United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of a Portfolio shares
or to meet ordinary daily cash needs, a Portfolio temporarily may hold cash
(U.S. dollars, foreign currencies or multinational currency units) and may
invest any portion of its assets in high quality foreign or domestic money
market instruments (See Appendix B).
SIMULTANEOUS INVESTMENTS (ALL PORTFOLIOS)
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by BSAM. However, if such other
investment companies or accounts are prepared to invest in, or desire to dispose
of, securities of the type in which a Portfolio invests at the same time as the
Portfolio, available investments or opportunities for sales will be allocated
equitably to each. In some cases, this procedure may adversely affect the size
of the position obtained for or disposed of by a Portfolio or the price paid or
received by the Portfolio.
MISCELLANEOUS TECHNIQUES (ALL PORTFOLIOS)
In addition to the techniques and investments described above, the High Yield
Portfolio may invest in trade claims, depository receipts and depository shares,
and may engage in forward foreign currency exchange contracts, currency swaps,
mortgage swaps, index swaps and interest rate swaps, caps, floors and collars
and reverse repurchase agreements. The Debt Portfolio may engage in forward
foreign currency exchange contracts, interest rate swaps, proxy hedging, cross
hedging, settlement hedging, transaction hedging, position hedging and other
strategies. The Income Portfolio may engage in forward currency contracts,
currency swaps and cross currency hedging.
PORTFOLIO TURNOVER
The Portfolios will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because high yield markets can be
especially volatile, securities of emerging market countries may at times be
held only briefly. Under normal conditions, the portfolio turnover rates for the
Income Portfolio, High Yield Portfolio and Debt Portfolio generally will not
exceed 250%, 150% and 150%, respectively, in any one year. However, the
portfolio turnover rates may exceed this rate when BSAM believes the anticipated
benefits of short-term investments outweigh any increase in transaction costs or
increase in short-term gains. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions or transaction costs.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income.
CERTAIN FUNDAMENTAL POLICIES
Each Portfolio may: (i) borrow money to the extent permitted under the 1940 Act;
and (ii) invest up to 25% of the value of its total assets in the securities of
issuers in a single industry, provided that there is no such limitation on
investments in securities issued or guaranteed by the U.S. Government, its
agencies or sponsored enterprises. Each of the Income Portfolio and the High
Yield Portfolio may also (iii) invest up to 5% of the value of its total assets
in the obligations of any issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested, and securities issued or guaranteed by
the U.S. Government, its agencies or sponsored enterprises may be purchased,
without regard to any such limitation. This paragraph describes certain
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares.
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See "Investment Objectives and Management Policies--Investment Restrictions" in
the relevant Portfolio's Statement of Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its
assets, but only to secure permitted borrowings; and (ii) invest up to 15% of
the value of its net assets in repurchase agreements providing for settlement in
more than seven days after notice and in other illiquid securities. In addition,
the Debt Portfolio may purchase securities of any company having less than three
years' continuous operation (including operations of any predecessors) if such
purchase does not cause the value of Debt Portfolio's investments in all such
companies to exceed 10%, of the value of its total assets. See "Investment
Objectives and Management Policies--Investment Restrictions" in the Bear Stearns
Funds' Statements of Additional Information and "Investment Objective and
Policies" in The Bear Stearns Investment Trust's Statement of Additional
Information.
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Risk Factors
No investment is free from risk. Investing in a Portfolio will subject investors
to certain risks which should be considered. The following risks apply to each
Portfolio to the extent that it engages in the investment practices set forth
below.
NET ASSET VALUE FLUCTUATIONS
No Portfolio's net asset value per share is fixed and should be expected to
fluctuate. Investors should purchase Portfolio shares only as a supplement to an
overall investment program and only if investors are willing to undertake the
risks involved.
FIXED-INCOME SECURITIES
Investors should be aware that even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities that may be purchased by the
Portfolios, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, the Portfolio
will consider all circumstances deemed relevant in determining whether to
continue to hold the security. Holding such securities that have been downgraded
below investment grade can subject a Portfolio to additional risk. Certain
securities purchased by a Portfolio, such as those rated Baa by Moody's or BBB
by S&P, Fitch or Duff, may be subject to such risk with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated fixed-income securities. Debt securities which are rated Baa by Moody's
are considered medium grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal, and while such debt
securities ordinarily exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt securities in this
category than in higher rated categories. Fitch considers the obligor's ability
to pay interest and repay principal on debt securities rated BBB to be adequate;
adverse changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these debt securities and, therefore, impair
timely payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Funds' Board of Trustees. In accordance with
such guidelines, BSAM will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information.
FOREIGN SECURITIES
Foreign securities involve certain risks, which should be considered carefully
by an investor in the Portfolios. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company or government than about a domestic company or the U.S. Government.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could
21
<PAGE>
affect investment. In many instances, foreign debt securities may provide higher
yields than securities of domestic issuers which have similar maturities and
quality. These investments, however, may be less liquid than the securities of
U.S. corporations. In the event of default of any such foreign debt obligations,
it may be more difficult for a Portfolio to obtain or enforce a judgement
against the issuers of such securities.
Investing in the securities markets of developing countries involves exposure to
economies that are generally less diverse and mature and to political systems
which can be expected to have less stability than those of developed countries.
Historical experience indicates that the markets of developing countries have
been more volatile than the markets of developed countries. The risks associated
with investments in foreign securities may be greater with respect to
investments in developing countries and are certainly greater with respect to
investments in the securities of financially and operationally troubled issuers.
Additional costs could be incurred in connection with a Portfolio's
international investment activities. Foreign brokerage commissions are generally
higher than United States brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversion between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of a Portfolio's securities
denominated in that currency. Such changes also will affect the Portfolio's
income and distributions to shareholders. In addition, although the Portfolio
will receive income in such currencies, the Portfolio will be required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency declines after the Portfolio's income has been
accrued and translated into U.S. dollars, the Portfolio could be required to
liquidate portfolio securities to make such distributions, particularly in
instances in which the amount of income the Portfolio is required to distribute
is not immediately reduced by the decline in such currency. Similarly, if an
exchange rate declines between the time the Portfolio incurs expenses in U.S.
dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater than the equivalent amount in any such currency of such
expenses at the time they were incurred.
Each Portfolio may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking-in the
U.S. dollar price of the purchase or sale of securities denominated in a foreign
currency; locking-in the U.S. dollar equivalent of dividends to be paid on such
securities which are held by the Portfolio; and protecting the U.S. dollar value
of such securities which are held by the Portfolio.
RISK OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the
Portfolios would not be subject absent the use of these strategies. The
Portfolios, and thus the investors, may lose money through any unsuccessful use
of these strategies. If BSAM's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options,
foreign currency and futures contracts and options on futures contracts include
(1) dependence on BSAM's ability to predict correctly movements in the direction
of interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to pursue these strategies are different
from those needed to select portfolio securities; (4) the possible absence of a
liquid secondary market for any particular instrument at any time; (5) the
possible need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of a Portfolio to purchase or sell
a portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Portfolio to maintain "cover" or
to segregate securities in connection with hedging transactions. See "Dividends,
Distributions and Taxes" in The Bear Stearns Funds' Statement of Additional
Information and "Investment Objective and Policies" in the Bear Stearns
Investment Trust's Statement of Additional Information.
22
<PAGE>
The Portfolios will generally purchase options and futures on an exchange only
if there appears to be a liquid secondary market for such options or futures;
the Portfolios will generally purchase OTC options only if BSAM believes that
the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or that the other party will continue to make a market. Thus, it may
not be possible to close an options or futures transaction. The inability to
close options and futures positions also could have an adverse impact on a
Portfolio's ability to effectively hedge its portfolio. There is also the risk
of loss by a Portfolio of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Portfolio has an open position in an
option, a futures contract or related option.
HIGH YIELD SECURITIES
GENERAL. The High Yield and Debt Portfolios may invest all or substantially all
of their assets in high yield, high risk debt securities, commonly referred to
as "junk bonds." The Income Portfolio may invest up to 25% of its assets in
securities rated below investment grade. Securities rated below investment grade
and comparable unrated securities offer yields that fluctuate over time, but
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks than
higher-rated securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Certain of the debt securities in which a
Portfolio may invest may have, or be considered comparable to securities having,
the lowest ratings for non-subordinated debt instruments assigned by Moody's,
S&P or D&P (i.e., rated C by Moody's or CCC or lower by S&P or D&P). Under
rating agency guidelines, these securities are considered to have extremely poor
prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default, to be unlikely to have the capacity to
pay interest and repay principal when due in the event of adverse business,
financial or economic conditions, and/or to be in default or not current in the
payment of interest or principal. Such securities are considered speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. Unrated securities deemed
comparable to these lower- and lowest- rated securities will have similar
characteristics. Accordingly, it is possible that these types of factors could,
in certain instances, reduce the value of securities held by a Portfolio with a
commensurate effect on the value of its respective shares. Therefore, an
investment in a Portfolio should not be considered as a complete investment
program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers, and participants in the market
are mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on a
Portfolio's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Portfolio is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Funds' Board of Trustees to value the Portfolio's
securities and the Funds' Trustees may have to use a greater degree of judgment
in making such valuations. Furthermore, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on fundamental
analysis, may tend to decrease the market value and liquidity of such
lower-rated securities. Less liquid secondary markets may also affect a
Portfolio's ability to sell securities at their fair value. In addition, each
Portfolio may invest up to 15% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield, high risk debt
securities contract due to adverse economic conditions or for other reasons,
certain previously liquid securities in a Portfolio may become illiquid and the
proportion of the Portfolio's assets invested in illiquid securities may
increase.
The ratings of fixed-income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
23
<PAGE>
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their Debt Obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default in payment of interest or principal by such issuers is
significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
Many fixed-income securities, including certain U.S. corporate fixed-income
securities in which the Portfolios may invest, contain call or buy-back features
which permit the issuer of the security to call or repurchase it. Such
securities may present risks based on payment expectations. If an issuer
exercises such a "call option" and redeems the security, a Portfolio may have to
replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Portfolio.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose a
Portfolio to the direct or indirect consequences of political, social or
economic changes in the developing and emerging countries that issue the
securities. The ability and willingness of sovereign obligors in developing and
emerging countries or the governmental authorities that control repayment of
their external debt to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which a Portfolio may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
As a result, a governmental obligor may default on its obligations. If such a
default occurs, a Portfolio may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign sovereign debt
securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
sovereign Debt Obligations in the event of default under their commercial bank
loan agreements.
DISTRESSED SECURITIES
Distressed securities involve a high degree of credit and market risk and may be
subject to greater price volatility than other securities in which the Portfolio
invests.
Although a Portfolio will invest in select companies which in the view of BSAM
have the potential over the long term for capital growth, there can be no
assurance that such financially or operationally troubled companies can be
successfully transformed into profitable operating companies. There is a
possibility that the Portfolio may incur substantial or total losses on its
investments. During an economic downturn or recession, securities of financially
troubled issuers are more likely to go into default than securities of other
issuers. In addition, it may be difficult to obtain information about
financially and operationally troubled issuers.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The market
prices of such securities are subject to erratic and abrupt market movements and
the spread between bid and asked prices may be greater than normally expected.
In addition, it is anticipated that many of such portfolio investments may not
be widely traded and that the Portfolio's position in such securities may be
substantially relative to the market for such securities. As a result, the
Portfolio may experience delays and incur losses and other costs in connection
with the sale of its portfolio securities.
Distressed securities which a Portfolio may purchase may also include securities
of companies involved in bankruptcy proceedings, reorganizations and financial
restructurings. To the extent the Portfolio invests in such securities, it may
have a more active participation in the affairs of issuers than
24
<PAGE>
is generally assumed by an investor. This may subject the Portfolio to
litigation risks or prevent the Debt Portfolio from disposing of securities. In
a bankruptcy or other proceeding, the Portfolio as a creditor may be unable to
enforce its rights in any collateral or may have its security interest in any
collateral challenged, disallowed or subordinated to the claims of the
creditors. See "Investment Objective and Management Policies--Portfolio
Securities--Bankruptcy and Other Proceedings--Litigation Risks" in The Bear
Stearns Funds' Statement of Additional Information and "Risk Factors and Special
Considerations--Investing in Securities Markets of Emerging Countries" in the
Bear Stearns Investment Trust's Statement of Additional information.
Of the Debt Portfolio's total net assets as of March 31, 1998, 94.85% consisted
of portfolio investments and 5.15% consisted of other assets in excess of
liabilities. The percentage of the Portfolio's investments invested in
securities rated by S&P and Moody's as of March 31, 1998 are as follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BBB Baa 3.05%
BB B 16.31%
BB Ba 60.28%
B B 15.38%
NR NR 4.98%
</TABLE>
Based on the weighted average ratings of all investments held during the
Portfolio's most recent fiscal period (the fiscal year ended March 31, 1998),
the percentage of the Debt Portfolio's total investments in securities rated by
S&P or Moody's applicable rating category (AAA, A, BB, or B by S&P or Aaa, A, Ba
or B by Moody's) by monthly dollar-weighted average is set forth below. It
should be noted that this information reflects the average composition of the
Debt Portfolio's assets during the most recent period and is not necessarily
representative of the Debt Portfolio's assets as of the end of such period, the
current fiscal period or at any time in the future.
<TABLE>
- --------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB Baa 3.27%
BB B 29.50%
BB Ba 45.38%
B B 16.66%
NR NR 5.19%
</TABLE>
Of the High Yield Portfolio's total net assets as of March 31, 1998, 110.88%
consisted of portfolio investments and -10.88% consisted of liabilities in
excess of other assets. The percentage of the High Yield Portfolio's investments
invested in securities rated by S&P and Moody's as of March 31, 1998 are as
follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 1.33%
BB Ba 0.64%
B Ba 0.64%
B B 67.55%
B Caa 11.25%
CCC B 3.63%
CCC Caa 2.55%
NR NR 12.41%
</TABLE>
25
<PAGE>
Based on the weighted average ratings of all investments held during the High
Yield Portfolio's most recent fiscal period (the fiscal year ended March 31,
1998), the percentage of the High Yield Portfolio's total investments in
securities rated by S&P or Moody's applicable rating category (AAA, A, BB, or B
by S&P or Aaa, A, Ba or B by Moody's) by monthly dollar-weighted average is set
forth below. It should be noted that this information reflects the average
composition of the High Yield Portfolio's assets during the most recent period
and is not necessarily representative of the High Yield Portfolio's assets as of
the end of such period, the current fiscal period or at any time in the future.
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
OF TOTAL
S&P MOODY'S INVESTMENTS
RATINGS RATINGS RATED*
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
BB B 0.68%
BB Ba 0.97%
B Ba 1.31%
B B 63.27%
B Caa 12.45%
CCC B 3.67%
CCC Caa 4.31%
NR NR 13.34%
</TABLE>
- ------
* Equivalent Unrated-These categories represent the comparable quality of
unrated securities as determined by the Adviser. For foreign government
obligations not individually rated by an internationally recognized
statistical rating organization, the Debt Portfolio assigns a rating based
on the rating of the sovereign credit of the issuing government.
Debt Obligations in which the Portfolios may invest may have stated maturities
ranging from overnight to 30 years and may have floating or fixed rates. Changes
in interest rates generally will cause the value of debt securities held by the
Portfolio to vary inversely to changes in prevailing interest rates. A
Portfolio's investments in fixed-rate debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
short-term obligations. Brady bonds and other Debt Obligations acquired at a
discount are subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities which are
not subject to a discount.
DISCOUNT OBLIGATIONS
The Portfolios expect to invest in both short-term and long-term Debt
Obligations purchased at a discount, for example, zero coupon securities. The
amount of original issue discount and/or market discount on obligations
purchased by a Portfolio may be significant, and accretion of market discount
together with original issue discount, will cause the Portfolio to realize
income prior to the receipt of cash payments with respect to these securities.
See "Taxation" in the Statement of Additional Information for a discussion of
original issue discount and market discount. In order to distribute income
realized by a Portfolio and thereby maintain its qualification as a "regulated
investment company" under the Code, a Portfolio may be required to liquidate
portfolio securities that it might otherwise have continued to hold, use its
cash assets or borrow funds on a temporary basis necessary to declare and pay a
distribution to shareholders. Under adverse market conditions, this may result
in shareholders receiving a portion of their original purchase price as a
taxable dividend and could further negatively impact net asset value.
POLITICAL AND ECONOMIC FACTORS
Investing in Debt Obligations of emerging countries involves risks relating to
political and economic developments abroad. The value of a Portfolio's
investments will be affected by commodity prices, inflation, interest rates,
taxation, social instability, and other political, economic or diplomatic
developments in or affecting the Emerging Countries in which the Portfolio has
invested. In many cases, governments of Emerging Countries continue to exercise
a significant degree of control over the economy, and government actions
concerning the economy may adversely effect issuers within that country.
Government actions relative to the economy, as well as economic developments
generally, may also affect a given country's international foreign currency
reserves. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus could
have a bearing on the capacity of Emerging Country issuers to make payments on
their Debt Obligations regardless of their financial condition. In addition,
there is a possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, or other similar
developments which could affect investments in those countries.
26
<PAGE>
While BSAM intends to manage the Portfolios in a manner that will minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause the Portfolio to suffer a loss of interest or principal on any of
its holdings. The Portfolio will treat investments of the Portfolio that are
subject to repatriation restrictions of more than seven (7) days as illiquid
securities.
FOREIGN EXCHANGE RISK
Many of the currencies of Emerging Countries have experienced significant
devaluations relative to the dollar, and major adjustments have been made in
certain of them at times. To the extent a Portfolio had invested in non-dollar
denominated securities, a decline in the value of such currency would reduce the
value of certain portfolio securities and the net asset value of the Portfolio.
The Debt Portfolio may invest up to 30% of its assets in Debt Obligations
denominated in local currencies. In addition, if the exchange rate for the
currency in which the Portfolio receives interest payments declines against the
U.S. dollar before such interest is paid as dividends to shareholders, the
Portfolio may have to sell portfolio securities to obtain sufficient cash to pay
such dividends.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention or failure to intervene by U.S. or foreign governments or central
banks or by currency controls or political developments in the U.S. or abroad.
To the extent that a substantial portion of a Portfolio's total assets, adjusted
to reflect the Portfolio's net position after giving effect to currency
transactions, is denominated in currencies of foreign countries, the Portfolio
will be more susceptible to the risk of adverse economic and political
developments within those countries.
SOVEREIGN DEBT
Investing in Debt Obligations of governmental issuers in Emerging Countries
involves economic and political risks. While BSAM intends to manage the
Portfolios in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse political changes will not cause a Portfolio to
suffer a loss of interest or principal on any of its holdings. The governmental
entity that controls the servicing of obligations of those issuers may not be
willing or able to repay the principal and/or interest when due in accordance
with the terms of the obligations. A governmental entity's willingness or
ability to repay principal and interest when due in a timely manner may be
affected by, among other factors, its cash flow situation, the market value of
the debt, the relative size of the debt service burden to the economy as a
whole, the governmental entity's dependence on expected disbursements from third
parties, the governmental entity's policy toward the IMF and the political
constraints to which the governmental entity may be subject. As a result,
governmental entities may default on their obligations. Holders of certain
Emerging Country Debt Obligations may be requested to participate in the
restructuring and rescheduling of these obligations and to extend further loans
to their issuers. The interests of holders of Emerging Country Debt Obligations
could be adversely affected in the course of restructuring arrangements or by
certain other factors referred to below.
Sovereign obligors in developing and Emerging Countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. The issuers of the sovereign
debt securities in which the Portfolio expects to invest have in the past
experienced substantial difficulties in servicing their external Debt
Obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady bonds and other
foreign sovereign debt securities in which the Portfolio may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Portfolio's holdings.
Sovereign debt issued by issuers in many Emerging Countries generally is deemed
to be the equivalent in terms of quality to securities rated below investment
grade by Moody's and S&P. Such securities are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve major risk
exposure to adverse conditions. Some of such sovereign debt may be comparable to
securities rated D by S&P or C by Moody's.
27
<PAGE>
INVESTING IN SECURITIES MARKETS OF EMERGING COUNTRIES
Most securities markets in Emerging Countries may have substantially less volume
and are subject to less government supervision than U.S. securities markets, and
securities of many issuers in Emerging Countries may be less liquid and more
volatile than securities of comparable domestic issuers. In addition, there is
generally less government regulation of securities exchanges, securities
dealers, and listed and unlisted companies in Emerging Countries than in the
United States.
Markets in Emerging Countries also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of a Portfolio is uninvested and
no return is earned thereon. The inability of a Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of securities due to
settlement problems could result either in losses to the Portfolio due to
subsequent declines in value of the security or, if the Portfolio has entered
into a contract to sell the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign securities are
generally higher than costs associated with transactions in U.S. securities.
Such transactions also involve additional costs for the purchase or sale of
foreign currency.
Foreign investment in certain Emerging Country Debt Obligations is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain Emerging Country Debt Obligations and
increase the costs and expenses of a Portfolio. Certain Emerging Countries
require prior governmental approval of investments by foreign persons, limit the
amount of investment by foreign persons in a particular company, limit the
investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain Emerging Countries may also restrict investment
opportunities in issuers in industries deemed important to national interests.
Certain Emerging Countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
Emerging Country's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Portfolio could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.
Throughout the last decade many Emerging Countries have experienced and continue
to experience high rates of inflation. In certain countries inflation has at
times accelerated rapidly to hyperinflationary levels, creating a negative
interest rate environment and sharply eroding the value of outstanding financial
assets in those countries. Increases in inflation could have an adverse affect
on a Portfolio's non-dollar denominated securities and on the issuers of debt
obligations generally.
In addition, with respect to certain Emerging Countries, there is a possibility
of expropriation or confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, limitations on the removal of funds or other
assets of a Portfolio, and political or social instability or diplomatic
developments which could affect investments in those countries. Individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position. The securities markets, values of securities, yields and risks
associated with securities markets in different countries may change
independently of each other. The risk also exists that an emergency situation
may arise in one or more emerging countries as a result of which trading of
securities may cease or may be substantially curtailed and prices for the
Portfolio's securities in such markets may not be readily available. The Funds
may suspend redemption of Portfolio shares for any period during which an
emergency exists, as determined by the Securities and Exchange Commission.
Accordingly, if a Portfolio believes that appropriate circumstances exist, it
will promptly apply to the Securities and Exchange Commission for a
determination that an emergency is present. During the period commencing from a
Portfolio's identification of such condition until the date of the Securities
and Exchange Commission action, the Portfolio's securities in the affected
markets will be valued at fair value determined in good faith by or under the
direction of the Board of Trustees.
REPORTING STANDARDS
The Debt Obligations of emerging markets countries will not be registered with
the Securities and Exchange Commission or subject to U.S. regulatory or
reporting requirements. Disclosure
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requirements in Emerging Countries are generally not as stringent as in the U.S.
and there may be less publicly available information about issuers in Emerging
Countries than about domestic issuers. Emerging Country issuers are not
generally subject to accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers.
INVESTMENT PRACTICES
Certain of the investment practices in which the Portfolios may engage have
risks associated with them, including possible default by the other party to the
transaction, illiquidity and, to the extent BSAM's views as to certain market
movements are incorrect, the risk that the use of such strategies could result
in losses greater than if they had not been used. The risks associated with
illiquidity are particularly acute in situations in which a Portfolio's
operations require cash, such as when the Portfolio redeems for its shares of
beneficial interests or pays distributions, and may result in the Portfolio
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of such investments. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specified currency at a future
date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at the price set at the time of the contract. The use of
forward foreign currency exchange contracts entails certain risks. The cost to a
Portfolio of engaging in forward currency contracts varies with factors such as
the currency involved, the length of the contract period and the market
conditions then prevailing. Because forward currency contracts are usually
entered into on a principal basis, no fees or commissions are involved. When a
Portfolio enters into a forward currency contract, it relies on the counterparty
to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the counterparty to do so would result in the loss of any
expected benefit of the transaction. Secondary markets generally do not exist
for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the counterparty. Thus, there can be no assurance that the
Portfolio will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, the Portfolio might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Portfolio would
continue to be subject to market risk with respect to the position and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or securities in a segregated account.
Use of put and call options could result in losses to the Portfolios, force the
purchase or sale of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation a Portfolio
could realize on its investments or cause the Portfolio to hold a security it
might otherwise sell. The use of currency transactions could result in the
Portfolio's incurring losses as a result of the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. A Portfolio depends upon the reliability and creditworthiness of the
counterparty when it enters into OTC currency or securities options or other
agreements. Investments in indexed securities offer the potential for an
attractive rate of return, but also entail the risk of loss of principal. The
use of options and futures transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Portfolio could create the possibility that losses on the hedging instrument
will be greater than gains in the value of the Portfolio's position, thereby
reducing the Portfolio's net asset value. Proxy hedges may result in losses if
the currency used to hedge does not perform similarly to the currency in which
the hedged securities are denominated. With regards to the Portfolio's use of
proxy hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relating to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Portfolio's proxy hedges
and the movements in the exchange rates of the foreign currencies in which the
Portfolio assets that are the subject of such proxy-hedges are denominated.
YEAR 2000 RISK
Many of the world's computer systems currently record years in two-digit format.
Such computer systems will be unable to properly interpret dates beyond the year
1999, which could lead to business disruptions in the U.S. and internationally
(the "Year 2000 Issue").
To ensure that the Portfolios are not negatively impacted by the Year 2000
Issue, BSAM's corporate parent through its relevant subsidiaries or its
affiliates commenced in 1996, and have made significant progress on, a
coordinated effort to identify and correct any Year 2000 Issues that could
potentially arise in internally developed computer systems and to either obtain
representations from, or make
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other inquiries of, those parties who provide computer applications or services
that are computer system dependent that BSAM has determined are critical to the
Portfolios.
At the present time, BSAM has been informed by its corporate parent that it
expects that most of its significant Year 2000 corrections should be tested in
production by the end of 1998. Full integration testing of these systems and
testing of interfaces with third party providers will continue through 1999.
However, there can be no assurance that such schedule will be met or the systems
of other companies on which BSAM and the Portfolios are dependent also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Portfolios.
Management of the Portfolios
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. Each Portfolio's Statement of Additional Information contains
the name and general business experience of each Trustee.
PORTFOLIO MANAGEMENT
BSAM uses a team approach to manage each Portfolio. Each team consists of
portfolio managers, assistant portfolio managers and analysts performing as a
dynamic unit to manage the assets of each Portfolio.
INVESTMENT ADVISER AND MANAGER
The Portfolios' investment adviser and manager is BSAM, a wholly owned
subsidiary of The Bear Stearns Companies Inc., which is located at 575 Lexington
Avenue, New York, New York 10022. The Bear Stearns Companies Inc. is a holding
company which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSAM is a registered investment adviser
and offers, either directly or through affiliates, investment advisory services
to open-end and closed-end investment funds and other managed pooled investment
vehicles with net assets at June 30, 1998, of $9.8 billion.
BSAM supervises and assists in the overall management of the Portfolios' affairs
under an Investment Advisory Agreement between BSAM and the Portfolios, subject
to the overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law.
BSAM uses a team approach to money management consisting of portfolio managers,
assistant portfolio managers and analysts performing as a dynamic unit to manage
the assets of each Portfolio.
Under the terms of an Investment Advisory Agreement, BSAM is entitled to receive
from the Income Portfolio and High Yield Portfolio a monthly fee equal to an
annual rate of 0.45% and 0.60%, respectively, of each Portfolio's average daily
net assets. For the fiscal year ended March 31, 1998, investment advisory fees
accrued by the Income Portfolio and High Yield Portfolio amounted to $91,715 and
$28,723, respectively, all of which was waived.
Under the terms of the Investment Management Agreement, the Debt Portfolio pays
BSAM a fee computed daily and payable monthly, at an annual rate equal to 1.15%
of the Debt Portfolio's average daily net assets up to $50 million, 1.00% of the
Debt Portfolio's average daily net assets of more than $50 million but not in
excess of $100 million, and 0.70% of the Debt Portfolio's average daily net
assets above $100 million. For the fiscal year ended March 31, 1998, investment
management fees earned by the Debt Portfolio amounted to $435,752, of which
$328,977 was waived.
BSAM has agreed that if, in any fiscal year, the sum of the Debt Portfolio's
expenses exceeds the expense limitations applicable to the Debt Portfolio
imposed by state securities administrators, BSAM will reimburse the Debt
Portfolio its fees under the Investment Management Agreement or make other
arrangements to limit Debt Portfolio expenses to the extent required by such
expense limitations. From time to time, BSAM may waive receipt of its fees
and/or voluntarily assume certain of the Debt Portfolio's expenses, which would
have the effect of lowering the Debt Portfolio's expense ratio and increasing
yield to investors at the time such amounts are waived or assumed, as the case
may be. The Debt Portfolio will not pay BSAM at a later time for any amounts it
may waive, nor will the Debt Portfolio reimburse BSAM for any amounts it may
assume until such time as the average net assets of the Debt Portfolio exceed
$50 million or the total operating expenses of the Debt Portfolio are less than
1.75%, 2.40% and 2.40% of the Class A shares, Class B and Class C shares,
respectively, of the Debt Portfolio. The investment management fees paid by the
Debt Portfolio are greater than those paid by most funds, but are believed by
BSAM to be appropriate for fees paid by funds with a global investment strategy.
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ADMINISTRATOR
Each Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York
10167. BSFM offers administrative services to open-end and closed-end investment
funds and other managed pooled investment vehicles with assets at June 30, 1998
of over $3.0 billion.
For providing administrative services to each Portfolio, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of 0.15 (before fee waiver) of 1% of
each Portfolio's average daily net assets.
Under the terms of an Administrative Services Agreement with the Funds, PFPC
Inc. provides certain administrative services to each Portfolio. For providing
these services, PFPC Inc. is entitled to receive from each Portfolio a monthly
fee equal to an annual rate of 0.10 of 1% of the Portfolio's average daily net
assets up to $200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of
the next $200 million and 0.03 of 1% of net assets above $600 million, subject
to a minimum annual fee of $150,000 for each portfolio.
From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
certain Portfolio expenses, which would have the effect of lowering a
Portfolio's expense ratio and increasing yield to investors at the time such
amounts are waived or assumed, as the case may be. No Portfolio will pay BSFM at
a later time for any amounts it may waive, nor will a Portfolio reimburse BSFM
for any amounts it may assume. From time to time PFPC Inc. may waive a portion
of its fee. PFPC Inc. reserves the right to revoke this voluntary fee waiver at
any time.
Brokerage commissions may be paid to Bear Stearns for executing transactions if
the use of Bear Stearns is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of each
Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional
Information.
Bear Stearns has agreed to permit the Funds to use the name "Bear Stearns" or
derivatives thereof as part of the Funds' name for as long as the Investment
Advisory and Management Agreements are in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
each Portfolio's principal underwriter and distributor of each Portfolio's
shares pursuant to an agreement which is renewable annually. Bear Stearns is
entitled to receive the sales load described under "How to Buy Shares" and
payments under each Portfolio's Distribution and Shareholder Servicing Plans
described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, acts as the custodian for the Bond Portfolio and the
High Yield Portfolio.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian for the Debt Portfolio's assets.
PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware
19809, acts as each Portfolio's administrator, transfer agent, dividend-paying
agent and registrar.
Rules adopted under the 1940 Act permit the Portfolios to maintain their
securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those rules, the Portfolios' portfolio of securities
and cash invested in securities of foreign countries are held by their
subcustodians, who are approved by the Trustees of the Portfolios in accordance
with the rules of the Securities and Exchange Commission.
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How to Buy Shares
GENERAL
The minimum initial investment is $2.5 million. Subsequent investments may be
made in any amount. Share certificates are issued only upon written request. The
Fund reserves the right to reject any purchase order. The Fund reserves the
right to vary the initial and subsequent investment minimum requirements at any
time. Investments by employees of Bear Stearns and its affiliates are not
subject to the minimum investment requirement. In addition, accounts under the
discretionary management of Bear Stearns and its affiliates are not subject to
the minimum investment requirement.
Purchases of a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the National Association of Securities Dealers, Inc. who have sales
agreements with Bear Stearns (an "Authorized Dealer"). Purchases of a
Portfolio's shares also may be made directly through the Transfer Agent.
Investors must specify that Class Y is being purchased.
Purchases are effected at Class Y Shares' net asset value next determined after
a purchase order is received by Bear Stearns, an Authorized Dealer or the
Transfer Agent (the "trade date"). Payment for Portfolio shares generally is due
to Bear Stearns or the Authorized Dealer on the third business day (the
"settlement date") after the trade date. Investors who make payment before the
settlement date may permit the payment to be held in their brokerage accounts or
may designate a temporary investment for payment until the settlement date. If a
temporary investment is not designated, Bear Stearns or the Authorized Dealer
will benefit from the temporary use of the funds if payment is made before the
settlement date.
PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds--[Name of
Portfolio]--Class Y" or "Bear Stearns Investment Trust--Emerging Markets Debt
Portfolio--Class Y" if purchased directly from a Portfolio, and should be
directed to the Transfer Agent: PFPC Inc., Attention: "The Bear Stearns
Funds--[Name of Portfolio]--Class Y" or "Bear Stearns Investment Trust--
Emerging Markets Debt Portfolio--Class Y," P.O. Box 8960, Wilmington, Delaware
19899-8960. Payment by check or Federal Reserve draft must be received within
three business days of receipt of the purchase order by Bear Stearns or an
Authorized Dealer. Orders placed directly with the Transfer Agent must be
accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is
responsible for forwarding payment promptly to the Fund. The Fund will charge
$7.50 for each wire redemption. The payment proceeds of a redemption of shares
recently purchased by check may be delayed as described under "How to Redeem
Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares through
the Transfer Agent. To make an initial investment in a Portfolio, an investor
must establish an account with the Portfolio by furnishing necessary information
to the Fund. An account with a Portfolio may be established by completing and
signing the Account Information Form indicating which class of shares is being
purchased, a copy of which is attached to this Prospectus, and mailing it,
together with a check to cover the purchase, to PFPC Inc., Attention: The Bear
Stearns Funds--[Name of Portfolio]--Class Y, P.O. Box 8960, Wilmington, Delaware
19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The Portfolio
account number should appear on the check.
Shareholders may not purchase shares of the Fund with a check issued by a third
party and endorsed over to the Fund.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the Portfolio calculates its net
asset value are priced according to the net asset value determined on that date.
Purchase orders received after the close of trading on the New York Stock
Exchange are priced as of the time the net asset value is next determined.
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Net Asset Value
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. Each Portfolio's investments are valued based on
market value or, where market quotations are not readily available, based on
fair value as determined in good faith by, or in accordance with procedures
established by, the Fund's Board of Trustees. For further information regarding
the methods employed in valuing each Portfolio's investments, see "Determination
of Net Asset Value" in The Bear Stearns Funds' Statement of Additional
Information and "Net Asset Value" in Bear Stearns Investment Trust's Statement
of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Funds could subject the investor to backup withholding and a $50 penalty imposed
by the Internal Revenue Service (the "IRS").
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for Class Y
shares of a Portfolio, Class Y shares of the Fund's other portfolios or shares
of certain other funds sponsored or advised by Bear Stearns, including the
Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money
Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered
for sale in the investor's state of residence. These funds have different
investment objectives which may be of interest to investors. To use this
privilege, investors should consult their account executive at Bear Stearns,
their account executive at an Authorized Dealer or the Transfer Agent to
determine if it is available and whether any conditions are imposed on its use.
To use this privilege, exchange instructions must be given to the Transfer Agent
in writing or by telephone. A shareholder wishing to make an exchange may do so
by sending a written request to the Transfer Agent at the address given above in
"How to Buy Shares--General." Shareholders are automatically provided with
telephone exchange privileges when opening an account, unless they indicate on
the account application that they do not wish to use this privilege.
Shareholders holding share certificates are not eligible to exchange shares of
the Portfolio by phone because share certificates must accompany all exchange
requests. To add this feature to an existing account that previously did not
provide for this option, a Telephone Exchange Authorization Form must be filed
with the Transfer Agent. This form is available from the Transfer Agent. Once
this election has been made, the shareholder may contact the Transfer Agent by
telephone at 1-800-447-1139 to request the exchange. During periods of
substantial economic or market change, telephone exchanges may be difficult to
complete and shareholders may have to submit exchange requests to the Transfer
Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for losses
or expenses arising out of telephone instructions reasonably believed to be
genuine. If the exchanging shareholder does not currently own Class Y shares of
the portfolio or fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
Authorized Dealer of record as the account from which shares are exchanged,
unless otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. To
participate in the Systematic Investment Plan, or establish automatic withdrawal
for the new account, however, an exchanging shareholder must file a specific
written request. The Exchange Privilege may be modified or terminated at any
time, or from time to time, by the Fund on 60 business days' notice to the
affected portfolio or fund shareholders. The Fund, BSAM and Bear Stearns will
not be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Fund will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as
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the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the shares
being exchanged must have a value of at least the minimum initial investment
required for the portfolio or fund into which the exchange is being made; if
making an exchange to an existing account, the dollar value must equal or exceed
the applicable minimum for subsequent investments. If any amount remains in the
investment portfolio from which the exchange is being made, such amount must not
be below the minimum account value required by the portfolio or Fund.
Class Y Shares will be exchanged at the next determined net asset value. No fees
currently are charged shareholders directly in connection with exchanges,
although the Fund reserves the right, upon not less than 60 days' written
notice, to charge shareholders a $5.00 fee in accordance with rules promulgated
by the Securities and Exchange Commission. The Fund reserves the right to reject
any exchange request in whole or in part. The Exchange Privilege may be modified
or terminated at any time upon notice to shareholders.
The exchange of shares of one portfolio or fund for shares of another is treated
for federal income tax purposes as a sale of the Class Y shares given in
exchange by the shareholder and, therefore, an exchanging shareholder may
realize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest automatically
dividends and/or capital gain distributions, if any, paid by a Portfolio in
Class Y shares of another portfolio of the Fund or a fund advised or sponsored
by Bear Stearns of which the shareholder is an investor, or the Money Market
Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be
purchased at the current net asset value.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No such
fee currently is contemplated.
How to Redeem Shares
GENERAL
The redemption price will be based on the net asset value next computed after
receipt of a redemption request. Investors may request redemption of Portfolio
shares at any time. Redemption requests may be made as described below. When a
request is received in proper form, the Portfolio will redeem the shares at the
next determined net asset value. If the investor holds Portfolio shares of more
than one class, any request for redemption must specify the class of shares
being redeemed. If the investor fails to specify the class of shares to be
redeemed or if the investor owns fewer shares of the class than specified to be
redeemed, the redemption request may be delayed until the Transfer Agent
receives further instructions from the investor, the investor's Bear Stearns
account executive or the investor's Authorized Dealer. The Fund imposes no
charges when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within three
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if an investor has purchased Portfolio shares by check and subsequently
submits a redemption request by mail, the redemption proceeds will not be
transmitted until the check used for investment has cleared, which may take up
to 15 business days. The Fund will reject requests to redeem shares by telephone
or wire for a period of 15 business days after receipt by the Transfer Agent of
the purchase check against which such redemption is requested. This procedure
does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 business days' written notice if the account's net asset value is
$750 or less, for reasons other than market conditions, and remains so during
the notice period.
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PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their account
executives or Authorized Dealers in person or by telephone, mail or wire. As the
Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request
by repurchasing Funds shares from a redeeming shareholder at the shares' net
asset value next computed after receipt of the request by Bear Stearns or the
Authorized Dealer. Under normal circumstances, within three days, redemption
proceeds will be paid by check or credited to the shareholder's brokerage
account at the election of the shareholder. Bear Stearns account executives or
Authorized Dealers are responsible for promptly forwarding redemption requests
to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably believed
by the Transfer Agent to be genuine. The Funds will require the Transfer Agent
to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Funds may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Funds nor the
Transfer Agent will be liable for following telephone instructions reasonably
believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Funds shares through the Transfer Agent. Mail
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds-[Name of Portfolio], P.O. Box 8960,
Wilmington, Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any Authorized
Dealer, or to the Transfer Agent if the shares are not held in a brokerage
account.
If share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. A signature guarantee is designed to protect the shareholders and
the Portfolio against fraudulent transactions by unauthorized persons. A
signature guarantee may be obtained from a domestic bank or trust company,
recognized broker, dealer, clearing agency or savings association who are
participants in a medallion program by the Securities Transfer Association. The
three recognized medallion programs are Securities Transfer Agent Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock
Exchange, Inc. Medallion Signature Program (MSP). Signature Guarantees which are
not a part of these programs will not be accepted. Please note that a notary
public stamp or seal is not acceptable. The Funds reserves the right to amend or
discontinue its signature guarantee policy at any time and, with regard to a
particular redemption transaction, to require a signature guarantee at its
discretion. Any questions with respect to signature-guarantees should be
directed to the Transfer Agent by calling 1- 800-447-1139.
During times of drastic economic or market conditions, investors may experience
difficulty in contacting Bear Stearns or Authorized Dealers by telephone to
request a redemption of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the redemption request being processed
at a later time than it would have been if telephone redemption had been used.
During the delay, each Portfolio's net asset value may fluctuate.
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Dividends and Distributions
INCOME PORTFOLIO AND HIGH YIELD PORTFOLIO
All expenses are accrued daily and deducted before declaration of dividends to
investors. Dividends paid by each class of a Portfolio will be calculated at the
same time and in the same manner and will be of the same amount, except that the
expenses attributable solely to a particular class will be borne exclusively by
such class. Class B and C shares will receive lower per share dividends than
Class A shares because of the higher expenses borne by Class B and C shares. See
"Fee Table."
Dividends will be automatically reinvested in additional shares of each
Portfolio at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution Option.
Each Portfolio ordinarily pays dividends from its net investment income monthly
and distributes net realized securities gains, if any, once a year, but it may
make distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the 1940 Act. Neither Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired .
DEBT PORTFOLIO
The Portfolio declares and pays as dividends quarterly to shareholders
substantially all of its net investment income (i.e., its income, including both
original issue discount and market discount accretions, other than its net
realized long and short-term capital gains and net realized foreign exchange
gains). Substantially all of the Portfolio's net realized capital gains (net
realized long-term capital gains in excess of net realized short- term capital
losses, including any capital loss carryovers), net realized short-term capital
gains and net realized foreign exchange gains, if any, are expected to be
distributed each year by the Portfolio.
Each dividend and distribution, if any, declared by the Portfolio on its
outstanding shares will, at the election of each shareholder, be paid in cash or
in additional shares of the Portfolio or redirected into another fund pursuant
to the Redirected Distribution Option. This election should initially be made on
a Shareholder's Account Information Form and may be changed upon written notice
to either Bear Stearns, an Authorized Dealer or the Transfer Agent at any time
prior to the record date for a particular dividend or distribution. If no
election is made, all dividends and distributions will be reinvested in the
Portfolio. The Portfolio distributes net realized securities gains, if any, once
a year, but it may make distributions on a more frequent basis to comply with
the distribution requirements of the Code, in all events in a manner consistent
with the provisions of the Investment Company Act. The Portfolio will not make
distributions from net realized securities gains unless capital loss carryovers,
if any, have been utilized or have expired. Dividends are automatically
reinvested in additional shares of the Portfolio at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
All income dividends and capital gains distributions are automatically paid in
full and fractional shares of the Portfolio, unless the shareholder requests
that they be paid in cash. Each purchase of shares of the Portfolio is made upon
the condition that the Transfer Agent is thereby automatically appointed as
agent of the investor to receive all dividends and capital gains distributions
on shares owned by the investor. Such dividends and distributions will be paid,
at the net asset value per share, in shares of the Portfolio (or in cash if the
shareholder so requests) as of the close of business on the record date. At any
time an investor may request the Transfer Agent, in writing, to have subsequent
dividends and/or capital gains distributions paid to him or her in cash rather
than shares. In order to provide sufficient time to process the change, such
request should be received by the Transfer Agent at least five (5) business days
prior to the record date of the dividend or distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to Bear Stearns or the
Authorized Dealer which will be forwarded to the shareholder, upon the receipt
of proper instructions.
At the time of an investor's purchase of shares of the Portfolio, a portion of
the price per share may be represented by undistributed income of the Portfolio
or unrealized appreciation of the Portfolio's securities. Therefore, subsequent
distributions (or portions thereof) attributable to such items, may be taxable
to the investor even if the distributions (or portions thereof) in reality
represent a return of a portion of the purchase price.
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Taxes
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid by
a Portfolio will be taxable to U.S. shareholders as ordinary income, whether
received in cash or reinvested in additional shares of such Portfolio or
redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of a Portfolio will be taxable to U.S. shareholders
as long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio shares and whether such
distributions are received in cash or reinvested in, or redirected into, other
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28% and certain
capital gains of individuals may be subject to a lower tax rate. Dividends and
distributions may be subject to state and local taxes.
Each Portfolio may enter into short sales "against the box." See "Description of
the Portfolio-Investment Instruments and Strategies." Any gains realized by a
Portfolio on such sales will be recognized at the time the Portfolio enters into
the short sales.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of market discount bonds, paid by a Portfolio to a foreign investor
generally are subject to U.S. nonresident withholding taxes at the rate of 30%,
unless the foreign investor claims the benefit of a lower rate specified in a
tax treaty. Distributions from net realized long-term securities gains paid by a
Portfolio to a foreign investor as well as the proceeds of any redemptions from
a foreign investor's account, regardless of the extent to which gain or loss may
be realized, generally will not be subject to U.S. nonresident withholding tax.
However, such distributions may be subject to backup withholding, as described
below, unless the foreign investor certifies his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of their
accounts which will include information as to dividends and distributions from
securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for shares
of another fund or portfolio advised or sponsored by BSAM or its affiliates
within 91 days of purchase and such other fund reduces or eliminates its
otherwise applicable sales load for the purpose of the exchange. In this case,
the amount of the sales load charged the investor for such shares, up to the
amount of the reduction of the sales load charge on the exchange, is not
included in the basis of such shares for purposes of computing gain or loss on
the exchange, and instead is added to the basis of the fund shares received on
the exchange.
Federal regulations generally require the Portfolios to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on a
federal income tax return. Furthermore, the IRS may notify the Portfolios to
institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a federal income tax return.
A TIN is either the Social Security number or employer identification number of
the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's federal income
tax return.
While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state or local taxes in respect of their
investment in Portfolio shares.
Management of the Portfolios intends to have each Portfolio qualify as a
"regulated investment company" under the Code and, thereafter, to continue to so
qualify if such qualification is in the best interests of its shareholders. Such
qualification relieves a Portfolio of any liability for federal income tax to
the extent its earnings are distributed in accordance with applicable provisions
of the Code. In
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addition, a Portfolio is subject to a non-deductible 4% excise tax, measured
with respect to certain undistributed amounts of taxable investment income and
capital gains.
If, for any reason, a Portfolio fails to qualify as a regulated investment
company, the Portfolio would be subject to federal income tax on its net income
at regular corporate rates (without a deduction for distributions to
shareholders). When distributed, such income would then be taxable to
shareholders as ordinary income to the extent of the Portfolio's earnings and
profits. Although management intends to have each Portfolio qualify as a
regulated investment company, there can be no assurance that it will achieve
this goal.
For a detailed discussion of certain federal, state and local tax consequences
of investing in shares of the Portfolio, see "Taxation" in the Statement of
Additional Information of Bear Stearns Investment Trust and the Bear Stearns
Funds. Shareholders are urged to consult their own tax advisors regarding
specific questions as to Federal, state and local taxes as well as to any
foreign taxes.
Performance Information
For purposes of advertising, performance for Class Y shares may be calculated on
the basis of average annual total return and/or total return. These total return
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by a Portfolio during the
measuring period were reinvested in Class Y shares.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in a Portfolio was purchased with an initial
payment of $1,000 and that the investment was redeemed at the end of a stated
period of time, after giving effect to the reinvestment of dividends and
distributions, if any, during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result in
the redeemable value of the investment at the end of the period. Advertisements
of each Portfolio's performance will include the Portfolio's average annual
total return for one, five and ten year periods, or for shorter periods
depending upon the length of time during which the Portfolio has operated.
Computations of average annual total return for periods of less than one year
represent an annualization of the Portfolio's actual total return for the
applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions, if any. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value per share at
the beginning of the period. Advertisements may include the percentage rate of
total return or may include the value of a hypothetical investment at the end of
the period which assumes the application of the percentage rate of total return.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance is
a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance
information, such as that described above, may not provide a basis for
comparison with other investments or other investment companies using a
different method of calculating performance.
Comparative performance information may be used from time to time in advertising
or marketing the High Yield Portfolio's shares, including data from Lipper
Analytical Services, Lehman Brothers High Yield Bond Index, Credit Suisse First
Boston High Yield Bond Index and other industry publications. Performance
information that may be used in advertising or marketing the Income Portfolio's
shares can include data from Lipper Analytical Services, Inc., Morningstar,
Inc., Bond Buyer's 20-Bond Index, Moody's Bond Survey Bond Index, Lehman
Brothers Aggregate Bond Index, Salomon Brothers Broad Investment-Grade Index and
components thereof, Mutual Fund Values, Mutual Fund Forecaster, Mutual Fund
Investing and other industry publications. Comparative performance information
may be used from time to time in advertising or marketing the Emerging Markets
Debt Portfolio's shares, including data from Lipper Analytical Services, Inc.,
Morningstar, Inc., Moody's Bond Survey Index and components thereof, Mutual Fund
Values, Mutual Fund Forecaster, Mutual Fund Investing and other industry
publications.
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DEBT PORTFOLIO
Quotations of distribution rates are calculated by analyzing the most recent
distribution of net investment income for a monthly, quarterly or other relevant
period and dividing this amount by the average net asset value during the period
for which the distribution rates are being calculated.
The Debt Portfolio may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
the Portfolio may from time to time advertise its performance relative to
certain performance rankings and indices.
The investment results of the Debt Portfolio will fluctuate over time, and any
presentation of investment results for any prior period should not be considered
a representation of what an investment in the Debt Portfolio may earn or what
the Debt Portfolio's performance may be in any future period.
In addition to information provided in shareholder reports, the Debt Portfolio
may from time to time, in its discretion, make a list of the Debt Portfolio's
holdings available to investors upon request. A discussion of the Debt
Portfolio's performance will be included in the Portfolio's annual report to
shareholders which will be made available to shareholders upon request and
without charge.
General Information
The Bear Stearns Funds was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
(the "Trust Agreement") dated September 29, 1994, and commenced operations on or
about April 3, 1995.
The Bear Stearns Investment Trust was organized under the laws of The
Commonwealth of Massachusetts on October 15, 1992 as a Massachusetts business
trust pursuant to a Trust Agreement and commenced investment operations on May
3, 1993.
The Funds are authorized to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Each Portfolio's shares are classified
into four classes--Class A, B, C and Y. Each share has one vote and shareholders
will vote in the aggregate and not by class, except as otherwise required by
law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Funds or a Trustee. The Trust Agreement provides for
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Portfolios" in the Portfolios' Statement of
Additional Information, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of 10 portfolios of
shares. All consideration received by the Funds for shares of one of the
portfolios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Funds) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Funds
have the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company, such as
the Funds, will not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
portfolio affected by such matter. Rule 18f-2 further provides that a portfolio
shall be deemed to be affected
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by a matter unless it is clear that the interests of such portfolio in the
matter are identical or that the matter does not affect any interest of such
portfolio. However, Rule 18f-2 exempts the selection of independent accountants
and the election of Trustees from the separate voting requirements of Rule
18f-2.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account. Shareholder inquiries may be made by
writing to the Funds at PFPC Inc., Attention: The Bear Stearns Funds, P.O. Box
8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling
Bear Stearns at 1-800-766-4111.
ADDITIONAL INFORMATION
The term "majority of the outstanding shares" of each Portfolio means the vote
of the lesser of (i) 67% or more of the shares of the Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
As used in this Prospectus, the term "Business Day" refers to those days when
the NYSE is open for business. Currently, the NYSE is closed on New Year's Day,
President's Day, Good Friday, Martin Luther King's Day, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in each
Portfolio's official sales literature in connection with the offer of the
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any State in which,
or to any person to whom, such offering may not lawfully be made.
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Appendix A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of each Fund's Portfolios may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or
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changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
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Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1---High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
----------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Funds, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Funds. Neither event
will require a sale of such security by the Funds. However, BSAM will consider
such event in its determination of whether the Funds should continue to hold the
security. To the extent that the ratings given by Moody's, S&P or D&P may change
as a result of changes in such organizations or their rating systems, the Funds
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
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Appendix B
MONEY MARKET INSTRUMENTS
Each Portfolio may invest, for temporary defensive purposes, in the following
types of money market instruments, each of which of purchase must have or be
deemed to have under rules of the Securities and Exchange Commission remaining
maturities of 13 months or less.
U.S. TREASURY SECURITIES
U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury
Bonds that differ in their interest rates, maturities and times of issuance.
Treasury Bills have initial maturities of one year or less; Treasury Notes have
initial maturities of one to ten years; and Treasury Bonds generally have
initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES
In addition to U.S. Treasury securities, U.S. Government securities include
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
BANK OBLIGATIONS
Each Portfolio may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Portfolio may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. No Portfolio will invest more than 15% of
the value of its net assets in time deposits maturing in more than seven days
and in other securities that are illiquid.
Banker's acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS (ALL PORTFOLIOS)
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by each
Portfolio will consist only of direct obligations
B-1
<PAGE>
which, at the time of their purchase, are (a) rated not lower than Prime-1 by
Moody's, A-1 by S&P, F-1 by Fitch or Duff-1 by Duff, (b) issued by companies
having an outstanding unsecured debt issue currently rated not lower than Aa3 by
Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by BSAM to
be of comparable quality to those rated obligations which may be purchased by a
Portfolio. Each Portfolio may purchase floating and variable rate demand notes
and bonds, which are obligations ordinarily having stated maturities in excess
of one year, but which permit the holder to demand payment of principal at any
time or at specified intervals.
B-2
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Custodian
Emerging Markets Debt Portfolio
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Counsel
Emerging Markets Debt Portfolio
Mayer Brown & Platt
1675 Broadway
New York, NY 10019
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN
THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIOS' SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS.
THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
Rule 497(c)
Registration No. 33-84842
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
LARGE CAP VALUE PORTFOLIO
SMALL CAP VALUE PORTFOLIO
INCOME PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
OCTOBER 16, 1998
- --------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
prospectus (the "Prospectus") dated July 28, 1998 of The Bear Stearns Funds (the
"Fund"), as each may be revised from time to time, offering shares of three
diversified portfolios (each, a "Portfolio"): Large Cap Value Portfolio and
Small Cap Value Portfolio (together, the "Equity Portfolios") and Income
Portfolio (the "Income Portfolio"). To obtain a free copy of such Prospectus,
please write to the Fund at PFPC Inc. ("PFPC"), Attention: [Name of Portfolio],
P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1-800-447- 1139 or call
Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-4111.
Bear Stearns Asset Management Inc. ("BSAM" or the "Adviser"), a wholly-
owned subsidiary of The Bear Stearns Companies Inc., serves as each
Portfolio's investment adviser.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolios.
Bear Stearns, an affiliate of BSAM, serves as distributor of each
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies........................... B-2
Management of the Fund................................................. B-10
Management Arrangements................................................ B-13
Purchase and Redemption of Shares...................................... B-17
Determination of Net Asset Value....................................... B-20
Dividends, Distributions and Taxes..................................... B-21
Portfolio Transactions................................................. B-28
Performance Information................................................ B-30
Code of Ethics......................................................... B-31
Information About the Fund............................................. B-32
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors..................................... B-36
Financial Statements................................................... B-37
Appendix............................................................... B-38
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Description of the
Portfolios."
Portfolio Securities
Bank Obligations. (All Portfolios) Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by each Portfolio are insured by the FDIC (although such
insurance may not be of material benefit to a Portfolio, depending on the
principal amount of the CDs of each bank held by such Portfolio) and are subject
to Federal examination and to a substantial body of Federal law and regulation.
As a result of Federal or state laws and regulations, domestic branches of
domestic banks whose CDs may be purchased by each Portfolio generally are
required, among other things, to maintain specified levels of reserves, are
limited in the amounts which they can loan to a single borrower and are subject
to other regulation designed to promote financial soundness. However, not all of
such laws and regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries
of domestic banks and domestic and foreign branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
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<PAGE>
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, BSAM carefully evaluates such investments on a case-by-case
basis.
Mortgage-Related Securities
U.S. Government Agency Securities. (Income Portfolio) Mortgage-related
securities issued by the Government National Mortgage Association ("GNMA")
include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes")
which are guaranteed as to the timely payment of principal and interest by GNMA
and such guarantee is backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee.
U.S. Government Related Securities. (Income Portfolio) Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States. The FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of
the United States created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When the FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Repurchase Agreements. (All Portfolios) Each Portfolio's custodian or
sub-custodian will have custody of, and will hold in a segregated account,
securities acquired by the Portfolio under a repurchase agreement. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Portfolio. In an attempt to reduce the risk of incurring a
loss on a repurchase agreement, each Portfolio will enter into repurchase
agreements only with domestic banks with total assets in excess of one billion
dollars, or primary government securities dealers reporting to the Federal
Reserve Bank of New York, with respect to securities of the type in which each
Portfolio may invest, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below the
resale price. BSAM will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Portfolio
will consider on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements.
Municipal Obligations. (Income Portfolio) Municipal obligations are
classified as general obligation bonds, revenue bonds and notes. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Industrial
development bonds, in most cases, are revenue bonds and generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
B-3
<PAGE>
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities. Certain municipal
obligations are subject to redemption at a date earlier than their stated
maturity pursuant to call options, which may be separated from the related
municipal obligation and purchased and sold separately. The Income Portfolio
will invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Income Portfolio investments.
Commercial Paper and Other Short-Term Corporate Obligations. (All
Portfolios) Variable rate demand notes include variable amount master demand
notes, which are obligations that permit each Portfolio to invest fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. As mutually agreed between the parties, a Portfolio may
increase the amount under the notes at any time up to the full amount provided
by the note agreement, or decrease the amount, and the borrower may repay up to
the full amount of the note without penalty. Because these obligations are
direct lending arrangements between the lender and the borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest, at any time. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, a Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with floating
and variable rate demand obligations, BSAM will consider, on an ongoing basis,
earning power, cash flow and other liquidity ratios of the borrower, and the
borrower's ability to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies, and an Equity Portfolio may
invest in them only if at the time of an investment the borrower meets the
criteria set forth in the Equity Portfolios' Prospectus for other commercial
paper issuers.
Illiquid Securities. (All Portfolios) When purchasing securities that
have not been registered under the Securities Act of 1933, as amended, and are
not readily marketable, each Portfolio will endeavor to obtain the right to
registration at the expense of the issuer. Generally, there will be a lapse of
time between a Portfolio's decision to sell any such security and the
registration of the security permitting sale. During any such period, the price
of the securities will be subject to market fluctuations. However, if a
substantial market of qualified institutional buyers develops for certain
unregistered securities purchased by a Portfolio pursuant to Rule 144A under the
Securities Act of 1933, as amended, such Portfolio intends to treat them as
liquid securities in accordance with procedures approved by the Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to Rule 144A will develop, the Fund's Board
of Trustees has directed BSAM to monitor carefully each Portfolio's investments
in such securities with particular regard to trading activity, availability of
reliable price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, a Portfolio's investing in such securities may
have the effect of increasing the level of illiquidity in such Portfolio during
such period.
Ratings of Debt. (Income Portfolio) Subsequent to its purchase by the
Bond Portfolio, a debt issue may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Income Portfolio. Neither event
will require the sale of such securities by the Income Portfolio, but BSAM will
consider such event in determining whether the Income Portfolio should continue
to hold the securities. To the extent that the ratings given by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, a division
of The McGraw-Hill Companies, Inc. ("S&P"), Fitch Investors Service, L.P.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") may change as a result of
changes in such organizations or their rating systems, the Income
B-4
<PAGE>
Portfolio will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Portfolio's Prospectus and this Statement of Additional Information.
Management Policies
Each Portfolio may engage in the following practices in furtherance of
its objective.
Options Transactions. (All Portfolios) Each Portfolio may engage in
options transactions, such as purchasing or writing covered call or put options.
The principal reason for writing covered call options, which are call options
with respect to which a Portfolio owns the underlying security or securities, is
to realize, through the receipt of premiums, a greater return than would be
realized on a Portfolio's securities alone. In return for a premium, the writer
of a covered call option forfeits the right to any appreciation in the value of
the underlying security above the strike price for the life of the option (or
until a closing purchase transaction can be effected). Nevertheless, the call
writer retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums that a Portfolio may receive may be adversely affected as new or
existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written by the Portfolios ordinarily will have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the time the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. Each Portfolio may write (a) in-the-money call
options when BSAM expects that the price of the underlying security will remain
stable or decline moderately during the option period, (b) at-the-money call
options when BSAM expects that the price of the underlying security will remain
stable or advance moderately during the option period and (c) out-of- the-money
call options when BSAM expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as a Portfolio's obligation as the writer of an option
continues, such Portfolio may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the Portfolio to
deliver, in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or a Portfolio effects a closing purchase
transaction. A Portfolio can no longer effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice.
While it may choose to do otherwise, each Portfolio generally will
purchase or write only those options for which BSAM believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures,
B-5
<PAGE>
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer a Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Stock Index Options. (Equity Portfolios) Each Equity Portfolio may
purchase and write put and call options on stock indexes listed on U.S. or
foreign securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly, while
those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make delivery
of a stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. The amount
of cash received will be equal to such difference between the closing price of
the index and the exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Futures Contracts and Options on Futures Contracts. (All Portfolios)
Each Portfolio may trade futures contracts and options on futures contracts in
U.S. domestic markets, such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange, or, to the extent permitted
under applicable law, on exchanges located outside the United States, such as
the London International Financial Futures Exchange and the Sydney Futures
Exchange Limited. Foreign markets may offer advantages such as trading in
commodities that are not currently traded in the United States or arbitrage
possibilities not available in the United States.
Initially, when purchasing or selling futures contracts, a Portfolio
will be required to deposit with the Fund's custodian in the broker's name an
amount of cash or cash equivalents up to approximately 10% of the contract
amount. This amount is subject to change by the exchange or board of trade on
which the contract is traded and members of such exchange or board of trade may
impose their own higher requirements. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio upon termination of the futures position,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker will be made daily as the
price of the index or securities underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the Portfolio may elect to close the position
by taking an opposite position, at the then prevailing price, which will operate
to terminate the Portfolio's existing position in the contract.
Although each Portfolio intends to purchase or sell futures contracts
only if there is an active market for such contracts, no assurance can be given
that a liquid market will exist for any particular contract at any particular
B-6
<PAGE>
time. Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting a Portfolio
to substantial losses. If it is not possible, or the Portfolio determines not,
to close a futures position in anticipation of adverse price movements, the
Portfolio will be required to make daily cash payments of variation margin. In
such circumstances, an increase in the value of the portion of the Portfolio
being hedged, if any, may offset partially or completely losses on the futures
contract. However, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
In addition, to the extent a Portfolio is engaging in a futures
transaction as a hedging device, due to the risk of an imperfect correlation
between securities owned by the Portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is possible
that the hedge will not be fully effective in that, for example, losses on the
portfolio securities may be in excess of gains on the futures contract or losses
on the futures contract may be in excess of gains on the portfolio securities
that were the subject of the hedge. In futures contracts based on indexes, the
risk of imperfect correlation increases as the composition of each Equity
Portfolio's investments varies from the composition of the index. In an effort
to compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of futures contracts, a
Portfolio may buy or sell futures contracts in a greater or lesser dollar amount
than the dollar amount of the securities being hedged if the historical
volatility of the futures contract has been less or greater than that of the
securities. Such "over hedging" or "under hedging" may adversely affect a
Portfolio's net investment results if market movements are not as anticipated
when the hedge is established.
Upon exercise of an option on a futures contract, the writer of the
option will deliver to the holder of the option the futures position and the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. The potential loss related to the purchase of options
on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of each Portfolio.
Foreign Currency Transactions. (All Portfolios) Each Portfolio may
engage in foreign currency trancsactions, including foreign currency contracts,
currency swaps and cross currency hedging. If a Portfolio enters into a currency
transaction, it will deposit, if so required by applicable regulations, with its
custodian cash, U.S. Government securities or other high grade debt obligations,
in a segregated account of the Portfolio in an amount at least equal to the
value of the Portfolio's total assets committed to the consummation of the
forward contract. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the Portfolio's
commitment with respect to the contract.
B-7
<PAGE>
At or before the maturity of a forward contract, the Portfolio either
may sell a security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Portfolio will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio, at the time of execution of the offsetting
transaction, will incur a gain or loss to the extent movement has occurred in
forward contract prices. Should forward prices decline during the period between
the Portfolio's entering into a forward contract for the sale of a currency and
the date it enters into an offsetting contract for the purchase of the currency,
the Portfolio will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio will suffer a loss to the extent
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The cost to each Portfolio of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange usually are conducted on a principal basis, no fees or commissions are
involved. The use of forward currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved in the future. If a devaluation generally
is anticipated, a Portfolio may not be able to contract to sell the currency at
a price above the devaluation level it anticipates. The requirements for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), may cause the Fund to restrict the degree to
which each Portfolio engages in currency transactions. See "Dividends,
Distributions and Taxes."
Lending Portfolio Securities. (All Portfolios) To a limited extent,
each Portfolio may lend its portfolio securities to brokers, dealers and other
financial institutions, provided it receives cash collateral which at all times
is maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, a Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, a Portfolio considers collateral consisting of U.S. Government
securities or irrevocable letters of credit issued by banks whose securities
meet the standards for investment by such Portfolio to be the equivalent of
cash. From time to time, a Portfolio may return to the borrower or a third party
which is unaffiliated with such Portfolio, and which is acting as a "placing
broker," a part of the interest earned from the investment of collateral
received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
each Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) each Portfolio must be
able to terminate the loan at any time; (4) each Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) each Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Trustees must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification. The
Portfolios have appointed Custodial Trust Company (CTC) an affiliate of BSAM as
the Lending Agent. CTC received a fee for its services.
B-8
<PAGE>
Investment Restrictions. Each Portfolio has adopted investment
restrictions numbered 1 through 10 as fundamental policies. These restrictions
cannot be changed, as to a Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of such Portfolio's outstanding voting shares. Investment
restrictions numbered 11 through 16 are not fundamental policies and may be
changed by vote of a majority of the Trustees at any time. No Portfolio may:
1. Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, provided that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or sponsored enterprises.
2. Invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of the Portfolio's total assets may
be invested, and securities issued or guaranteed by the U.S. Government, or its
agencies or sponsored enterprises may be purchased, without regard to any such
limitation.
3. Hold more than 10% of the outstanding voting securities of any
single issuer. This Investment Restriction applies only with respect to 75% of
the Portfolio's total assets.
4. Invest in commodities, except that each Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
5. Purchase, hold or deal in real estate, real estate limited
partnership interests, or oil, gas or other mineral leases or exploration or
development programs, but each Portfolio may purchase and sell securities that
are secured by real estate or issued by companies that invest or deal in real
estate or real estate investment trusts.
6. Borrow money, except to the extent permitted under the 1940 Act. The
1940 Act permits an investment company to borrow in an amount up to 33-1/3% of
the value of such company's total assets. For purposes of this Investment
Restriction, the entry into options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or indexes
shall not constitute borrowing.
7. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange Commission
and the Fund's Board of Trustees.
8. Act as an underwriter of securities of other issuers, except to the
extent each Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
9. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act).
10. Purchase securities on margin, but each Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
Non-Fundamental Restrictions.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with
B-9
<PAGE>
respect to options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
12. Purchase, sell or write puts, calls or combinations thereof, except
as described in the Portfolios' Prospectus and Statement of Additional
Information.
13. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 15% of the value of its net assets would be so
invested.
14. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
The following investment restrictions numbered 15 and 16, which are not
fundamental policies, apply only to the Equity Portfolios. Neither of these
Portfolios may:
15. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessor) if such purchase
would cause the value of the Equity Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
16. Invest in the securities of a company for the purpose of exercising
management or control, but each Equity Portfolio will vote the securities it
owns in its portfolio as a shareholder in accordance with its views.
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
MANAGEMENT OF THE FUND
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
NAME AND ADDRESS PRINCIPAL OCCUPATION
(AND AGE) POSITION WITH FUND DURING PAST FIVE YEARS
--------- ------------------ ----------------------
Peter M. Bren (64) Trustee President of The Bren Co.,
126 East 56th Street since 1969; President of Koll,
New York, NY 10021 Bren Realty Advisors and
Senior Partner for Lincoln
Properties prior thereto.
Alan J. Dixon* (70) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United States
Belleville, IL 62223 Senator of Illinois from 1981
to 1993.
John R. McKernan, Jr. (50) Trustee Chairman and Chief Executive
P.O. Box 15213 Officer of McKernan
Portland, ME 02110 Enterprises since January
1995; Governor of Maine prior
thereto.
M.B. Oglesby, Jr. (56) Trustee President and Chief Executive
700 13th Street, N.W. Officer, Association of
Suite 400 American Railroads from June
Washington, D.C. 20005 1997 to March 1998; Vice
Chairman of Cassidy &
Associates from February 1996
to June 1997; Senior Vice
President of RJR Nabisco, Inc.
from April 1989 to February
1996; Former Deputy Chief of
Staff-White House from 1988 to
January 1989.
B-10
<PAGE>
NAME AND ADDRESS PRINCIPAL OCCUPATION
(AND AGE) POSITION WITH FUND DURING PAST FIVE YEARS
--------- ------------------ ----------------------
Michael Minikes (53) Trustee Senior Managing Director of
245 Park Avenue Chairman Bear Stearns since September
New York, NY 10167 1985; Chairman of BSFM since
December 1997; Treasurer of
Bear Stearns since January
1986; Treasurer of The Bear
Stearns Companies Inc. since
September 1985; Director of
The Bear Stearns Companies
Inc. since October 1989.
Robert S. Reitzes* (54) President President of Mutual Funds-Bear
575 Lexington Avenue Stearns Asset Management and
New York, NY 10022 Senior Managing Director of
Bear Stearns since March 1994;
Co-Director of Research and
Senior Chemical Analyst of
C.J. Lawrence/Deutsche Bank
Securities Corp. from January
1991 to March 1994.
Peter Fox (46)
Three First National Plaza Executive Vice Founder, Fox Development
Chicago, IL 60602 President Corp., 1998; Managing Director
- Emeritus, Bear Stearns since
February 1997; Senior Managing
Director, Public Finance, Bear
Stearns from 1987 to 1997.
William J. Montgoris (51) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer, Bear
New York, NY 10167 Stearns.
Stephen A. Bornstein (55)
575 Lexington Avenue Vice President Managing Director, Legal
New York, NY 10022 Department; General Counsel,
Bear Stearns Asset Management.
Frank J. Maresca (39) Vice President Managing Director of Bear
and Treasurer Stearns since September 1994;
245 Park Avenue Chief Executive Officer and
New York, NY 10167 President of BSFM since
December 1997; Associate
Director of Bear Stearns from
September 1993 to September
1994; Vice President of Bear
Stearns from March 1992 to
September 1993.
Donalda L. Fordyce (39) Vice President Senior Managing Director of
575 Lexington Avenue Bear Stearns since March,
New York, NY 10022 1996; previously Vice
President, Asset Management
Group, Goldman, Sachs from
1986 to 1996.
B-11
<PAGE>
NAME AND ADDRESS PRINCIPAL OCCUPATION
(AND AGE) POSITION WITH FUND DURING PAST FIVE YEARS
--------- ------------------ ----------------------
Ellen T. Arthur (48) Secretary Associate Director of Bear
575 Lexington Avenue Stearns since January 1996;
New York, NY 10022 Secretary of BSAM since
December 1997; Senior Counsel
and Corporate Vice President
of PaineWebber Incorporated
from April 1989 to September
1995.
Vincent L. Pereira (33) Assistant Associate Director of Bear
245 Park Avenue Treasurer Stearns since September 1995;
New York, NY 10167 Treasurer and Secretary of
BSFM since December 1997; Vice
President of Bear Stearns from
May 1993 to September 1995;
Assistant Vice President of
Mitchell Hutchins Asset
Management Inc. from October
1992 to May 1993.
Christina LaMastro (28) Assistant Legal Assistant of Bear
575 Lexington Avenue Secretary Stearns since May 1997;
New York, NY 10022 Assistant Secretary of BSAM
since December 1997;
Compliance Assistant at Reich
& Tang L.P. from April 1996
through April 1997; Legal
Assistant at Fulbright &
Jaworski L.P. from April 1993
through April 1996.
The Fund pays its non-affiliated Board members an annual retainer of
$5,000 and a per meeting fee of $500 and reimburses them for their expenses. The
Fund does not compensate its officers. The aggregate amount of compensation paid
to each Board member by the Fund and by all other funds in the Bear Stearns
Family of Funds for which such person is a Board member (the number of which is
set forth in parenthesis next to each Board member's total compensation) for the
fiscal year ended March 31, 1998 is as follows:
B-12
<PAGE>
<TABLE>
<CAPTION>
(5)
(3) Total
(2) Pension or (4) Compensation from
(1) Aggregate Retirement Benefits Estimated Annual Fund and Fund
Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to
Member from Fund * Fund's Expenses Retirement Board Members
<S> <C> <C> <C> <C> <C>
Peter M. Bren $8,000 None None $20,000 (2)
Alan J. Dixon $8,000 None None $ 8,000 (1)
John R. McKernan, Jr. $8,000 None None $20,000 (2)
M.B. Oglesby, Jr. $8,000 None None $20,000 (2)
Robert S. Reitzes** None None None None
Michael Minikes** None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $8,600 Board members of the Fund, as a
group.
** Robert S. Reitzes resigned as a Director to Funds effective September 8,
1997. Michael Minikes was appointed as replacement for Mr. Reitzes
effective September 8, 1997.
Board members and officers of the Fund, as a group, owned less than 1%
of the Portfolio's shares outstanding on June 30, 1998.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution Plans" remains in effect, the Fund's Trustees who are
not "interested persons" of the Fund, as defined in the 1940 Act, will be
selected and nominated by the Trustees who are not "interested persons" of the
Fund.
No meetings of shareholders of the Fund will be held for the sole
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Under the 1940 Act, shareholders of record of not less than
two-thirds of the outstanding shares of the Fund may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. Under the Fund's Agreement and Declaration of Trust, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of the
Fund's outstanding shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Management of the
Portfolios."
General. On December 3, 1997, BSFM, the registered investment adviser of
the Portfolios, changed its name to BSAM. On December 4, 1997, BSFM formed a new
corporate entity under the laws of Delaware to conduct mutual fund
administrative work for The Bear Stearns Funds and other affiliated and
non-affiliated investment companies.
Investment Advisory Agreement. BSAM provides investment advisory
services to each Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 22, 1995, as revised May 4, 1995, with the Fund. As
to each Portfolio, the Agreement is subject to annual approval by (i) the Fund's
Board of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Portfolio, provided that in
B-13
<PAGE>
either event the continuance also is approved by a majority of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Fund or BSAM, by vote cast in person at a meeting called for the purpose of
voting on such approval. The Board of Trustees, including a majority of the
Trustees who are not "interested persons" of any party to the Agreement, last
approved the Agreement at a meeting held on January 28, 1997. The Agreement is
terminable, as to each Portfolio, without penalty, on 60 days' notice, by the
Fund's Board of Trustees or by vote of the holders of a majority of the
Portfolio's shares, or, on not less than 90 days' notice, by BSAM. As to the
relevant Portfolio, the Agreement will terminate automatically in the event of
its assignment (as defined in the 1940 Act).
BSAM is a wholly owned subsidiary of The Bear Stearns Companies Inc.
The following persons are directors and/or senior officers of BSAM: Mark A.
Kurland, President, Chairman of the Board and Director; Robert S. Reitzes,
Executive Vice President and Director; Donalda L. Fordyce, Vice President,
Chief Operating Officer and Director; Ellen T. Arthur, Secretary; and Warren
J. Spector and Robert M. Steinberg, Directors.
BSAM provides investment advisory services to each Portfolio in
accordance with its stated policies, subject to the approval of the Fund's Board
of Trustees. BSAM provides each Portfolio with portfolio managers who are
authorized by the Board of Trustees to execute purchases and sales of
securities. The portfolio managers of the Equity Portfolios are Robert S.
Reitzes, Mark A. Kurland, James G. McCluskey, Gail Sprute and Harris Cohen. The
portfolio managers of the Income Portfolio are Jon Geisinger and Peter E.
Mahoney. All purchases and sales are reported for the Board of Trustees' review
at the meeting subsequent to such transactions.
As compensation for BSAM's advisory services, each Equity Portfolio has
agreed to pay BSAM a monthly fee at the annual rate of 0.75 of 1% of the value
of such Equity Portfolio's average daily net assets. The Income Portfolio has
agreed to pay BSAM a monthly fee at the annual rate of 0.45 of 1% of the value
of the Income Portfolio's average daily net assets. For the fiscal year ended
March 31, 1997, the investment advisory fees payable by the Large Cap Value
Portfolio, Small Cap Value Portfolio and the Income Portfolio amounted to
$151,578, $285,539 and $98,957, respectively. For the fiscal year ended March
31, 1998, the investment advisory fees payable by the Large Cap Value Portfolio,
Small Cap Value Portfolio and the Income Portfolio amounted to $140,641,
$425,409 and $91,715, respectively. These amounts were waived pursuant to an
undertaking by BSAM, resulting in no fees being paid by the Large Cap Value
Portfolio, Small Cap Value Portfolio and the Income Portfolio. In addition, BSAM
reimbursed $161,196, $86,666 and $280,261 for Large Cap Value Portfolio, Small
Cap Value Portfolio and the Income Portfolio, respectively, in order to maintain
the voluntary expense limitation for the fiscal year ended March 31, 1997. BSAM
reimbursed $185,275, $20,648 and $275,119 for Large Cap Value Portfolio, Small
Cap Value Portfolio and the Income Portfolio, respectively, in order to maintain
the voluntary expense limitation, for the fiscal year ended March 31, 1998.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated February 22, 1995, as
revised April 11, 1995, June 2, 1997 , September 8, 1997 and February 4, 1998
with the Fund. As to each Portfolio, the Administration Agreement will continue
until February 22, 1999 and thereafter will be subject to annual approval by (i)
the Fund's Board of Trustees or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Portfolio, provided that in
either event its continuance also is approved by a majority of the Fund's Board
members who are not "interested persons" (as defined in the 1940 Act) of the
Fund or BSFM, by vote cast in person at a meeting called for the purpose of
voting on such approval. The Administration Agreement is terminable, as to each
Portfolio, without penalty, on 60 days' notice, by the Fund's Board or by vote
of the holders of a majority of the
B-14
<PAGE>
Portfolio's shares or, upon not less than 90 days' notice, by BSFM. As to the
relevant Portfolio, the Administration Agreement will terminate automatically in
the event of its assignment (as defined in the 1940 Act).
As compensation for BSFM's administrative services, the Fund has agreed
to pay BSFM a monthly fee at the annual rate of 0.15 of 1% of each Portfolio's
average daily net assets. For the fiscal year ended March 31, 1997, the
administration fees amounted to $30,232, $57,108 and $32,986, respectively, for
the Large Cap Value Portfolio, Small Cap Value Portfolio and Income Portfolio.
For the fiscal year ended March 31, 1998, the administration fees accrued
amounted to $28,128, $85,085 and $30,572, respectively, for the Large Cap Value
Portfolio, Small Cap Value Portfolio and Income Portfolio.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated
February 22, 1995, as revised September 8, 1997 with the Fund. The
Administrative Services Agreement is terminable upon 60 days notice by either
the Fund or PFPC. PFPC may assign its rights or delegate its duties under the
Administrative Services Agreement to any wholly-owned direct or indirect
subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that
(i) PFPC gives the Fund 30 days notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the 1940 Act;
and (iii) PFPC and such delegate (or assignee) promptly provide information
requested by the Fund in connection with such delegation.
As compensation for PFPC's administrative services, the Fund has agreed
to pay PFPC a monthly fee at the rate set forth in the Portfolios' Prospectus.
For the fiscal year ended March 31, 1997, the administrative services fees
payable by the Large Cap Value Portfolio, Small Cap Value Portfolio and Income
Portfolio amounted to $99,570, $119,822 and $99,469, respectively, as a result
of a waiver of fees by PFPC. For the fiscal year ended March 31, 1998, the
administrative services fees for the Large Cap Value Portfolio, Small Cap Value
Portfolio and Income Portfolio amounted to $100,107, $134,255 and $98,944,
respectively, as a result of a waiver of fees by PFPC.
Distribution Plans. Rule 12b-1 (the "Rule") adopted by the Securities
and Exchange Commission under the 1940 Act provides, among other things, that an
investment company may bear expenses of distributing its shares only pursuant to
a plan adopted in accordance with the Rule. The Fund's Board of Trustees has
adopted a distribution and shareholder servicing plan with respect to Class A
and Class C shares and a distribution plan with respect to Class B shares (the
"Distribution Plans"). The Fund's Board of Trustees believes that there is a
reasonable likelihood that the Distribution Plans will benefit each Portfolio
and the holders of its Class A, Class B and Class C shares.
A quarterly report of the amounts expended under the Distribution Plans,
and the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, each Distribution Plan provides that it
may not be amended to increase materially the costs which holders of a class of
shares may bear pursuant to such Plan without approval of such effected
shareholders and that other material amendments of the Plan must be approved by
the Board of Trustees, and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Fund nor have any direct or indirect
financial interest in the operation of the Plan or in the related Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. In addition, because Class B shares automatically
convert into Class A shares after eight years, the Fund is required by a
Securities and Exchange Commission rule to obtain the approval of Class B as
well as Class A shareholders for a proposed amendment to each Distribution Plan
that would materially increase the amount to be paid by Class A shareholders
under such Plan. Such approval must be by a "majority" of the Class A and Class
B shares (as defined in the 1940 Act), voting
B-15
<PAGE>
separately by class. Each Distribution Plan and related agreements is subject to
annual approval by such vote cast in person at a meeting called for the purpose
of voting on such Plan. The Distribution Plan with respect to Class A and Class
C shares was so approved on February 4, 1998. The Distribution Plan with respect
to the Class B shares was so approved on September 8, 1997 and February 4, 1998.
Each Distribution Plan is terminable at any time, as to each class of each
Portfolio, by vote of a majority of the Trustees who are not "interested
persons" and who have no direct or indirect financial interest in the operation
of the Plan or in the Plan agreements or by vote of holders of a majority of the
relevant class' shares. A Plan agreement is terminable, as to each class of each
Portfolio, without penalty, at any time, by such vote of the Trustees, upon not
more than 60 days written notice to the parties to such agreement or by vote of
the holders of a majority of the relevant class' shares. A Plan agreement will
terminate automatically, as to the relevant class of a Portfolio, in the event
of its assignment (as defined in the 1940 Act).
For the period from April 3, 1995 (commencement of operations) through
March 31, 1996, the Large Cap Value Portfolio, Small Cap Value Portfolio and
Income Portfolio paid Bear Stearns $13,300, $22,762 and $14,093, respectively,
with respect to Class A shares and $23,300, $37,577 and $11,638, respectively,
with respect to Class C shares under the Plan. Of such amounts, the following
amounts were paid as indicated for Class A and C shares of each Portfolio:
<TABLE>
<CAPTION>
Large Cap Value Portfolio Small Cap Value Portfolio Income Portfolio
Class A Class C Class A Class C Class A Class C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Payments to
Brokers or Dealers $13,300 ---- $22,762 ---- $14,093 ----
Payments for ---- $23,300 ---- $37,577 ---- $11,638
Advertising
For the fiscal year ended March 31, 1997, the Large Cap Value
Portfolio, Small Cap Value Portfolio and Income Portfolio paid Bear Stearns
$27,440, $57,907 and $15,344, respectively, with respect to Class A shares and
$37,332, $111,111 and $12,483, respectively, with respect to Class C shares
under the Plan. Of such amounts, the following amounts were paid as indicated
for Class A and C shares of each Portfolio:
Large Cap Value Portfolio Small Cap Value Portfolio Income Portfolio
------------------------- ------------------------- ---------------------------
Class A Class C Class A Class C Class A Class C
------- ------- ------- ------- ------- -------
Payments to
Brokers or Dealers $27,440 $15,234 $57,907 $30,062 $15,344 $6,904
Payments to ---- $22,098 $81,049 $81,049 ---- $5,579
Underwriters
</TABLE>
<PAGE>
For the fiscal year ended March 31, 1998, the Large Cap Value
Portfolio, Small Cap Value Portfolio and Income Portfolio paid Bear Stearns
$32,237, $95,967 and $11,111, respectively, with respect to Class A shares,
$271, $830 and $21, respectively, with respect to Class B shares and $40,215,
$145,963 and $10,434, respectively, with respect to Class C shares under the
Plan. Of such amounts, the following amounts were paid as indicated for Class A,
B and C shares of each Portfolio:
<TABLE>
<CAPTION>
Large Cap Value Portfolio Small Cap Value Portfolio Income Portfolio
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Payments to Brokers and $16,119 ---- $31,566 $47,984 ---- $95,103 $7,936 ---- $8,499
Dealers
Payments for Advertising, $16,119 ---- ---- $47,984 ---- ---- $3,175 ---- ----
Printing, Mailing of
Prospectuses to prospective
shareholders, compensation to
sales personnel, and interest
carrying, or other financing
charges
Payments to Underwriters ---- $271 $8,649 ---- $830 $50,860 ---- $21 $1,935
</TABLE>
Income Portfolio
Class A Class B Class C
------- ------ -------
Payments to Underwriters $7,936 21 ----
Payments for Advertising, $3,175 ----
Printing, Mailing of
Prospectuses to prospective
shareholders, compensation to
sales personnel, and interest
carrying, or other financing
charges
Shareholder Servicing Plan. The Fund has adopted a shareholder
servicing plan on behalf of the Portfolios' Class B shares and the Class C
shares of the Income Portfolio (the "Shareholder Servicing Plan"). In accordance
with the Shareholder Servicing Plan, the Fund may enter into shareholder service
agreements under which a Portfolio pays fees of up to 0.25% of the average daily
net assets of Class B shares or Class C shares of
B-16
<PAGE>
the Income Portfolio for fees incurred in connection with the personal service
and maintenance of accounts holding Portfolio shares for responding to inquiries
of, and furnishing assistance to, shareholders regarding ownership of the shares
or their accounts or similar services not otherwise provided on behalf of the
Portfolio.
Expenses. All expenses incurred in the operation of the Fund are borne
by the Fund, except to the extent specifically assumed by BSAM. The expenses
borne by the Fund include: organizational costs, taxes, interest, loan
commitment fees, interest and distributions paid on securities sold short,
brokerage fees and commissions, if any, fees of Board members who are not
officers, directors, employees or holders of 5% or more of the outstanding
voting securities of BSAM or its affiliates, Securities and Exchange Commission
fees, state Blue Sky qualification fees, advisory, administrative and fund
accounting fees, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance premiums, industry association fees, outside auditing
and legal expenses, costs of maintaining the Fund's existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing certain
prospectuses and statements of additional information, and any extraordinary
expenses. Expenses attributable to a particular portfolio are charged against
the assets of that portfolio; other expenses of the Fund are allocated among the
portfolios on the basis determined by the Board of Trustees, including, but not
limited to, proportionately in relation to the net assets of each Portfolio.
Expense Limitation. BSAM agreed that if, in any fiscal year, the
aggregate expenses of a Portfolio, exclusive of taxes, brokerage commissions,
interest on borrowings and (with prior written consent of the necessary state
securities commissions) extraordinary expenses, exceed the expense limitation of
any state having jurisdiction over the Portfolio, the Fund may deduct from the
payment to be made to BSAM, such excess expense to the extent required by state
law. Such deduction or payment, if any, will be estimated daily, and reconciled
and effected or paid, as the case may be, on a monthly basis. No such expense
limitations currently apply to any Portfolio.
Activities of BSAM and its Affiliates and Other Accounts Managed by
BSAM. The involvement of BSAM, Bear Stearns and their affiliates in the
management of, or their interests in, other accounts and other activities of
BSAM and Bear Stearns may present conflicts of interest with respect to the
Portfolios or limit the Portfolios' investment activities. BSAM, Bear Stearns
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Portfolios and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Portfolios. BSAM, Bear Stearns and its
affiliates will not have any obligation to make available any accounts managed
by them, for the benefit of the management of the Portfolios. The results of the
Portfolios' investment activities, therefore, may differ from those of Bear
Stearns and its affiliates and it is possible that the Portfolios could sustain
losses during periods in which BSAM, Bear Stearns and its affiliates and other
accounts achieve significant profits on their trading for proprietary and other
accounts. From time to time, the Portfolios' activities may be limited because
of regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolios' Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
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The Distributor. Bear Stearns serves as the Portfolios' distributor on
a best efforts basis pursuant to an agreement dated February 22, 1995, as
revised September 8, 1997 and February 4, 1998, which is renewable annually. For
the period April 3, 1995 (commencement of operations) through March 31, 1996,
Bear Stearns retained $72, $388 and $10,549 from the sales loads on Class A
shares of the Large Cap Value Portfolio, Small Cap Value Portfolio and the
Income Portfolio, respectively, and $110, $583 and $185 from contingent deferred
sales charges ("CDSC") on Class C shares of the Large Cap Value Portfolio, Small
Cap Value Portfolio and the Income Portfolio, respectively. For the fiscal year
ended March 31, 1997, Bear Stearns retained $68,262, $214,826 and $11,400 from
the sales loads on Class A shares of the Large Cap Value Portfolio, Small Cap
Value Portfolio and the Income Portfolio, respectively, and $552, $4,052 and
$100 from contingent deferred sales charges ("CDSC") on Class C shares of the
Large Cap Value Portfolio, Small Cap Value Portfolio and the Income Portfolio,
respectively. For the fiscal year ended March 31, 1998, Bear Stearns retained
$68,262, $214,826 and $11,400 from the sales loads on Class A shares of the
Large Cap Value Portfolio, Small Cap Value Portfolio and the Income Portfolio,
respectively, and $552, $4,052 and $100 from CDSC on Class C shares of the Large
Cap Value Portfolio, Small Cap Value Portfolio and the Income Portfolio,
respectively. In some states, banks or other institutions effecting transactions
in Portfolio shares may be required to register as dealers pursuant to state
law.
Purchase Order Delays. The effective date of a purchase order may be
delayed if PFPC, the Portfolios' transfer agent, is unable to process the
purchase order because of an interruption of services at its processing
facilities. In such event, the purchase order would become effective at the
purchase price next determined after such services are restored.
Sales Loads--Class A. Set forth below is an example of the method of
computing the offering price of the Class A shares of each Portfolio. The
example assumes a purchase of Class A shares aggregating less than $50,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of the Class A shares on March 31, 1998.
EQUITY PORTFOLIOS: Large Cap Value Small Cap Value
Portfolio Portfolio
--------- ---------
Net Asset Value per Share $20.83 $ 23.65
====== =======
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 1.21 1.38
----- ----
Per Share Offering Price to
the Public $22.04 $ 25.03
====== =======
INCOME PORTFOLIO:
Net Asset Value per Share 12.37
Per Share Sales Charge - 4.50%
of offering price (4.71% of
net asset value per share) 0.58
Per Share Offering Price to
the Public $12.95
Redemption Commitment. Each Portfolio has committed itself to pay in
cash all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part
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in securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets each Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of a Portfolio's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit to protect Portfolio
shareholders.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Portfolio shares may receive different compensation with respect to one
class of shares than the other. Bear Stearns will not accept any order of
$500,000 or more of Class B shares or $1 million or more of Class C shares, on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Portfolio instead. A fourth class of shares may be
purchased only by certain institutional investors at net asset value per share
(the "Class Y shares").
The four classes of shares each represent an interest in the same
portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of each Portfolio's Class A, B, C and Y shares recognizes two
types of expenses. General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Portfolio's total assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution Plan
and Shareholder Servicing Plan fees, (b) incremental transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption,
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<PAGE>
reinvestment, exchange, or transfer of shares of a Portfolio, the selection of
classes of shares, or the reinvestment of dividends apply to Class Y shares.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Equity Portfolio securities,
including covered call options written by an Equity 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. Any
assets or liabilities initially expressed in terms of foreign currency will be
converted into U.S. dollars at the prevailing market rates for purposes of
calculating net asset value. Because of the need to obtain prices as of the
close of trading on various exchanges throughout the world for such foreign
securities, the calculation of net asset value does not take place
contemporaneously with the determination of prices of such securities. Forward
currency contracts will be valued at the current cost of offsetting the
contract. Short-term investments are carried at amortized cost, which
approximates 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 the Fund'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 an
Equity 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.
Substantially all of the Income Portfolio's investments (including
short-term investments) are valued 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). Any assets
or liabilities initially expressed in terms of foreign currency will be
converted into U.S. dollars at the prevailing market rates for purposes of
calculating net asset value. Because of the need to obtain prices as of the
close of trading on various exchanges throughout the world for such foreign
securities, the calculation of net asset value does not take place
contemporaneously with the determination of prices of such securities. Other
investments valued by the Service are carried at fair value as determined by the
Service, based on methods which include consideration of: yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
are not valued by the Service are carried at amortized cost, which approximate
value. Other investments that are not valued by the Service are valued at the
average of the most recent bid and asked prices in the market in which such
investments are primarily traded, or at the last sales price for securities
traded primarily on an exchange or the national securities market. In the
absence of reported sales of investments traded primarily on an exchange or the
national securities market, the average of the most recent bid and asked prices
is used. Bid price is used when no asked price is available. 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 Income
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<PAGE>
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.
Each Portfolio's restricted securities, as well as securities or other
assets for which market quotations are not readily available, or are not valued
by a pricing service approved by the Board of Trustees, are valued at fair value
as determined in good faith by the Board of Trustees. The Board of Trustees will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Board of Trustees generally will take
the following factors into consideration: (i) restricted securities which are,
or are convertible into, securities of the same class of securities for which a
public market exists usually will be valued at market value less the same
percentage discount at which purchased (this discount will be revised
periodically by the Board of Trustees if the Board of Trustees believe that it
no longer reflects the value of the restricted securities); (ii) restricted
securities not of the same class as securities for which a public market exists
usually will be valued initially at cost; and (iii) any subsequent adjustment
from cost will be based upon considerations deemed relevant by the Board of
Trustees.
New York Stock Exchange Closings. The holidays (as observed) on which
the New York Stock Exchange is closed currently are: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in each Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional federal income
tax considerations generally affecting the Portfolios and their shareholders
that are not described in the Prospectuses. No attempt is made to present a
detailed explanation of the tax treatment of the Portfolios or their
shareholders, and the discussions here and in the Prospectuses are not intended
as substitutes for careful tax planning.
Qualification as a Regulated Investment Company. Each Portfolio has
elected to be taxed as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, a Portfolio is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by a Portfolio made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will, therefore, count toward satisfaction of the
Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including, but not limited to, gains from
B-21
<PAGE>
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "Income Requirement").
In general, gain or loss recognized by a Portfolio on the disposition
of an asset will be a capital gain or loss. In addition, gain will be recognized
as a result of certain constructive sales, including short sales "against the
box." However, gain recognized on the disposition of a debt obligation purchased
by a Portfolio at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the
Portfolio held the debt obligation. In addition, under the rules of Code section
988, gain or loss recognized on the disposition of a debt obligation denominated
in a foreign currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency exchange rates), and gain or loss
recognized on the disposition of a foreign currency forward contract, futures
contract, option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to Code
section 1256 (unless the Portfolio elects otherwise), will generally be treated
as ordinary income or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Portfolio's net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Portfolio and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
section 1092 of the Code; (3) the transaction is one that was marketed or sold
to the Portfolio on the basis that it would have the economic characteristics of
a loan but the interest-like return would be taxed as capital gain; or (4) the
transaction is described as a conversion transaction in the Treasury
Regulations. The amount of the gain recharacterized generally will not exceed
the amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the federal long-term, mid-term, or
short-term rate, depending upon the type of instrument at issue, reduced by an
amount equal to: (1) prior inclusions of ordinary income items from the
conversion transaction and (2) the capital interest on acquisition indebtedness
under Code section 263(g). Built-in losses will be preserved where a Portfolio
has a built-in loss with respect to property that becomes a part of a conversion
transaction. No authority exists that indicates that the converted character of
the income will not be passed through to a Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (2) the asset is otherwise held by the Portfolio as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the
Portfolio grants a qualified covered call option (which, among other things,
must not be deep-in-the-money) with respect thereto), or (3) the asset is stock
and the Portfolio grants an in-the-money qualified covered call option with
respect thereto. In addition, a Portfolio may be required to defer the
recognition of a loss on the disposition of an asset held as part of a straddle
to the extent of any unrecognized gain on the offsetting position. Any gain
recognized by a Portfolio on the lapse of, or any gain or loss recognized by the
Portfolio from a closing transaction with respect to, an option written by the
Portfolio will be treated as a short-term capital gain or loss.
Certain transactions that may be engaged in by a Portfolio (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as
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<PAGE>
if they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising as
a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. A Portfolio, however, may elect not to have this special tax treatment
apply to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Portfolio that are not Section 1256 contracts.
A Portfolio may purchase securities of certain foreign investment funds
or trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Portfolio invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualified electing
fund (a "QEF"), in which event the Portfolio will each year have ordinary income
equal to its pro rata share of the PFIC's ordinary earnings for the year and
long-term capital gain equal to its pro rata share of the PFIC's net capital
gain for the year, regardless of whether the Portfolio receives distributions of
any such ordinary earnings or capital gains from the PFIC. Second, a Portfolio
that invests in stock of a PFIC may make a mark-to-market election with respect
to such stock. Pursuant to such election, the Portfolio will include as ordinary
income any excess of the fair market value of such stock at the close of any
taxable year over the Portfolio's adjusted tax basis in the stock. If the
adjusted tax basis of the PFIC stock exceeds the fair market value of the stock
at the end of a given taxable year, such excess will be deductible as ordinary
loss in an amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Portfolio included in income in
previous years. The Portfolio's holding period with respect to its PFIC stock
subject to the election will commence on the first day of the next taxable year.
If a Portfolio makes the mark-to-market election in the first taxable year it
holds PFIC stock, it will not incur the tax described below under the third
option.
Finally, if a Portfolio does not elect to treat the PFIC as a QEF and
does not make a mark-to-market election, then, in general, (1) any gain
recognized by the Portfolio upon the sale or other disposition of its interest
in the PFIC or any "excess distribution" (as defined) received by the Portfolio
from the PFIC will be allocated ratably over the Portfolio's holding period of
its interest in the PFIC stock, (2) the portion of such gain or excess
distribution so allocated to the year in which the gain is recognized or the
excess distribution is received shall be included in the Portfolio's gross
income for such year as ordinary income (and the distribution of such portion by
the Portfolio to shareholders will be taxable as an ordinary income dividend,
but such portion will not be subject to tax at the Portfolio level), (3) the
Portfolio shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year, plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received, at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Portfolio to its shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the
Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
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Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
(including, to the extent provided in Treasury Regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each
Portfolio must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
each of which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option.
If for any taxable year a Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4% non-deductible
excise tax is imposed on a regulated investment company that fails to distribute
in each calendar year an amount equal to 98% of its ordinary income for such
calendar year and 98% of its capital gain net income for the one-year period
ended on October 31 of such calendar year (or, at the election of a regulated
investment company having a taxable year ending November 30 or December 31, for
its taxable year (a "taxable year election")). The balance of such income must
be distributed during the next calendar year. For the foregoing purposes, a
regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses and ordinary gains or losses arising as a
result of a PFIC mark-to-market election (or upon the actual disposition of the
PFIC stock subject to such election) incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Portfolio may in certain circumstances
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<PAGE>
be required to liquidate portfolio investments to make sufficient distributions
to avoid excise tax liability.
Portfolio Distributions. Each Portfolio anticipates distributing
substantially all of its investment company taxable income for each taxable
year. Such distributions will be taxable to shareholders as ordinary income and
treated as dividends for federal income tax purposes, but will qualify for the
70% dividends-received deduction for corporate shareholders only to the extent
discussed below.
A Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. Each Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term capital
gain, regardless of the length of time the shareholder has held his shares or
whether such gain was recognized by the Portfolio prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% (58% for alternative minimum tax purposes) of the capital
gain recognized upon a Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if a Portfolio elects to retain its net capital gain, the
Portfolio will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If a Portfolio elects to retain
its net capital gain, it is expected that the Portfolio also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of his pro rata share of such gain, with the result that
each shareholder will be required to report his pro rata share of such gain on
his tax return as long-term capital gain, will receive a refundable tax credit
for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by a Portfolio with respect to a taxable
year will qualify for the 70% dividends-received deduction generally available
to corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Portfolio from domestic corporations for the taxable
year. A dividend received by a Portfolio will not be treated as a qualifying
dividend (1) if it has been received with respect to any share of stock that the
Portfolio has held for less than 46 days (91 days in the case of certain
preferred stock), excluding for this purpose under the rules of Code section
246(c)(3)and (4) any period during which the Portfolio has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that the
Portfolio is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent that the stock on which the dividend is paid is
treated as debt-financed under the rules of Code section 246A. The 46-day
holding period must be satisfied during the 90-day period beginning 45 days
prior to each applicable ex-dividend date; the 91-day holding period must be
satisfied during the 180-day period beginning 90 days before each applicable
ex-dividend date. Moreover, the dividends-received deduction for a corporate
shareholder may be disallowed or reduced (1) if the corporate shareholder fails
to satisfy the foregoing requirements with respect to its shares of a Portfolio
or (2) by application of Code section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain other
items).
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Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder will generally be required
to take the full amount of any dividend received from a Portfolio into account
(without a dividends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by a Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle a Portfolio to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known.
Distributions by a Portfolio that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by a Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Portfolios or shares of another portfolio (or another
fund). Shareholders receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of a
Portfolio reflects undistributed net investment income or recognized capital
gain net income, or unrealized appreciation in the value of the assets of the
Portfolio, distributions of such amounts will be taxable to the shareholder in
the manner described above, although they economically constitute a return of
capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a
Portfolio into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Portfolio) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Portfolio will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
and the proceeds of redemption of shares, paid to any shareholder (1) who has
failed to provide a correct taxpayer identification number , (2) who is subject
to backup withholding for failure to properly report the receipt of interest or
dividend income , or (3) who has failed to certify to the Portfolio that it is
not subject to backup withholding or that it is an exempt recipient (such as a
corporation).
Sale or Redemption of Shares. A shareholder will recognize gain or
loss on the sale or redemption of shares of a Portfolio in an amount equal
to the difference between the proceeds of the sale or redemption and the
B-26
<PAGE>
shareholder's adjusted tax basis in the shares. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of the
Portfolio within 30 days before or after the sale or redemption. In general, any
gain or loss arising from (or treated as arising from) the sale or redemption of
shares of a Portfolio will be considered capital gain or loss and will be
long-term capital gain or loss if the shares were held for longer than one year.
Long-term capital gain recognized by an individual shareholder will be taxed at
the lowest rate applicable to capital gains if the holder has held such shares
for more than 18 months at the time of the sale. However, any capital loss
arising from the sale or redemption of shares held for six months or less will
be treated as a long-term capital loss to the extent of the amount of capital
gain dividends received on such shares. For this purpose, the special holding
period rules of Code section 246(c)(3) and (4) (discussed above in connection
with the dividends-received deduction for corporations) generally will apply in
determining the holding period of shares. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the same or another Portfolio or another
fund at a reduced sales load pursuant to a right to reinvest at such reduced
sales load acquired in connection with the acquisition of the shares disposed
of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on the shares disposed of but
shall be treated as incurred on the acquisition of the shares subsequently
acquired.
Foreign Shareholders. Taxation of a shareholder who, as to the United
States, is a nonresident alien individual, foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder") depends on whether
the income from the Portfolio is "effectively connected" with a U.S. trade or
business carried on by such shareholder.
If the income from a Portfolio is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) upon the gross amount of the
dividend. Such foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Portfolio, capital gain
dividends, and amounts retained by a Portfolio that are designated as
undistributed capital gains.
If the income from a Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of such Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Portfolio may be
required to withhold U.S. federal income tax at the rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a
Portfolio, including the applicability of foreign taxes.
B-27
<PAGE>
Effect of Future Legislation; State and Local Tax Considerations. The
foregoing general discussion of U.S. federal income tax consequences is based on
the Code and the Treasury Regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect .
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies may differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the Portfolios.
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
Bond Portfolio for the purchase or sale of investment securities. Purchases and
sales of portfolio securities usually are principal transactions. Income
Portfolio securities ordinarily are purchased directly from the issuer or from
an underwriter or a market maker for the securities. Usually no brokerage
commissions are paid by the Income Portfolio for such purchases. Purchases of
portfolio securities from underwriters include a commission or concession paid
by the issuer to the underwriter and the purchase price paid to market makers
for the securities may include the spread between the bid and asked price.
Income Portfolio transactions are allocated to various dealers by the its
portfolio managers in their best judgment.
BSAM assumes general supervision over placing orders on behalf of each
Equity Portfolio for the purchase or sale of investment securities. Allocation
of brokerage transactions, including their frequency, is made in BSAM's best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders at the most favorable net price.
Subject to this consideration, the brokers selected will include those that
supplement BSAM's research facilities with statistical data, investment
information, economic facts and opinions. Information so received is in addition
to and not in lieu of services required to be performed by BSAM and BSAM's fees
are not reduced as a consequence of the receipt of such supplemental
information. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that BSAM, as applicable, determines in good faith that such commission
is reasonable in terms of the transaction or the overall responsibility of BSAM
to the Portfolio and its other clients and that the total commissions paid by
the Portfolio will be reasonable in relation to the benefits to the Portfolio
over the long-term.
Such supplemental information may be useful to BSAM in serving each
Equity Portfolio and the other funds which it advises and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to BSAM in carrying out its obligations to each Equity Portfolio.
Sales of Portfolio shares by a broker may be taken into consideration, and
brokers also will be selected because of their ability to handle special
executions such as are involved in large block trades or broad distributions,
provided the primary consideration is met. Large block trades may, in certain
cases, result from two or more funds advised or administered by BSAM being
engaged simultaneously in the purchase or sale of the same security. Certain of
BSAM's transactions in securities of foreign issuers may not benefit from the
negotiated commission rates available to each Equity Portfolio for transactions
in securities of domestic issuers. When transactions are executed in the
over-the-counter market, each Portfolio will deal with the primary market makers
unless a more favorable price or execution otherwise is obtainable. Foreign
exchange transactions of each Equity
B-28
<PAGE>
Portfolio are made with banks or institutions in the interbank market at prices
reflecting a mark-up or mark-down and/or commission.
Portfolio turnover may vary from year to year as well as within a year.
The portfolio turnover rate for the Large Cap Value Portfolio, Small Cap Value
Portfolio and Income Portfolio for the period April 3, 1995 (commencement of
operations) through March 31, 1996 was 45%, 41% and 107%, respectively. The
portfolio turnover rate for the fiscal year ended March 31, 1997 was 137%, 57%
and 263%, respectively. In periods in which extraordinary market conditions
prevail, BSAM will not be deterred from changing investment strategy as rapidly
as needed, in which case higher portfolio turnover rates can be anticipated
which would result in greater brokerage expenses. The overall reasonableness of
brokerage commissions paid is evaluated by BSAM based upon its knowledge of
available information as to the general level of commissions paid by other
institutional investors for comparable services.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the Securities and Exchange Commission
thereunder, the Board of Trustees has determined that transactions for each
Portfolio may be executed through Bear Stearns if, in the judgment of BSAM, the
use of Bear Stearns is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers, and if, in the
transaction, Bear Stearns charges the Portfolio a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for each
Portfolio on the floor of any national securities exchange, provided (i) the
Board of Trustees has expressly authorized Bear Stearns to effect such
transactions, and (ii) Bear Stearns annually advises the Board of Trustees of
the aggregate compensation it earned on such transactions. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
For the fiscal year ended March 31, 1997, Large Cap Value Portfolio and
Small Cap Value Portfolio paid total brokerage commissions of $59,523 and
$102,411, respectively, of which approximately $1,300 and $9,000 was paid to
Bear Stearns, respectively. The Large Cap Value Portfolio and Small Cap Value
Portfolio paid 2.18% and 8.79%, respectively, of its commissions to Bear
Stearns, and, with respect to all the securities transactions for each Equity
Portfolio, 2.93% and 8.89% of the transactions, respectively, involved
commissions being paid to Bear Stearns. No brokerage commissions were paid by
the Income Portfolio.
For the fiscal year ended March 31, 1998, Large Cap Value Portfolio and
Small Cap Value Portfolio paid total brokerage commissions of $26,799 and
$302,476, respectively, of which approximately $522 and $1,728, respectively,
was paid to Bear Stearns. The Large Cap Value Portfolio and Small Cap Value
Portfolio paid 1.95% and 0.57%, respectively, of its commissions to Bear
Stearns, and, with respect to all the securities transactions for each Equity
Portfolio, 1.89% and 1.15% of the transactions, respectively, involved
commissions being paid to Bear Stearns. For the fiscal year ended March 31,
1998, the Large Cap Value Portfolio and Small Cap Value Portfolio paid an
average commission rate per share of $0.0581 and $0.0557, respectively. The
percentage of commissions for which they received research services paid by the
Large Cap Value Portfolio and Small Cap Value Portfolio was 98.40% and 94.95%,
respectively, of the total brokerage commissions paid by each Portfolio.
B-29
<PAGE>
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Performance
Information."
Current yield for the 30-day period ended March 31, 1998 for Class A,
Class C and Class Y of the Income Portfolio was 5.86%, 5.21% and 6.21%,
respectively. The current yield for each class reflects the waiver and
reimbursement of certain fees and expenses by the investment adviser, without
which the Portfolio's current yield for such period would have been 3.87% for
Class A, 3.67% for Class C and 4.42% for Class Y. Current yield of the Income
Portfolio is computed pursuant to a formula which operates as follows: The
amount of the Income Portfolio's expenses accrued for the 30-day period (net of
reimbursements) is subtracted from the amount of the dividends and interest
earned by the Income Portfolio during the period. That result is then divided by
the product of: (a) the average daily number of shares outstanding during the
period that were entitled to receive dividends, and (b) the maximum offering
price per share on the last day of the period less any undistributed earned
income per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the 6th
power, after which 1 is subtracted. The current yield is then arrived at by
multiplying the result by 2.
Average annual total return of each Portfolio is calculated by
determining the ending redeemable value of an investment purchased at net asset
value (maximum offering price in the case of Class A) per share with a
hypothetical $1,000 payment made at the beginning of the period (assuming the
reinvestment of dividends and distributions), dividing by the amount of the
initial investment, taking the "n"th root of the quotient (where "n" is the
number of years in the period) and subtracting 1 from the result. A class'
average annual total return figures calculated in accordance with such formula
assume that in the case of Class A the maximum sales load has been deducted from
the hypothetical initial investment at the time of purchase or in the case of
Class B the maximum applicable CDSC has been paid upon redemption at the end of
the period.
Total return of each Portfolio is calculated by subtracting the amount
of the Portfolio's net asset value (maximum offering price in the case of
Class A) per share at the beginning of a stated period from the net asset value
per share at the end of the period (after giving effect to the reinvestment of
dividends and distributions during the period and any applicable CDSC), and
dividing the result by the net asset value (maximum offering price in the case
of Class A) per share at the beginning of the period. Total return also may be
calculated based on the net asset value per share at the beginning of the period
instead of the maximum offering price per share at the beginning of the period
for Class A shares or without giving effect to any applicable CDSC at the end of
the period for Class B and C shares. In such cases, the calculation would not
reflect the deduction of the sales load with respect to Class A shares or any
applicable CDSC with respect to Class B and C shares, which, if reflected, would
reduce the performance quoted.
The chart below sets forth average annual total return from inception*
through March 31, 1998 and total return for one-year and inception* through
March 31, 1998 for Class A, Class C and Class Y:
B-30
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN - INCEPTION* THROUGH MARCH 31, 1998
Class A Class B Class C
------- ------- -------
Based on Maximum Based on Net Based on Maximum Based on Net Based on Based on Net
Name of Portfolio Offering Price Asset Value Offering Price Asset Value Maximum CDSC Asset Value
- ----------------- --------------- ------------ --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Value 100.86% 110.90% 8.04% 13.70% N/A 107.85%
Portfolio
Small Cap Value 109.93% 120.43% 11.83% 17.69% N/A 116.88%
Portfolio
Income Portfolio 19.32% 24.00% (5.04%) (0.04%) N/A 22.47%
Class Y
-------
Based on Net
Name of Portfolio Asset Value
- ----------------- -----------
Large Cap Value 83.29%
Portfolio
Small Cap Value 104.44%
Portfolio
Income Portfolio 18.39%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN - ONE-YEAR ENDED MARCH 31, 1998
Class A Class B Class C
------- ------- -------
Based on Maximum Based on Net Based on Maximum Based on Net Based on Based on Net
Name of Portfolio Offering Price Asset Value Offering Price Asset Value Maximum CDSC Asset Value
- ----------------- --------------- ------------ --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Value 37.69% 44.59% N/A N/A N/A 43.94%
Portfolio
Small Cap Value 39.90% 46.86% N/A N/A N/A 46.10%
Portfolio
Income Portfolio 5.31% 9.43% N/A N/A N/A 8.92%
Class Y
-------
Based on Net
Name of Portfolio Asset Value
- ----------------- -----------
Large Cap Value 45.27%
Portfolio
Small Cap Value 47.54%
Portfolio
Income Portfolio 9.81%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN - INCEPTION* THROUGH MARCH 31, 1998
Class A Class B Class C
------- ------- -------
Based on Maximum Based on Net Based on Maximum Based on Net Based on Based on Net
Name of Portfolio Offering Price Asset Value Offering Price Asset Value Maximum CDSC Asset Value
- ----------------- --------------- ------------ --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Value 26.20% 28.27% N/A N/A N/A 27.65%
Portfolio
Small Cap Value 28.07% 30.18% N/A N/A N/A 29.47%
Portfolio
Income Portfolio 6.08% 7.45% N/A N/A N/A 7.01%
Class Y
Based on Net
Name of Portfolio Asset Value
- ----------------- ------------
Large Cap Value
Portfolio 26.75%
Small Cap Value
Portfolio 29.36%
Income Portfolio 6.81%
</TABLE>
* Class A and Class C shares of Large Cap Value Portfolio commenced
investment operations on April 4, 1995. Class A and Class C shares of Small
Cap Value Portfolio commenced investment operations on April 3, 1995. Class
A and Class C shares of the Income Portfolio commenced investment
operations on April 5, 1995. The initial public offering of the Class Y
shares of Large Cap Value Portfolio, Small Cap Value Portfolio and Income
Portfolio commenced on September 11, June 22, and September 8, 1995,
respectively.
CODE OF ETHICS
The Fund, on behalf of each Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
B-31
<PAGE>
include, among others, trustees and officers of the Fund and employees of the
Fund and BSAM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security for his or her account or for any account
in which he or she has any direct or indirect beneficial interest, without prior
approval by the Fund or without the applicability of certain exemptions; (2) the
recommendation of a securities transaction without disclosing his or her
interest in the security or issuer of the security; (3) the commission of fraud
in connection with the purchase or sale of a security held by or to be acquired
by each Portfolio; and (4) the purchase of any securities in an initial public
offering or private placement transaction eligible for purchase or sale by each
Portfolio without prior approval by the Fund. Certain transactions are exempt
from item (1) of the previous sentence, including: (1) any securities
transaction, or series of related transactions, involving 500 or fewer shares of
(i) an issuer with an average monthly trading volume of 100 million shares or
more, or (ii) an issuer that has a market capitalization of $1 billion or
greater; and (2) transactions in exempt securities or the purchase or sale of
securities purchased or sold in exempt transactions.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of each Portfolio first, shall avoid potential or
actual conflicts of interest with each Portfolio, and shall not take unfair
advantage of their relationship with each Portfolio. Under certain
circumstances, the Adviser to each Portfolio may aggregate or bunch trades with
other clients provided that no client is materially disadvantaged. Access
persons are required by the Code of Ethics to file quarterly reports of personal
securities investment transactions. However, an access person is not required to
report a transaction over which he or she had no control. Furthermore, a trustee
of the Fund who is not an "interested person" (as defined in the 1940 Act) of
the Fund is not required to report a transaction if such person did not know or,
in the ordinary course of his duties as a Trustee of the Fund, should have
known, at the time of the transaction, that, within a 15 day period before or
after such transaction, the security that such person purchased or sold was
either purchased or sold, or was being considered for purchase or sale, by each
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "General Information."
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Portfolio shares have no preemptive, subscription or conversion rights and are
freely transferable.
The Fund will send annual and semi-annual financial statements to all
its shareholders.
As of July 28, 1998, the following shareholders owned, directly or
indirectly, 5% or more of the indicated class of the Portfolio's shares.
Percent of Large Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 17.3
FBO 200-40406- 19
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-32
<PAGE>
Percent of Large Cap
Value Portfolio
Name and Address Class B Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 8.3%
FBO 051-35974-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Donaldson Lufkin Jenrette 5.7%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Bear, Stearns Securities Corp. 6.6%
FBO 127-95173-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Raymond James Assoc. Inc. 14.5%
For Elite Account 54008603
300 Brickstone Square, 9th Floor
Andover, MA 01810
Priscilla A. Pickles 6.2%
600 Hillcrest Ave.
Methuen, MA 01844
Percent of Large Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 6.2%
FBO 220-43167-11
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Large Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 12.0%
FBO 049-40734-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-33
<PAGE>
Bear, Stearns Securities Corp. 6.3%
FBO 049- 40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.4%
FBO 051-36493-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.0%
FBO 051-36492-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
EAMCO 16.9%
FBO 02130004
Attn: Mutual Funds Desk
c/o Riggs Bank N.A.
P.O. Box 96211
Washington, DC 20090-6211
Percent of Small Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 5.4%
FBO 042-13302-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
Mainstreet Trust Company 5.2%
Cust API Trust Growth Fund
PO Box 5228
Martinsville, VA 24115
Percent of Small Cap
Value Portfolio
Class B Shares Outstanding
--------------------------
Bear Stearns Securities Corp. 5.1%
FBO 984- 13624-25
1 Metrotech Center North
Brooklyn, NY 01201-3859
B-34
<PAGE>
Percent of Small Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Custodial Trust Company 22.5%
101 Carnegie Center
Princeton, NJ 08540
Bear Stearns Securities Corp. 5.3%
FBO 049-40880-16
1 Metrotech Center North
Brooklyn, NY 01201-3859
Percent of
Income Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 29.5%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 7.8%
FBO 051-26459-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of
Income Portfolio
Name and Address Class B Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 6.8%
FBO 037-12362-17
1 Metrotech Center North
Brooklyn, NY 01201-3859
Bruce E. Brizzi 9.1%
and Pamela J. Brizzi
JT Ten Wros
131 Oristmill LN
Zeliehople, PA 16063
Wexford Cleaning Services Corp. 75.8%
FBO UA DTD 03 0796
22960 Cass Ave.
Woodland Hills, CA 91364-3917
Percent of
Income Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 12.3%
FBO 498-00055-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-35
<PAGE>
Bear, Stearns Securities Corp. 8.3%
FBO 220-43677-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 7.9%
FBO 220-43671-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 7.8%
FBO 498-00056-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of
Income Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 11.7%
FBO 049- 40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 10.8%
FBO 051-98474-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 6.5%
FBO 046-03216-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 6.1%
FBO 049-40716-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 9.1%
FBO 051-35282-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 14.5%
FBO 049-40863-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
A shareholder who beneficially owns, directly or indirectly, more than
25% of a Portfolio's voting Securities may be deemed a "control person" (as
defined in the 1940 Act) of a Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New
Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's custodian. Under
a custody agreement with each Portfolio, CTC holds each Portfolio's securities
and keeps all necessary accounts and records. For its services,
B-36
<PAGE>
CTC receives from each Portfolio an annual fee of the greater of 0.015% of the
value of the domestic assets held in custody or $5,000, such fee to be payable
monthly based upon the total market value of such assets, as determined on the
last business day of the month. In addition, CTC receives certain securities
transactions charges which are payable monthly. PFPC, Bellevue Corporate Center,
400 Bellevue Parkway, Wilmington, Delaware 19809, is each Portfolio's transfer
agent, dividend disbursing agent and registrar. Neither CTC nor PFPC has any
part in determining the investment policies of any Portfolio or which securities
are to be purchased or sold by any Portfolio.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, as counsel for the Fund, has provided legal advice as to certain legal
matters regarding the shares of beneficial interest being sold pursuant to the
Portfolios' Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1434, independent auditors, have been selected as auditors of the Fund.
FINANCIAL STATEMENTS
The Portfolios' annual report to shareholders for the fiscal year ended
March 31, 1998 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference into this
Statement of Additional Information.
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APPENDIX
Description of certain ratings assigned by S&P, Moody's, Fitch and
Duff:
S&P
Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
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Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
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Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
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F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
Bond Ratings
AAA
Bonds rated AAA are considered highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection factors
but still considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
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